World Bank Document - Documents & Reportsdocuments.worldbank.org/curated/en/397131468260378454/pdf/31644.pdf · Special Purpose State Agency Govemment auditor Country Assistance Strategy

Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No: 3 1644-ID

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF US$50.00 MILLION

AND A PROPOSED

CREDIT OF SDR19.85 MILLION (US$3 0.00 MILLION EQUIVALENT)

TO THE

REPUBLIC OF INDONESIA

FOR A

MANAGING HIGHER EDUCATION FOR RELEVANCE AND EFFICIENCY PROJECT

Human Development Sector Unit East Asia and Pacific Region

performance o f their off icial duties. I t s contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective April 30,2005)

AAA ADB AusAID

BAPPENAS BHE BHMN

BLU BPKP CAS CBS CFAA CPA

BAN-PT

CPAP CPAR CPCU D1 D2 D3 DGHE

DIK DIKS

DIP DIPA DRK DUE

EMIS ESW FDI FM FMS FMR GDLN

GDP GFMRAP

GO1 GNP

DGHE-IU

Currency Unit = Indonesian Rupiah (IDR) IDR 1 million = US$105.60

US$1 = SDR1.51

FISCAL YEAR January 1 - December31

ACADEMIC YEAR July 1 - June 30

ABBREVIATIONS AND ACRONYMS Analytical and Advisory Activities Asian Development Bank Australian Intemational Development Agency National Accreditation Board National Planning Agency Board of Higher Education Autonomous Nonprofit State Higher Education Institution Special Purpose State Agency Govemment auditor Country Assistance Strategy Central Bureau of Statistics Country Financial Accountability Assessment Committee for Poverty Alleviation (Chair: Indonesia Coordinating Minister for Social Welfare) Corruption Prevention Action Plan Country Procurement Assessment Review Central Project Coordinating Unit Post-secondary diploma (1 -year) Post-secondary diploma (2-year) Post-secondary diploma (3-year) Directorate General of Higher Education DGHE - Implementation Unit Recurrent Budget (Routine) Supplementary Recurrent Budget (Self- Generated Routine) Investment Budget Integrated Budget (Recurrent and Investment) Self-generated Income Development of Undergraduate Education project (IBRD 4043-IND, DUE) Education Management Information System Economic and Sector Work Foreign Direct Investment Financial Management Financial Management Specialist Financial Monitoring Report Global Development Leaming Network Project

Gross Domestic Product Govemment Financial Management and Revenue Administration Project Govemment of Indonesia Gross National Product

(IBRD 4669-IND)

GPA HE1

HEI-IU

HELTS IBRD

IDR ICB IDA IG IKIP I-PRSP ISDS JICA JBIC KPPN LPIU LCS LF S LSS MDG M&E MRI MOF MONE

NCB NISHE

OECD

OPM PCN PER PETS PHK

PHRD

PNS PIP PRSP

MONE-IG

Grade Point Average Higher Education Institution (university, institute, school of higher learning, academy, or polytechnic) Higher Education Institution - Implementation Unit Higher Education Long-Term Strategy Intemational Bank for Reconstruction and Development Indonesian Rupiah Intemational Competitive Bidding Intemational Development Association MONE Intemal Audit Unit Teacher Training College Interim Poverty Reduction Strategy Paper Integrated Safeguards Data Sheet Japan Intemational Co-operation Agency Japan Bank for Intemational Cooperation Govemment treasure office Local Project Implementation Unit Least Cost Selection Labor Force Survey Lower Secondary School Millennium Development Goal Monitoring and Evaluation Mitsubishi Research Inst i tute Ministry of Finance Ministry of National Education MONE intemal audit unit National Competitive Bidding National Information System for Higher Education Organization for Economic Co-operation and Development Operational Procedures Manual Project Concept Note Public Expenditure Review Public Expenditure Tracking Survey Program Hibah Kompetisi (DGHE competitive fund) Japan Policy and Human Resources Development Trust Fund Civil Servants Project Implementation Plan Poverty Reduction Strategy Paper

FOR OFFICIAL USE ONLY

QUE

s1 s2 s3 SDS SAR SARS SPZD SPM TA SUR TOR UMPl

Quality of Undergraduate Education Project,

Degree equivalent to Bachelor’s degree Degree equivalent to Master’s degree Degree equivalent to PhD Service Delivery Survey Staff Appraisal Report Sudden Acute Respiratory Syndrome Remittance instrument Payment order Technical Assistance Special Drawing Rights Terms of Reference

( m m 4 1 9 3 - 1 ~ ~ , QUE)

rN National University Entrance Examination

UGM UI UNPAD UNAIR ITB IPB UBAYA TPSD

URGE WBOJ

Gajah Mada University University of Indonesia Padjadjaran University Airlangga University Bandung Institute of Technology Bogor Agriculture Institute Surabaya University Technological and Professional Skills Development Project (ADB project) University Research for Graduate Education World Bank Office Jakarta (World Bank Country Office for Indonesia)

Vice President: Jemal-ud-din Kassum, EAPVP Country Managermirector:

Sector Manager: Task Team Leaders:

Andrew D. Steer, E A C I F Christopher J. Thomas, E A S H D Richard R. Hopper and Susiana Iskandar,

I EASHD I

This document has a rest r ic ted distr ibution and may be used by recipients only in the performance of their official duties. I t s contents may not be otherwise disclosed without Wor ld Bank authorization.

INDONESIA FOR OFFICIAL USE ONLY

MANAGING HIGHER EDUCATION FOR RELEVANCE AND EFFICIENCY

CONTENTS Page

A . STRATEGIC CONTEXT AND RATIONALE ................................................................. 1

1 . 2 . 3 .

Country and sector issues .................................................................................................... 1

Rationale for Bank involvement ......................................................................................... 4

Higher level objectives to which the project contributes .................................................... 4

. ................................................................................................. B PROJECT DESCRIPTION 5

1 . 2 . 3 . 4 . 5 . 6 .

Lending instrument ............................................................................................................. 5

[If Applicable] Program objective and phases .................................................................... 5

Project development objective and key indicators .............................................................. 5

Project components ............................................................................................................. 6

Lessons leamed and reflected in the project design ............................................................ 9

Altematives considered and reasons for rejection ............................................................ 11

C . IMPLEMENTATION ........................................................................................................ 12

1 . Partnership arrangements (if applicable) .......................................................................... 12

2 . Institutional and implementation arrangements ................................................................ 12

3 . Monitoring and evaluation o f outcomeshesults ................................................................ 14

4 . Sustainability ..................................................................................................................... 15

5 . Critical risks and possible controversial aspects ............................................................... 15

6 . Loadcredit conditions and covenants ............................................................................... 17

. . .

D . APPRAISAL SUMMARY ................................................................................................. 17

1 . Economic and financial analyses ...................................................................................... 17

2 . Technical ........................................................................................................................... 17

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties . I t s contents may not otherwise be disclosed without World Bank authorization .

3 . Fiduciary ........................................................................................................................... 18

4 . Social ................................................................................................................................. 19

5 . Environment ...................................................................................................................... 20

6 . Safeguard policies ............................................................................................................. 20

7 . Policy Exceptions and Readiness ...................................................................................... 20

Annex 1: Country and Sector o r Program Background ......................................................... 21

Annex 2: Ma jo r Related Projects Financed by the Bank and/or other Agencies ................. 32

Annex 3: Results Framework and Monitoring ........................................................................ 34

Annex 4: Detailed Project Description ...................................................................................... 42

Annex 5: Project Costs ............................................................................................................... 55

Annex 6: Implementation Arrangements ................................................................................. 56

Annex 7: Financial Management and Disbursement Arrangements ..................................... 59

Annex 8: Procurement Arrangements ...................................................................................... 70

Annex 9: Economic and Financial Analysis ............................................................................. 76

Annex 10: Safeguard Policy Issues ............................................................................................ 84

Annex 11: Project Preparation and Supervision ..................................................................... 85

Annex 12: Documents in the Project F i l e ................................................................................. 86

Annex 13: Statement o f Loans and Credits .............................................................................. 90

Annex 14: Country at a Glance ................................................................................................. 92

Annex 15: Corruption Prevention Action Plan ........................................................................ 94

INDONESIA MANAGING HIGHER EDUCATION FOR RELEVANCE AND EFFICIENCY PROJECT

Annual Cumulative

PROJECT APPRAISAL DOCUMENT

5.05 I 15.24 I 21.10 I 20.31 I 13.99 I 3.31 I 1-00 I 5.05 I 20.29 I 41.39 I 61.70 I 75.69 I 79.00 I 80.00 I

East Asia and the Pacific Region Human Development Sector Management Unit

Date: 05/17/2005 Team Leaders:

Country Director: Andrew D. Steer Sectors: Tertiary education (100%) Sector Manager: Christopher J. Thomas Director: Emmanuel Y. Jimenez

Project ID: PO85374 Lending Instrument: Specific Investment Loan

Richard R. Hopper / Susiana Iskandar

Themes: Education for the knowledge economy

Environmental screening category: N o t Required Safeguard screening category: C

(PI

Project Financing Data

[XI Loan [XI Credit [ ] Grant [ ] Guarantee [ ] Other:

For Loans/Credits/Others: Total Bank financing (US$m): 80.00 Proposed Terms: Standard IBRD and IDA Terms

Financing Plan (US$m)

BORROWER/ RECIPIENT 33.91 0.63 34.54 Source Local Foreign Total

I 50.00 44*00 I 6*oo I INTERNATIONAL BANK FOR

RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT 26.53 3.47 30.00

Responsible Agency: Ministry o f Education Prof, Dr. Satryo S. Brodjonegoro Director General o f Higher Education J1. Jend. Sudirman, Jakarta, 10270 Indonesia Tel: +62-21-572-5061

_ _ _ _ ~

Project implementation period: 5 years Expected effectiveness date: 11/05/2005 Expected closing date: 06/30/2011 Does the project depart f rom the CAS in content or other significant respects? Re$ PAD A.3 Does the project require any exceptions f rom Bank policies? Re$ PAD D. 7 Have these been approved by Bank management? I s approval for any policy exception sought f rom the Board? Does the project include any critical r isks rated “substantial” or “high”? Re$ PAD C.5 Does the project meet the regional criteria for readiness for implementation? Re$ PAD D. 7 Project development objective Re$ PAD B.2, Technical Annex 3 T o create an enabling environment for the evolution o f autonomous and accountable public higher education institutions (HEIs) and to develop effective support mechanisms for the improvement o f the quality, relevance, efficiency, and equity o f higher education.

Project description Re$ PAD B.3.a, Technical Annex 4 Component one: This component will support the government to implement Indonesia’s Higher Education Long-Term Strategy (HELTS) by refining the legal framework for higher education, strengthening the management and administration o f the DGHE, assisting the B A N - P T to develop an institutional accreditation program, and developing a strategy to revitalize the Open University.

Component two: This component further supports H E L T S by improving the quality o f higher education through targeted investments and by strengthening the management and administration o f HEIs. This would be achieved through the expansion o f competitive grants to HEIs, and through the introduction o f institutional management grants and performance-based contracting for newly autonomous public HEIs.

Wh ich safeguard policies are triggered, if any? None Significant, nonstandard conditions, if any?: None

Board presentation: None

Loadcredi t effectiveness:

[ ]Yes [XI N o

[ ]Yes [x] N o [ ]Yes [XI N o [ ]Yes [XI N o

[ ]Yes [XI No

[x]Yes [ 3 No

Operational Procedures Manual (OPM) for the project, including manuals for the competitive fund and the performance-based contract scheme, satisfactory to the Bank.

1. Appoint the Director General o f DGHE as the of f ic ia l responsible for overall project implementation. In this capacity the Director General which will (a) appoint the Board o f Higher Education as the entity responsible for establishing the selection criteria for Grants, as wel l as monitoring and evaluation of Project implementation; (b) appoint the DGHE Implementing Unit as the entity responsible for the management and monitoring o f the Project at the central level, including the grant selection process for HEIs; and (c) appoint a Project Steering Committee to provide the DGHE with guidance in Project implementation.

2. Implement the Project in accordance with the Operation Procedures Manual; 3. Allocate funds to finance grants in accordance with selection criteria and guidelines governing

grants; 4. Prepare and submit to the Association quarterly reports o n the progress o f the Project.

Covenants applicable to project implementation:

A. STRATEGIC CONTEXT AND RATIONALE 1. Country and sector issues Indonesia continues i t s transition fkom an autocratic, centralized state to a democratic, decentralized one. There has been a move toward public sector and fiscal decentralization since 1999. The country has successfully regained macroeconomic and political stability, but economic growth remains below 4 percent, poverty reduction remains a challenge, and governance concerns continue to cloud i t s achievements. Indonesia continues to trail i t s neighbors not only in access to quality health, education, and other basic services but also in i t s ability to attract foreign direct investment (FDI) and compete in the world economy. FDI has declined from its 1996 peak - 30 percent o f Gross Domestic Product (GDP) - t o hover around the 2002 low point at 20 percent o f GDP. Weak governance institutions, poor infrastructure, and shortages o f high-level human capital are keeping investors away and undermining service provision.'

The Government o f Indonesia has prepared a comprehensive package o f reforms covering macroeconomic management, financial sector reform, and polices to help raise investment and reduce poverty. I t s Higher Education Long Term Strategy 2003-2010 (HELTS) i s an important part o f that reform package. I t is an important time to make transformational pol icy changes in the higher education system. The HELTS is designed to improve the quality o f higher education, thereby helping to alleviate shortages o f higher-level sk i l ls that slow investment and absorption o f new technologies. Over the past 20 years, Indonesia has been successful in increasing enrollment in basic education to about 90 percent. Enrollment in secondary education continues to grow and has reached 38 percent in upper secondary education, with higher education enrollments now at 13 percent and growing.

There are 8 1 public higher education institutions (HEIs) and approximately 2000 private HEIs in Indonesiaa2 The HELTS focuses on decentralizing public HEIs and making them autonomous institutions, shifting public expenditure o n higher education to a combination o f block grants, competitive grants, and perfonnance-based grants. These resource transfers are aimed at improving not only education quality but also governance, efficiency, and equity. This wil l be followed by the introduction of demand-side financing (such as vouchers, student grants, and subsidized student loans) that will include transfers to both public and private HEIs. With i t s emphasis on reforming governance in the sector and developing innovative public financing tools, the HELTS can also be viewed as a significant experiment in improving the management and governance o f public sector organizations.

Higher Education Sector Issues Coverage. The private sector has expanded rapidly over the past decade, with a large number o f institutions now enrolling approximately 60 percent o f a l l higher education enrollment.. Nevertheless, higher education enrollment rate is low compared with other countries in Asia:

Indonesia Country Assistance Strategy 2004-2007 and Improv ing the Investment Climate in Indonesia, 2004.

In 2000, there were also 521 (475 private and 46 public) Islamic higher education institutions that f e l l under the oversight o f the Ministry of Religious Affairs - MORA. (JBIC study, 2003). There were also 88 higher education institutions that f e l l under other techmcal ministries, most o f wh ich offered D1, D2, D3, and D4 (pre-baccalaureate) diplomas. The Ministries of Interior, Defense, and State Administration were the on ly techmcal ministries offering higher education programs at the S 1 o r bachelor level.

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gross enrollment in higher education i s 12.8 percent compared with 3 1.9 percent in Thailand, 28.3 percent in Malaysia, and 29.4 percent in the Philippines.

Quality. The public sector s t i l l plays a very important role in higher education, and the GO1 strategy i s to focus on improving the quality and governance o f these institutions. Only a few o f Indonesia’s HEIs are internationally competitive. Four o f Indonesia’s HEIs made it onto Asiaweek’s 2000 ranking o f top multidisciplinary universities in Asia, with the best o f Indonesia’s HEIs ranking number 61 out o f 77. One Indonesian HE1 made it to the l i s t o f top science and technology schools: i t ranked number 21 o f 39. All o f these ranked institutions are public HEIs, yet by international comparisons they fal l toward the bottom end o f the rankings. By the standards o f Indonesia’s own National Higher Education Accreditation Board (BAN-PT), only 9.1 percent o f 4,925 undergraduate study programs (public and private) reviewed by 2000 received an “excellent” rating, while 44.8 percent received a “good” rating, 38.9 percent a “satisfactory” rating, and 7.2 percent a “failing” rating (see International Higher Education, Fal l 200 1). Substantial quality challenges remain in this relatively young higher education system: there continue to be shortages o f qualified staff and underdeveloped systems for supporting and financing high-quality study programs and research (see HELTS).

Public spending. A major contributing factor to the l o w levels o f enrollment and quality i s the l o w level o f public spending on higher education. Public spending on al l levels o f education in Indonesia in 2004 was only 2.4 percent o f GDP compared with an average o f 3.2 percent in other East Asian countries. Twenty-one percent o f the country’s national education budget i s spent o n higher education (World Bank EdStats). This translates into very low spending per student in higher education compared with other countries in the region (see Table 1 below).

Table 1: Public Expenditure on Higher Education Students, 1997 Country

Indonesia 12.3% Phdippines 14.8% Thailand 25.4% Malaysia 53.6% China 65.3% Vietnam 86.1% India 92.5%

Public Expenditure per Student as Percentage of GDP per capita 1997

Source: DGHE Higher Education Sector Study, 2003

The government recognizes the need to improve the efficiency and effectiveness o f public spending in higher education. At present, 95 percent o f the recurrent budget i s spent on the salaries o f faculty and staff, a l l of whom are c iv i l servants managed from Jakarta. Roughly 75 percent o f the development budget i s also directly managed by the central government, while 25 percent i s provided to HEIs in the form o f competitive grants. The government’s strategy i s to increase the proportion of funds provided to HEIs through competitive grants. These grant programs were developed over the last decade in partnership with the Wor ld Bank and the Asian

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Development Bank (ADB) through a series o f loan projects3 and have proved to be effective in aligning spending with local priorities and improving outcomes in student learning as well as enhancing internal and external efficiency. For example, the majority o f HEIs participating in the competitive grant schemes o f the two most recent World Bank projects experienced moderate (5-10 percent) or substantial (>lo percent) increases in the average test scores o f applicants, increases in grade point averages o f students, declines in time required to complete degrees, and declines in the time graduates spend waiting for their first employment. The competitive grant mechanism has also been effective in increasing transparency in public spending. Grant applications are prepared through a participatory process at the institutional level and are peer reviewed according to a widely publicized set o f criteria. In addition to expanding the grants programs, the government intends to introduce a more sophisticated, performance-based financing mechanism that wil l provide additional incentives to public HEIs to improve their quality and increase their efficiency.

Inequality. L o w enrollment i s also explained in part by the difficulty that poor students have in accessing education. In Indonesia, only 3.3 percent o f young adults from the lowest income quintile enroll in higher education, while 3 1 percent o f those from the highest income quintile enroll. The HELTS has a strong commitment to addressing issues o f economic and regional disparity in access, but financing mechanisms to address the problem remain in the very early design stages. The government plans to work with HEIs in the coming years to pi lot outreach, assistance, and remediation programs to increase the participation o f disadvantaged students. More broadly, the GO1 i s discussing plans for investment in secondary schools and support for poor families so that more poor children can complete their upper-secondary education and qualify for entry into higher education.

Governance framework. Underlying al l o f the above i s a higher education governance framework that i s in need o f reform. The HELTS plans to change the role o f the Directorate General for Higher Education (DGHE) from one that tightly regulates HEIs to one that creates an enabling framework and infrastructure within which a diverse set o f institutions can flourish. The implementation o f HELTS wil l gradually provide HEIs with autonomy to bring decisionmaking closer to key stakeholders. This i s fully consistent with Indonesia’s broader trend toward the decentralization o f public services and democratization. The HELTS also recognizes the need to strengthen quality assurance and accreditation systems both to create a framework for continuous improvement and to provide the information needed for the higher education market to grow responsibly.

Implementing the HELTS will require adjustments in the legal framework to ensure the internal consistency o f regulations and to align laws with the vision o f HE1 autonomy. This will include revising the overarching education law and aligning government regulations, finance law, treasury law, c iv i l service law, and administrative law. I t wil l also require significant management and administrative improvements within DGHE, the BAN-PT, and the HEIs themselves. The government will need to expand and further innovate higher education financing mechanisms to provide institutions with the incentives to improve governance,

See Annex 2 for a l i s t and description of projects that have helped to inform the dialogue with the GOI. This l i s t includes not only the World Bank projects undertaken in Indonesia (URGE, DUE, and QUE), but also relevant projects conducted elsewhere.

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efficiency, education quality, and equity. These issues form the core o f the government’s strategy for higher education and provide the orientation for the design o f this project.

The World Bank’s appraisal team concludes that the HELTS provides a theoretically coherent strategy for reform. I t draws from intemational best practice in higher education management. I t applies lessons from other countries’ experience with higher education govemance reforms, such as those that have taken place in Lat in America, Australia, and the UK. The HELTS was formulated after wide consultations among key stakeholders in Indonesia and builds on local experience in the design o f competitive funding mechanisms, the pacing o f reform, and the accreditation o f study programs. Implementation i s designed to proceed at a measured and reasonable pace. The DGHE plan divides HEIs into two levels; non-autonomous public HEIs will participate in grant programs designed to improve their management and academic quality while the stronger, newly autonomous public HEIs wil l engage in higher-order innovations to build models o f good practice for autonomy.

However, the HELTS i s not without risks. Autonomy i s designed to improve decisionmaking, but it i s a risky proposition for institutions that are not we l l prepared to l ive up the challenge o f managing their own affairs. Competitive fbnding runs the risk o f resources being concentrated in the most capable and elite institutions or departments. Both the HELTS and this project include measures to mitigate these risks. Most importantly, grant programs are structured to strengthen planning and financial management o f public HEIs. Grant competitions are stratified in tiers so that institutions o f roughly equal capacity compete with one another for separate pools o f hnding. The implementation o f the HELTS wil l therefore require careful monitoring, evaluation, and adjustment as it moves forward.

2. Rationale for Bank involvement GO1 has asked the Bank to provide continued support for Indonesia’s higher education agenda, recognizing the fi-uitfulness o f past GOI-Bank collaboration in the sector - particularly with regard to the introduction o f new financing schemes. The Bank adds value by leveraging i t s international experience in higher education to help Indonesia to implement the most sophisticated finance and governance innovations proposed in the HELTS. The Bank has extensive experience in the design and implementation o f competitive funding, institutional autonomy, and performance-based financing. The Wor ld Bank’s involvement in this project would facilitate Indonesia’s access to global knowledge about ways to improve higher education. This partnership wil l help to deepen reforms by expanding competitive funding and capacity building for weaker institutions, while providing examples o f innovation at stronger institutions that wil l serve as examples o f good practice before scaling up.

3. Higher level objectives to which the project contributes ID-Country Assistance Strategy (CAS), Report No: 271 08 (October 2003) The project contributes to the CAS objective o f improving govemance by helping the government to build effective and efficient public sector institutions. In particular, the core values underpinning the HELTS, which this project supports, are: (a) competition in the award o f grants so that public resources fol low ideas and results, (b) user participation in the development o f grant proposals, (c) transparency in the decisionmaking process in the awarding o f grants, (d) greater democracy in the governance structures of newly autonomous HEIs, and (e) greater

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accountability for the use o f public hnds through strict accounting measures and outcome monitoring. These innovations in govemance and public financing that this project promotes in the higher education sector should yield value for other sectors as the government continues i t s efforts to decentralize and democratize service provision.

The project also contributes to the CAS objective o f improving the investment climate. As noted under “Country and sector issues” above, the investment climate i s partially constrained by shortages o f highly skilled manpower, which slows the absorption o f technology and lowers productivity. If action i s not taken now to improve the performance o f the higher education sector, the situation wil l deteriorate as competitiveness in the globalizing marketplace increasingly comes to depend on a country’s ability to absorb, use, and generate new knowledge and technologies.

B. PROJECT DESCRIPTION 1. Lending instrument The Wor ld Bank’s support for this project will be financed through a Specific Investment Loan (SIL). By using the S I L as the lending instrument, the Bank can assist the government in the specific priori ty areas required to implement the HELTS during the next several years - including the revision o f the legal framework for higher education, the development o f the quality assurance system, and the development of financing mechanisms that wil l provide HEIs with incentives to improve. The project supports the init ial phase o f an investment program required to implement the HELTS, with later phases to focus o n demand-side financing, further application o f new financing mechanisms, and assistance to the private sector. The government’s request for an APL to cover the above items was considered at the P C N review meeting, but this approach was rejected. Participants in the review meeting concluded that i t would be more prudent to move forward with a S IL as an immediate next step while working with the GO1 to further develop the conceptual approach to the other issues that i t wishes to tackle.

2. Program objective and phases N o t applicable.

3. Project development objective and key indicators The agreed project development objective is:

To create an enabling environment for the evolution of autonomous and accountable public higher education institutions and to develop effective support mechanisms for the improvement of the quality, relevance, efficiency, and equity of higher education.

Key project indicators: There are f ive key indicators for the development objectives o f this project. These general indicators wil l guide project monitoring and evaluation and are discussed in detail in Annex 3.

the foundation for a coherent legal structure and an overarching regulatory framework to support the effectiveness o f institutional autonomy.

The National Information System for Higher Education develops the capability to conduct and report on regular graduate tracer studies by 201 0, thereby signaling significant

The draft law on education institutions (BHP) is passed by 201 0, thereby putting in place

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improvements in the NISHE’s capacity to collect, analyze, and disseminate system-wide data. e Institutional accreditation is awarded to 5percent of all HEIs (public and private) by 201 0, thereby signaling the development and application o f new standards and procedures for institutional accreditation by the BAN-PT. e By 201 0, unqualiped opinion awarded by external auditors on financial audit to five public HEIs, thereby signaling that public HEIs are strengthening the management capability needed to exercise autonomy effectively.

A comprehensive process evaluation of line-item financing, competitive grants, and performance-based contracting is completed by 201 0, thereby permitting the government to make pol icy based on solid evidence about public financing mechanisms for higher education.

4. Project components This project consists of two components with a total baseline cost o f US$98,267,000: (1) reform and oversight o f the higher education system and (2) grants to improve academic quality and institutional performance. The activities and investments in this project represent a more comprehensive approach to reform than has been taken in the past. They focus on constructing an enabling environment at the central leve l while strengthening institutional management and supporting innovation to improve performance and results.

Proiect Component 1 : KJS$7,779,000) H i g h e r education system r e f o r m and oversight: This component wil l support the government in implementing the HELTS by refining the legal framework for higher education, strengthening the management and administration o f the DGHE, assisting the BAN-PT to develop an institutional accreditation program, and developing a strategy to revitalize the Open University, Indonesia’s largest institution o f continuing education.

Sub-component 1.1 - Modernization of higher education sector oversight and management (US$4,001,000): This sub-component will address key capacity constraints in the oversight and management o f the higher education system. Implementing the HELTS requires an enabling framework that permits the DGHE to encourage a results-oriented culture that aims to improve quality and efficiency across al l HEIs. To make the move toward institutional autonomy more effective, several changes must be made and management must be strengthened as follows: (a) developing a revised legal framework for higher education governance, financial management, and personnel management; (b) improving financial management both within the DGHE and within public HEIs; (c) expanding the data collection capacity o f the NISHE, and (d) developing a strategy for scaling up reforms based o n evidence o f their effectiveness, with particular attention given to financing innovations.

Sub-component 1.2 - Supporting a transition in the quality assurance system to emphasize institutional accreditation and licensing of professional fields (US$448,000): The current higher education quality assurance system in Indonesia functions well but i s overburdened, largely due to i t s emphasis on the accreditation o f study programs. This focus has created an overwhelming volume o f reviews that the agency must undertake each year across nearly 2,000 public and

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private HEIs. The BAN-PT and the DGHE have recognized the unsustainable nature o f the current structure but wish to retain many o f i t s established good practices. With support f i om the ADB, the BAN-PT and DGHE authorities have completed a thorough examination o f how best to restructure the accreditation system - not only to make the load manageable but also to make the system more aligned with the move toward HE1 autonomy and to provide information that wil l support the introduction o f performance-based financing. Moreover, the BAN-PT i s poised to acquire i t s own institutional autonomy and must find ways to sustain i t s activities more independently o f the government - including generating revenue to support i t s mission. The main objective o f this sub-component i s to strengthen the existing quality assurance system in higher education and help it to make an important transition f i om emphasizing the accreditation of study programs to emphasizing the accreditation o f overall institutions and professional disciplines (such as architecture, engineering, or medicine). In collaboration with the DGHE, the ADB has been supporting the initiation o f this transition with US$880,000 as part o f loan project whose implementation will continue until 2007. The proposed Wor ld Bank project seeks to leverage the progress made in changing the BAN-PT’s emphasis and continue the process beyond the l i f e o f the ADB’s support. An important part o f this wil l be to integrate professional licensing with the BAN-PT accreditation system. This sub-component also seeks to increase the ownership o f the quality assurance system through stakeholder participation and further strengthen transparency and accountability in accreditation. The adjustments made to the accreditation process will have a direct impact on the entire higher education sector, as the BAN- PT accredits both public and private institutions. To achieve these objectives, technical assistance, training, and materials will be funded under this sub-component to: a) conduct participatory action planning to assist the BAN-PT in building an institutional accreditation system, b) develop a strategy and strengthen management systems for the financial sustainability o f the quality assurance system, c) strengthen HE1 management and administration to help them complete the institutional accreditation process, d) strengthen professional associations to assume a key role in the assessment process needed for licensing fields, and e) support the development o f teacher certification.

Sub-component 1.3 - Development and adoption of a comprehensive revitalization plan for the Open University of Indonesia (US$3,330,000): The Open University (OU) i s the largest HE1 in Indonesia, delivering diploma and degree programs through distance learning. The O U serves 225,000 students each year, almost al l o f whom (nearly 90 percent) are working adults and most o f whom are in-service teachers and c iv i l servants pursuing a required mid-career credential. The programs are thus largely supply-driven by government directive rather than demand-driven by student or local labor market needs, yet the OU serves an important segment o f the population that i s not served by traditional HEIs, working adults. The OU also reaches students in remote regions where options for higher learning are limited. The headquarters o f the administration o f the OU and i t s production center for academic materials are in Jakarta, delivering texts and exams to students affiliated with 35 regional learning centers (RLCs) across Indonesia. The majority o f learning at the OU is completed through traditional correspondence methods, with a limited number o f tutorials and very l imited use of modem (computerized) instruction. The Open University plays an important equity and access role in Indonesian higher education, but the institution is in need of a comprehensive revitalization to modernize i t s governance, finance, outreach, content, and delivery. The strategy and plan to revitalize the institution has not yet been agreed upon. This sub-component would fund studies and technical assistance to examine

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the various options for revitalization. I t would also include broad stakeholder consultations to generate a consensus between the stakeholders and the DGHE on the future direction and mandate o f the institution. This sub-component would also fund the subsequent technical assistance, staff training, and materials for preliminary capacity upgrading as determined by the results o f the agreed strategy.

Project Component 2 - (US $87,338,000) Grants to improve academic quality and institutional performance There i s overall underinvestment in the public higher education sector o f Indonesia, and much o f the current spending i s made on a centralized, line-item basis by the DGHE. The predominance of this traditional funding practice has prevented the widespread development o f incentives for rational public expenditure - incentives that focus HE1 objectives on quality, efficiency, and government priorities. The goal o f the HELTS i s to develop and expand financing mechanisms that provide incentives for academic quality and efficient institutional performance. The government’s move to grant autonomy to public HEIs will provide increasing flexibility in institutional management. This new degree o f agility in HE1 operations wil l allow for the introduction o f further financing innovations that contain incentives for institutions to strive for better results. This component wil l support HELTS by improving the quality o f higher education through targeted investments and by improving management capacity at HEIs. This would be achieved by expanding competitive grants to HEIs and by introducing management strengthening grants and performance-based contracting for newly autonomous HEIs. Performance-based financing wil l be pilot-tested at those public institutions with the strongest management capacity. If successful, the pilots could then be scaled up to al l autonomous public HEIs in the subsequent phases o f reform.

Sub-component 2.1 - Competitive grants to public and private HEIs (US$60,816,000): The DGHE has considerable experience with competitive funding as a mechanism for transferring government resources to cover specific investments made by HEIs. Through this mechanism, the DGHE provides financial incentives to the HEIs to improve the quality o f their institutions and programs in alignment with the HELTS. The BHE initiates the grant award process with a call for proposals. HEIs can submit proposals for one o f two kinds o f grants aimed either at improving education quality or at increasing the employment o f HE1 graduates. To submit a proposal, institutions must meet stated eligibility criteria. These include demonstrating sufficient management capacity to administer the grant funds and to procure goods and services according to guidelines that ensure fairness and accountability. Institutions must also demonstrate that any study programs to be supported under the grant have been accredited by the BAN-PT. Within each grant window, competition is stratified according to tiers o f HE1 capacity so that the process does not favor only the strongest institutions. These tiers correspond to the size, mission, and management capacity o f HEIs. The BHE oversees the selection o f the winning grant proposals.

The proposal review process ensures transparency by adhering to the principles o f external peer review and by engaging a range of proposal reviewers from a cross-section o f HEIs and from abroad. The reviewers must adhere to a strict code o f conduct that ensures, among other things, that review panelists avoid any potential conflict of interest by recusing themselves from grant reviews related to their own institutions or programs. These review panels are comprised o f faculty, administrators, and students. The review panels assess the proposals according to their

8

strengths and to the inclusion o f the following elements: (a) a clearly articulated link between the proposed investments and anticipated outcomes, (b) an appropriate monitoring and evaluation plan, and (c) a demonstration o f sufficient institutional capacity to manage the grant. To ensure transparency, the results o f panels’ deliberations are made public. All proposals must include an 8 percent matching commitment o f HE1 counterpart funding as a demonstration o f i t s institutional commitment. To increase equity across al l grant-winning institutions, al l grant proposals must include a plan for developing an outreach program to increase study opportunities for disadvantaged students. All HEIs applying for such grants must agree and cooperate with the monitoring and evaluation o f their proposed programs. Private HEIs may apply only for grants intended to improve teacher training programs.

Sub-component 2.2 - Grants for promoting good governance in public HEIs and initiation of Performance-Based Contracts at autonomous HEIs (US$26,522,000): The DGHE seeks to develop a system of autonomous public HEIs with good governance practices and organizational cultures that focus on education quality, institutional efficiency, and active efforts to increase the participation o f disadvantaged students. In 2000, six public HEIs were granted autonomous legal status. The GO1 is eager to introduce performance-based financing at these institutions to increase their accountability for quality, efficiency, and equity. Although these HEIs are legally autonomous, they lack the capacity to manage their own finances, personnel, and procurement effectively. The remaining 75 public HEIs do not yet have autonomous status but must also begin improving their management capabilities in anticipation o f being granted that status in the future. This component focuses on strengthening institutional management and on improving the institutional performance o f a l l public HEIs, with the objective o f preparing them for eventual receipt o f performance-based financing. Once autonomous HEIs have sufficient management capacity in place, they wil l be eligible to participate in the initiation o f a performance-based grant financing system that will provide them with budget support conditional on them meeting agreed performance targets. The limited number o f autonomous HEIs participating in the init ial phase o f performance-based financing wil l serve as pi lot institutions for testing the practical application o f autonomy and performance-based grants before extending them to al l HEIs. This component provides support for:

(a) Competitive grants for strengthening institutional management in non-autonomous public HEIs; (b) Proposal-based grants for strengthening institutional management at autonomous public HEIs; (c) Performance-Based Contract (PBC) grants for autonomous public HEIs.

Proiect Component 3 - (US $3,150,000) Project Management Project implementation wil l be managed and administered by the DGHE Implementation Unit (DGHE-IU) .

5. Lessons learned and reflected in the project design The project design has benefited f rom the fol lowing lessons leamed from the Bank’s local and international experience, including three successful higher education projects in Indonesia.

Indonesia’s current quality assurance system i s in danger o f becoming less effective because i t s l imited financial and specialized human resources are being spread over a

0

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huge and expanding number o f study programs that need to be reviewed. The proposed project supports the GOI’s plan to shift the emphasis o f i t s accreditation system to the assessment o f overall higher education institutions and - in concert with professional associations - to continue to accredit individual study programs in professional fields that require licensing. Accreditation o f individual study programs by a central authority i s good practice in medium-sized higher education systems. In a large higher education system, once the HEIs adopt such practices, i t i s then possible to delegate much o f the study program accreditation process to the institution i tsel f . This allows the central accreditation authority to begin accrediting at a more macro level, to assess institutional operations and the HEIs’ fitness for purpose. Even with a shift in emphasis to institutional accreditation, however, i t i s important for the central authority to continue accrediting licensing fields. This assures academic quality so that graduates can acquire the key professional competencies needed for licensing in their chosen field. The private sector can be a good partner for the government in the provision o f higher education services. However, experience shows that i t tends to respond to market demand for disciplines and typically lacks any equity orientation supporting the inclusion o f poor but meritorious students. Without public subsidy, these concerns generally remain unaddressed. The project’s design provides for private sector participation through competitive grants to support the expansion and improvement o f study programs in teacher training, a field with l i t t le private sector provision in Indonesia. All grant proposals for study programs also require an institutional initiative to conduct outreach to disadvantaged students. Private HEIs wil l be eligible for certain demand-side financing options that wil l be developed in the context o f this project. Increasing equity in participation in higher education generally requires a government inducement. In this project, a l l HEIs applying for competitive grants for quality improvements must include the development o f a sustainable outreach program to identify, attract, and retain disadvantaged students. The inclusion o f strong equity provisions and activities will be a key element in the selection o f grant recipients. This equity requirement wil l be an important part o f selection criteria for grants for both public and private institutions. Competitive funding schemes for higher education have been tested in previous Bank- supported projects in al l regions. Completion reports from these projects indicate that this kind o f funding innovation i s an effective way to change organizational culture, promote innovation, and increase efficiency. This project supports further strengthening and scaling-up o f competitive funding in Indonesia and also an evaluation o f various funding mechanisms to determine more precisely the cost-effectiveness o f various funding options. Several industrial countries have introduced performance-based funding schemes for higher education. These mechanisms make public budget allocations conditional on measurable performance criteria. This approach requires HEIs to be more accountable for their results and can be a promising way to increase the efficiency and improve the quality o f routine expenditures. This project tests performance-based funding for public HEIs in the Indonesian context.

0

0

0

0

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6. Alternatives considered and reasons for rejection Several alternatives were considered in the choice o f strategy and project design. These included the fol lowing options:

0 Doing nothing. Continuing to under-finance higher education - and to do so through poorly managed, inefficient institutions with scarce resources - would prevent Indonesia from developing the necessary human capital to achieve i t s development goals. The HELTS i s a coherent strategy that requires an early i nhs ion o f resources and political will to generate the momentum necessary for its success. Inequity in the distribution o f higher education benefits also remains problematic, and the proposed project seeks to address certain equity issues. Without this project, the implementation o f the HELTS would be slower, risking the failure to move toward autonomy and financing innovations. Developing a national student assistance system and demand-sidefinancing. The development o f a comprehensive student grant and loan system was considered as a strategic alternative. Indonesia i s eager to diversify the ways in which it transfers government resources to higher education institutions, and demand-side financing i s an important option since it i s another way to simultaneously improve the quality and equity of higher education. The liquidity constraint faced by the poor and by middle-class families has a negative effect on the enrollment, career choice, and performance in higher education o f students from these households. This constraint arises due to the failure o f the credit market to invest in human capital. The GO1 is considering various options to address such market failures and equity concerns. Indonesia has deferred the introduction o f demand-side financing until after the pursuit o f institutional development. Demand- side financing options wil l be analyzed in the course o f implementing this project, and steps to develop such financing innovations will be taken based o n those findings. Using a more “centralist ” command and control approach. China, Korea, and Japan have used this strategy in the development o f their university sector. This approach was rejected for this project, as i t i s inconsistent with Indonesia’s democratization and decentralization policy and with the country’s diversity. Designing a repeatproject. It was suggested that a small project be undertaken to replicate the success o f the earlier competitive grant projects. This was rejected because i t was not sufficiently responsive to the GO1 strategy to provide HEIs with the tools necessary to make autonomy more effective and develop a new financing mechanism through which the government’s strategic priorities could be addressed. The proposed project supports Indonesia in achieving i t s objectives in the sector. Making more intensive use of the private sector. The private sector accounts for about 60 percent o f higher education enrollments in Indonesia. Improving the quality o f private institutions makes economic sense. The proposed project does not ignore the private sector; i t supports quality improvements by enhancing the accreditation capacity o f the BAN-PT and it allows private institutions to compete for grants for improving the quality o f primary and secondary school teachers, with a requirement that al l grant-winning institutions promote greater equity for disadvantaged students. More intensive support for the private sector, however, has been rejected at this time in favor a more prudent approach that concentrates on improving the quality o f pubic HEIs. Support for the private sector wil l be an important part o f the upcoming analysis o f demand-side financing to see how student scholarships, grants, vouchers, and loans can help to improve the quality and equity o f HEIs.

0

0

0

0

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C. IMPLEMENTATION 1. Partnership arrangements (if applicable) None.

2. Institutional and implementation arrangements In l ine with the project’s objectives, i t i s designed in such a way that management capabilities are improved at the institutional level throughout the project’s implementation. I t i s therefore very important that the project’s implementation unit should develop clear measures and strategies to institutionalize the sk i l ls gained from implementing this project,

At the central level, the project funds wil l be transferred into the integrated budget (DIPA) o f the Directorate General o f Higher Education (DGHE). Accordingly, the Director General, as the head o f the working unit (Satuan Kerja) o f the Directorate General o f Higher Education o f the Ministry o f National Education (MONE), wil l be responsible for the overall implementation o f the project. A Project Steering Committee will be convened by the Director General with representatives f rom the DGHE, BHE, MoF, and Bappenas to provide the DGHE with guidance and strategic direction throughout the project’s implementation. The DGHE will be supported in i t s functions by the Board of Higher Education (BHE), which will be responsible for monitoring and evaluating the project, establishing the grant selection criteria, overseeing the selection process for competitive grants, and advising the DGHE on the negotiation o f performance-based contracts. The BHE will also oversee the necessary studies on the project.

The Director General will assign the Director o f Academic and Students Affairs o f DGHE to oversee the administration o f the IMHERE Project. The Director General will establish an implementing unit (DGHE Implementing Unit), which wil l absorb the existing capacity o f the Central Project Coordinating Unit (CPCU) o f the former and ongoing Wor ld Bank and ADB projects. The implementing unit’s responsibilities wil l include managing and monitoring project activities at the central level, overseeing the grant selection process for competitive grants to HEIs, coordinating the negotiations for the performance-based contracts with HEIs, producing the required project reports, and ensuring that the project achieves the agreed objectives.

As for the HEIs that receive competitive grant awards and performance-based contracts, there wil l be two different arrangements for two types o f institutions: (i) autonomous public HEIs and (ii) non-autonomous public HEIs and private HEIs.

In autonomous public HEIs, the HE1 Rector will have overall responsibility for implementing the proposed activities, administering the grants (including financial management and procurement), achieving the agreed objectives, monitoring and evaluating grant activities, and producing comprehensive reports as required. The grant will be integrated into the HEI ’s budget. Likewise, the administration o f the agreed grant activities will be integrated into the existing central administrative and management structure o f the HEI. The units that wi l l assume these roles must be designated in the grant proposal and in the grant agreement. Where necessary, specialist expertise wi l l be provided by the DGHE to ensure that the necessary capacity for grant implementation and management i s in place within the central administration o f the HEI.

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At non-autonomous public HEIs and at private HEIs, the Rector wil l have overall responsibility for implementing the activities to be financed by the grants, administering the grants, achieving the agreed objectives, monitoring and evaluating the activities, and producing comprehensive reports as required. The grant wil l be integrated into the institution’s official account. In accordance with the grant contract agreement between the institution and the DGHE, the Rector wil l establish (by issuing a Rector’s decree) an ad hoc implementation unit. However, the institution should develop a systematic program and action plan to integrate capacity built under the project into the central HE1 structures by the end o f the project.

Director Academic and

The competitive and performance-based grants wil l be managed through a contracting arrangement. The contracts between the DGHE and the autonomous HEIs wil l be cosigned by the DGHE and the respective Rector as HE1 representative. In case o f private institutions, the contract wil l be cosigned by the DGHE and the Chairperson o f the HE1 f ~ u n d a t i o n . ~

Secretary DGHE

Organization structure for project implementation

At DGHE

Board o f Higher Education

Steering Committee

I I I

Secretary General, 1 M o N E I I

I

I

I

I

I

I

DGHE-IU

Manager Secretary, Academic

Moni tor ing & Evaluation Expert Staff Procurement

Pettv Cash

I! I Reviewer

Request for Remittance (SPM) Payment (SPP) Issuer

Accounting Accounting

Private HEIs in Indonesia are governed by an external foundation.

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At the Participating HEIs

~

Rector 7 Vice Rector 1 - Vice Rector 2

71 Treasurer

3. Monitoring and evaluation o f outcomeshesults The project will assess progress toward each o f the five key indicators by regularly monitoring the set o f specified intermediate indicators presented in Annex 2. Project monitoring will also include a regular assessment of the two grant programs operating under Component 2.1 and 2.2 to measure progress toward the fulfillment o f the grant objectives as well as improvements made in management capacity. The Annual Report of Project Progress (ARPP) will provide a yearly summary o f a l l indicators; the reported data will serve as the basis for regular project supervision. The DGHE will establish baseline data o n al l indicators listed in Annex 2. These indicators will be monitored consistently throughout the l i fe o f the project. The ARPP will also include annual technical and financial audits of grant programs operating through this project.

The BHE will be responsible for overseeing the project monitoring and evaluation (M&E) plan, using information provided by the MONE, the NISHE, the BAN-PT, and a l l public HEIs. The DGHE- IU will carry out any administration necessary to ensure the completion o f the M&E plan to the satisfaction of the BHE, including drafting Terms o f Reference and issuing contracts. The N ISHE wil l collect data on al l indicators f rom al l institutions. Data collected from both beneficiary and non-beneficiary institutions will lay the foundation for evaluating the project. The key project evaluation activity wil l be to compare competitive, performance based, and traditional funding models in terms o f their effectiveness in achieving improved outcomes and in building capacity. Outcomes will be measured with reference to the Development Objective, which ultimately seeks improvements in quality, relevance, efficiency, and equity. Improvements in institutional management at public HEIs will be measured by progress in building basic capabilities in governance, financial management, procurement, human resources management, and data production for quality assurance (see the Detailed Project Description in Annex 4).

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The evaluation will proceed along three lines o f inquiry: (1) were the various financing mechanisms implemented as intended - according to operational procedures, in a timely fashion, and without leakage o f funds; (2) how did each funded program contribute to agreed outcome and capacity indicators (compared with a control group o f non-beneficiary institutions); and (3) what can be deduced from the above about the effectiveness o f each funding mechanism in achieving results and the efficiency o f each funding mechanism in allocating and managing public resources? The evaluation wil l require the DGHE to establish the baseline data on outcome and capacity indicators listed in Annex 2 and to monitor those indicators consistently throughout the l i f e o f the project. The design and preparatory steps for this evaluation wil l be funded by a PHRD grant for project preparation. The tasks to be undertaken prior to project effectiveness will include: the development o f Terms o f Reference for evaluators and enumerators; the production o f interview protocols, data collection instruments, and enumerator handbooks; the training o f evaluators and enumerators; and the collection o f baseline data. Resources for conducting the project evaluation are provided under Component 1.1.

4. Sustainability There are several reasons why the achievement o f the project’s development and strategic objectives are sustainable. First, the HELTS i s a solid and promising strategy that has the support o f al l key stakeholders. Second, the GO1 clearly owns the project, which the DGHE designed with the support o f the MONE, BAPPENAS, and the Ministry o f Finance. Third, the project has incorporated activities that will facilitate the institutionalization o f key reforms, including the establishment o f a coherent legal framework supporting the implementation o f HE1 autonomy. Fourth, the DGHE has a strong record o f adopting project innovations such as the introduction o f competitive funding mechanisms to transfer government resources to HEIs. Fifth, the project includes activities that will build institutional capacity and support the transition o f the higher education system towards greater autonomy. Finally, with the economy projected to grow steadily in the medium and long term, i t i s more l ikely to be feasible to sustain and scale up the implementation o f the HELTS in the future.

5, Critical risks and possible controvl

From Outputs to Objective The legal and regulatory framework may not be amended in a manner that supports HE1 autonomy and flexibility in financing innovations or be adopted by parliament.

Risk

HE1 autonomy may actually lead to a decline in quality due to a lack o f effective management capacity, poor leadership, or a lack o f incentives for improving institutional performance.

-sial aspects Risk Rating

M

M

Risk Mitiaation Measure

The GO1 i s in general support o f moving toward the decentralization o f public services, including the autonomy o f public HEIs. The GO1 also supports the introduction o f performance-based financing for public sector institutions, as well as c iv i l service reforms that wil l support the initiation and sustainability o f such a mechanism. Component 1 focuses attention and activities on addressing this risk from the start o f the project. The financing innovation o f performance-based contracting for autonomous HEIs will be preceded by management capacity building. Eligibility criteria for PBC require institutions to have a strategic plan in place, and they require a management capacity assessment. Project monitoring will help to identify changes in intermediate indicators to guide corrective actions.

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The quality assurance system and National - - Information System for Higher Education may not yield appropriate data to inform policymakers in their decisionmaking.

L I The planned transition to institutional accreditation

Risk From Components to Outputs Faculty and staff at HEIs may resist changes in management practices and m a y resist the c i v i l service reforms that are expected to accompany HE1 autonomy.

Management capacity built as a result o f project implementation may no t b e fully absorbed by the central administration o f the beneficiary HEIs.

The selection o f programs for competitive funding may b e biased toward the stronger institutions and might not be open and transparent.

Institutional capacity at some o f the traditional (non-autonomous) HEIs i s s t i l l quite weak and m a y prevent them f r o m developing sol id strategic plans and competitive proposals or implementing the program effectively. Weak management capacity at publ ic HEIs risks the misuse o f project funds and m i s - procurement. (See Annexes 7 and 8 for explanations o f high-risk ratings and agreed mit igation measures to lower the risk.)

1 Overall Risk Rating Risk Rating - H (High Risk), S (Substantial Risk), M (

Risk Rating

M

M

N

M

M

M

and professional licensing wil l include an examination o f institutional performance as we l l as a study o f program quality. The N I S H E wil l expand i t s data collection capacity to include the labor market

Risk Mitigation Measure

The project has included stakeholder dialogue as part )f each component. The grant selection process and h e P B C selection process both require the nvolvement o f faculty and staff to ensure their nterests are incorporated into the programs. The strongest HEIs wil l have project management :mbedded within their central administrative ;tructures. Weaker HEIs will build ad hoc project implementation structures, but the el igibi l i ty criteria for each grant requires HEIs to produce an institutional p lan to integrate project management Zapacity in to their central administration. (a) Competitions are judged in tiers so that a l l institutions compete for funding against institutions w i th similar capacity; (b) a Wor ld Bank appraisal mission reviewed the processes used in past competitions and noted the recent modifications made by the DGHE to ensure appropriate stratification o f HEIs according to their levels o f capacity and to make competitions more transparent. The processes and modifications were found to be satisfactory. Technical audits conducted as part o f the ARPP will review the selection process o f the grants. Proposed training, technical assistance, and tiered grant competitions included in the project wil l help tht weaker institutions to build the sufficient capacity for proposal writing and project management.

Proposed measures to mitigate project f inancial management and procurement risk have been agreed in advance with the DGHE. (See Annexes 7 and 8.) Further mit igation measures have been incorporated in to the Corruption Prevention Act ion Plan (Annex 15) for t h i s project.

[odest Risk), N (Negligible or Low Risk).

Possible controversial aspects: Controversy could arise over the introduction of performance-based contracting at the strongest HEIs. Only six aut o f 81 public HEIs currently ho ld autonomous status and those without such status or with weak management capacity may contest the need for HEIs to have this status in order to enter into performance-based contract negations with the GOI. The strategy i s

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predicated on selecting the strongest institutions to test sophisticated reforms that require the existence o f significant management capacity. The plan i s to allow the stronger institutions to experiment with these financing innovations and develop lessons o f experience and then to modify the mechanism based on those lessons. These institutions would then serve as models for the weaker or less-established HEIs.

6. Loadcredit conditions and covenants Condition of effectiveness: An Operational Procedures Manual for the project, acceptable to the World Bank, must be completed prior to project effectiveness.

Covenants: (1) Appoint the Director General o f DGHE as the official responsible for overall project implementation. In this capacity the Director General which wil l (a) appointment the Board o f Higher Education as the entity responsible for establishing the selection criteria for Grants, as wel l as monitoring and evaluation o f Project implementation; (b) appoint o f the DGHE Implementing Unit as the entity responsible for the management and monitoring o f the Project at the central level, including the grant selection process for HEIs; and (c) appoint o f a Project Steering Committee to provide the DGHE with guidance in Project implementation. (2) Implement the Project in accordance with the Operation Procedures Manual; (3) Allocate funds to finance grants in accordance with selection criteria and guidelines governing grants; (4) Prepare and submit to the Association, quarterly reports on the progress o f the Project..

D. APPRAISAL SUMMARY 1. Economic and financial analyses The proposed project supports investment in improving Indonesia’s stock o f human capital as part o f the country’s drive toward global competitiveness and an improved investment climate. The economic benefits o f this project will result from the expected returns f rom the production o f higher-quality human capital in fields o f national importance. Based o n experience from earlier projects that invested in quality improvements in higher education in Indonesia, the internal rate o f retum to the proposed interventions i s estimated to be high - possibly as much as 50 percent. Although the true values used for the parameters o f this calculation are imprecise, sensitivity analysis reveals that the general conclusion that the investment will yield a positive internal rate o f return i s robust. Public intervention can also be justified because the country arguably suffers from the failure o f the credit market to provide families with access to reasonably priced student loans to finance costly but profitable higher education studies. Alternative investments to support demand-side financing and student aid or to concentrate on stimulating the private sector were rejected for two reasons: (a) the private sector i s quite substantial (covering 40 percent o f higher education enrollments) and (b) the DGHE has a long- term plan to initiate demand-side financing and student assistance that touches both public and private HEIs in the subsequent phases o f i t s reform. The project can be further justified in that i t focuses on improving the governance o f public sector service delivery.

2. Technical The technical aspects o f the project design are sound. The project i s based on Indonesia’s carefblly articulated Higher Education Long-Term Strategy. The HELTS has been informed by international best practice and has incorporated the concerns voiced by stakeholders. The strategy seeks to improve the quality, efficiency, and equity o f higher education by supporting

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the move toward institutional autonomy. I t seeks to further stimulate progress toward these goals through the introduction and expansion o f financing innovations that contain incentives for institutions to improve their performance and outcomes. The project’s design focuses f i rst on building the enabling framework that wil l buttress the move toward institutional autonomy and the systemic focus on quality factors. The design then concentrates on building management capacity to support HE1 autonomy. This project also leverages investments being made in the reform o f the BAN-PT, which i s currently being supported by the ADB, and adds value by making the transition to the accreditation system more participatory and financially sustainable.

The expansion o f financing innovations - competitive grants and performance-based contracting - has been based on international best practices, as well as on years o f local experience with competitive funding in Indonesia. Many o f the practices have been locally tested for years through the Wor ld Bank’s past higher education projects in Indonesia, including URGE, DUE, and QUE (see Annex 2 for details). Lessons learned from earlier rounds o f grant selection have been integrated into the eligibility criteria and selection process; these lessons will be clearly reflected in the Operational Procedures Manual (OPM). The participatory approach to preparing grants and selecting grant recipients has helped to make public expenditure programs more democratic and transparent. Competitive funding also supports the institutional development o f HEIs by encouraging the development o f management capacity through grant administration. Controls to ensure the transparency o f the grant selection process have been applied to the new system o f performance-based contracts. Concern for equity has been embedded in the grant selection criteria and as an institutional performance indicator in the new performance-based contracting scheme. The private sector i s eligible for grants related to teacher training, which i s a field in which there tends to be a market failure, and grant-winning institutions must address equity concerns in a pro-active manner. The private sector HEIs will also benefit from the introduction o f institutional accreditation. The project also seeks to build capacity for management and administration by asking most HEIs to integrate grant administration into their central management structures and to take basic steps to improve their financial, personnel, and procurement systems. The project has incorporated a detailed evaluation o f the three financing mechanisms to capture important information about the implementation processes and effectiveness o f the various financing innovations. This wil l provide concrete evidence upon which future policy choices can be made. Finally, the Corruption Prevention Action Plan has been produced joint ly by the DGHE and the World Bank; i t contains many key mitigation measures, which are embedded throughout the project design.

3. Fiduciary The FM assessment was carried out in accordance with Assessment o f Financial Management Arrangements in World Bank-Financed Projects, Guidelines to Staff issued by the Financial Management Sector Board in October 15,2003. The appraisal team reviewed the operations o f the DGHE as the implementing agency. In addition, assessment site visits were made to several HEIs in Indonesia: Gajah Mada University (UGM), the University o f Indonesia (UI), the University o f Padjadjaran (UNPAD), the University o f Airlangga (UNAIR), the Bandung Institute of Technology (ITB), the Bogor Agriculture Institute (IPB), and the University o f Surabaya (UBAYA).

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The overall risk level o f the project i s considered to be high. This i s due mainly to the following observations: (i) weak environmental controls throughout the system; (ii) the heterogeneity o f capacity at eventual grant-recipient institutions; (iii) the unknown capacity o f the eventual grant recipients to successfully administer grant funds; and (iv) the generally weak financial management capacity at the institutional level observed at the aforementioned sample HEIs. These observations make it important for the implementing agency and the grant-recipient HEIs to commit to improving their financial management capacity. Such capacity building i s also an important technical aspect o f the project design itself.

Despite the high risk rating for financial management, i t should be noted that the DGHE project preparation and implementation team has demonstrated strong commitment to building financial management capacity at a l l public HEIs. Moreover, the DGHE has had years o f experience in implementing Wor ld Bank-financed projects. To lower the FM risk, the DGHE project preparation team has adopted an FM capacity-building action plan in consultation with the World Bank F M S (see Annex Table 8.1 at the end o f Annex 8 for precise details). This has caused the World Bank task team to be confident that - given strict adherence to the action plan - the financial management risk o f the project could be reduced significantly. The Wor ld Bank task team concluded that completing these proposed actions wil l ensure that the project will satisfy the Bank’s financial management requirements as stipulated in OPDP 10.02. The appraisal team recommends that the Financial Monitoring Report (FMR) should be used during project supervision as the basis for disbursement as the findings o f the FMR should provide an adequate level o f data for appropriate FM monitoring during project implementation.

Procurement will be carried out by the DGHE and by the participating HEIs. The DGHE has had years o f experience in conducting procurement under Wor ld Bank-financed projects. However, at this time, most o f the participating HEIs do not have adequate capacity to conduct procurement independently. The procurement risk for this project is, therefore, rated as high. This rating is due to the size o f the project, the l o w procurement capacity at HEIs, and the heterogeneity o f those HEIs that are expected to receive grants. To mitigate this risk, the Wor ld Bank and the DGHE agreed that the implementing bodies (whether the DGHE or the individual HEIs) should designate a unit to be in charge o f procurement and dedicate specialized staff to conduct procurement. Capacity for procurement will be built through training and technical assistance. Such procurement practices will include systematic accountability measures and public participation in the procurement process to ensure the transparency o f a l l transactions. Annex 8 (Procurement) and Annex 15 (Corruption Prevention Action Plan) further describe these measures to mitigate procurement risk.

4. Social In Indonesia, only 3.3 percent o f young adults f rom the lowest income quintile enroll in higher education, while 3 1 percent o f those from the highest income quintile enroll. The HELTS contains a strong commitment to addressing economic and regional disparities in access to higher education. The DGHE addresses these equity concerns in this project through the grant selection criteria; a l l HEIs competing for quality improvement grants must integrate into their activities the initiation or expansion o f outreach, remediation, and assistance programs for disadvantaged students. Under this project, the DGHE will also undertake the necessary studies and analysis to design future demand-side financing mechanisms that wil l ensure greater

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participation o f the poor in higher education. More broadly, the MONE and the DGHE are discussing plans for investing in secondary schools and supporting poor families with the aim o f increasing the number o f disadvantaged students gaining access to higher levels o f education.

5. Environment Any c iv i l works undertaken through the grants programs in this project are strictly limited to rehabilitation o f existing classrooms or laboratories. Environmental safeguards and procedures for meeting them will be set out in the Operational Procedures Manual (OPM) for this project. The OPM will clearly state that any such rehabilitation must meet World Bank guidelines for environmental safeguards. An acceptable O P M i s a condition o f project effectiveness.

6. Safeguard policies

Safeguard Policies Triggered by the Project Yes N o Environmental Assessment (OP/BP/GP 4.01) [I Natural Habitats (OP/BP 4.04) [I Pest Management (OP 4.09) [I Cultural Property (OPN 1 1.03, being revised as OP 4.11) [I Involuntary Resettlement (OP/BP 4.12) [I Indigenous People (OD 4.20, being revised as OP 4.10) [I Forests (OP/BP 4.36) [I Safety o f Dams (OP/BP 4.37) [I Projects in Disputed Areas (OP/BP/GP 7.60) * [I Projects on International Waterways (OP/BP/GP 7.50) 11 [XI

Note: * By supporting the proposed project, the Bank does no t intend to prejudice the f ina l determination o f the parties’ claims o n the disputed areas.

The safeguards have been assigned as Category C for this project. There are no specific issues regarding indigenous people arising from the project that require any action under the Bank’s policy.

7. Policy Exceptions and Readiness None.

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Annex 1 : Country and Sector or Program Background

MANAGING HIGHER EDUCATION FOR RELEVANCE AND EFFICIENCY Indonesia continues i t s transition f i om an autocratic, centralized state to a democratic, decentralized one. There has been a move toward public sector and fiscal decentralization since 1999. The country has successfully regained macroeconomic and political stability, but economic growth remains below 4 percent, poverty reduction remains a challenge, and govemance concerns continue to cloud i t s achievements. Indonesia continues to trail i t s neighbors not only in access to quality health, education, and other basic services but also in i t s ability to attract foreign direct investment (FDI) and compete in the world economy. FDI has declined from its 1996 peak - 30 percent o f Gross Domestic Product (GDP) - to hover around the 2002 l o w point at 20 percent o f GDP. Weak govemance institutions, poor infrastructure, and shortages o f high-level human capital are keeping investors away and undermining service provision (see Indonesia Country Assistance Strategy 2004-2007 and Improving the Investment Climate in Indonesia 2004).

The government has prepared a comprehensive package o f reforms covering macroeconomic management, financial sector reform, and polices to increase investment and reduce poverty. I t s Higher Education Long Term Strategy 2003-2010 (HELTS) i s an important part o f that reform package. Over the past 20 years, Indonesia has been successful in increasing enrollment in basic education to near universal access. Enrollment in secondary education continues to grow and has reached 80 percent for lower secondary and 38 percent for upper secondary, with higher education enrollments now at 13 percent and growing. I t i s an important time to make transformational pol icy changes in the higher education system. The HELTS i s designed to improve the quality o f higher education, thereby helping to alleviate shortages o f higher-level sk i l ls that are slowing investment in the economy and the absorption o f new technologies.

There are 8 1 public higher education institutions (HEIs) and approximately 2,000 private HEIs in Indonesia. The HELTS focuses on decentralizing public HEIs and making them autonomous institutions, changing public expenditure for higher education into a combination o f block grants, competitive grants, and performance-based grants. These resource transfers wil l focus on improving not only education quality but also governance, efficiency, and equity. This wil l be followed by the introduction o f demand-side financing (for example, vouchers, student grants, and subsidized student loans) that will include transfers to both public and private HEIs. With i t s emphasis on reforming governance in the sector and developing innovative public financing tools, the HELTS can also be viewed as a significant experiment in improving the management and govemance of public sector organizations.

Higher Education Sector Issues Coverage. The private sector has expanded rapidly over the past decade, with a large number o f institutions now enrolling approximately 60 percent of students in higher education. Nevertheless, the higher education enrollment rate i s l o w compared with other countries in Asia: gross enrollment in higher education i s 12.8 percent, compared with 31.9 percent in Thailand, 28.3 percent in Malaysia, and 29.4 percent in the Philippines.

Quality. The public sector s t i l l plays a very important role, and the government’s strategy i s to improve the quality and govemance o f these institutions. Only a few o f Indonesia’s HEIs are

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internationally competitive. Four o f Indonesia’s HEIs made it into Asiaweek’s 2000 ranking of top multidisciplinary universities in Asia, with the best o f Indonesia’s HEIs ranking number 61 out o f 77. One Indonesian HE1 made i t onto the l i s t o f top science and technology schools, ranking number 21 o f 39. All o f these ranked institutions are public HEIs, yet by intemational comparisons they fal l toward the bottom end o f the rankings. By the standards o f Indonesia’s own National Higher Education Accreditation Board (BAN-PT), only 9.1 percent o f 4,925 undergraduate study programs (public and private) reviewed by 2000 received an “excellent” rating, while 44.8 percent received a “good” rating, 38.9 percent a “satisfactory” rating, and 7.2 percent a “failing” rating (see Intemational Higher Education, Fal l 2001). Substantial quality challenges remain in this relatively young higher education system: there continue to be shortages of qualified staff and underdeveloped systems for supporting and financing high- quality study programs and research (see HELTS).

To ensure quality in higher education, the BAN-PT carries out accreditation o f study programs for Diploma (D3), Bachelor (Sl), and Graduate (S2) programs. Approximately 14 percent o f D 3 programs, 87 percent o f S 1 programs, and 96 percent o f S2 programs have been accredited since the creation o f the BAN-PT in 1995. The BAN-PT has the huge task o f accrediting and reaccrediting a total o f 9,455 study programs annually, which requires a large number o f qualified reviewers, sufficient time, and an ample budget. N e w study programs are continually being developed, which puts further stress on the current system. The BAN was established to introduce a quality-awareness and self-assessment tradition among public and private sector providers; i t has done this quite successfully. W h i l e the BAN i s now well established, i t does not have the capacity to evaluate and accredit a massive number o f new and existing study programs. N o w that the accreditation and self-evaluation culture i s wel l established in higher education, the DGHE seeks to support the BAN-PT as it transitions f rom accrediting individual study programs to accrediting overall institutions and specialized licensing fields, such as engineering, accounting, architecture, law, medicine, nursing, and teacher training.

Public spending. A major contributing factor to the l o w levels o f enrollment and quality i s the low level o f public spending on higher education. Public spending on al l levels o f education in Indonesia in 2004 was only 2.4 percent o f GDP compared with an average o f 3.2 percent in other East Asian countries. Twenty-one percent o f the country’s national education budget i s spent on higher education (World Bank EdStats). This translates into very l ow spending per student in higher education compared with other countries in the region (see Annex Table 1.1 below.)

Annex Table 1.1: Public Expenditure on Higher Education Students, 1997 Country

Indonesia 12.3% Philippines 14.8% Thailand 25.4% Malaysia 53.6% China 65.3% Vietnam 86.1% India 92.5%

Public Expenditure per Student as Percentage of GDP per capita 1997

Source: DGHE Higher Education Sector Study, 2003.

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The government recognizes the need to increase the efficiency and effectiveness o f public spending in higher education. At present, 95 percent o f the recurrent budget i s spent on the salaries o f faculty and staff, a l l o f whom are c iv i l servants managed from Jakarta. Roughly 75 percent o f the development budget i s also directly managed by the central government, while 25 percent i s provided to HEIs in the form o f competitive grants. The government’s strategy i s to increase the proportion o f funds provided to HEIs through competitive grants. These grant programs were developed over the last decade in partnership with the Wor ld Bank and the Asian Development Bank (ADB) through a series o f loan projects and have proved to be effective in aligning spending with local priorities and improving outcomes in student learning, as well as enhancing internal and external efficiency. For example, the majority o f HEIs participating in the competitive grant schemes o f the two most recent World Bank projects moderate (5-10 percent) or substantial (>lo percent) increases in the average test scores o f applicants, increases in the grade point averages o f students, declines in the time required to complete degrees, and declines in the time that graduates spend waiting for their f i rst employment. The competitive grant mechanism has also been effective in increasing transparency in public spending. Grant applications are prepared through a participatory process at the institutional level and are peer reviewed according to a widely publicized set o f criteria. In addition to expanding the grants programs, the government intends to introduce a more sophisticated, performance-based financing mechanism that wil l provide additional incentives to public HEIs to improve their quality and increase their efficiency.

Inequality. Low enrollment i s also explained in part by the dif f iculty that poor students have in accessing education. In Indonesia, only 3.3 percent o f young adults from the lowest income quintile enroll in higher education, while 3 1 percent o f those from the highest income quintile enroll. The HELTS has a strong commitment to addressing issues o f economic and regional disparity in access, but financing mechanisms to address the problem remain in the very early stages o f design. The government plans to work with HEIs in the coming years to pi lot programs for outreach, assistance, and remediation to increase the participation o f disadvantaged students in higher education. More broadly, the GO1 i s discussing plans for investing in secondary schools and supporting poor families so that more poor children complete their upper-secondary education and qualify for entry into higher education.

Governance framework. Underlying al l o f the above i s a higher education governance framework that i s in need o f reform. The HELTS plans to change the role o f the Directorate General for Higher Education (DGHE) from one that tightly regulates HEIs to one that creates the enabling framework and infrastructure for a diverse set o f institutions to flourish. The implementation o f the HELTS will gradually provide HEIs with autonomy, which wil l bring decisionmaking closer to key stakeholders. This i s h l ly consistent with Indonesia’s broader trend toward the decentralization o f public services and democratization. The HELTS also recognizes the need to strengthen quality assurance and accreditation systems, both to create a framework for continuous improvement and to provide the information needed for a market in higher education to grow appropriately.

The key aspects o f higher education governance have been the centralized and politicized selection o f HE1 leaders, the centralized budgeting o f public expenditure for the operations o f HEIs, the centralized human resource management for both academic and non-academic staff

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who have been part o f the c iv i l service rolls (PNS), and overall centralized decision making. Despite o f some past governance reforms at the margins, the core structure o f institutional oversight, budgeting, and decision making has led to a,rigid, bureaucratic network o f public HEIs that are constrained in their ability to innovate and respond rapidly to changes in their external and internal environment. Due to governance constraints and management capacity gaps within the individual institutions, public HEIs in Indonesia remain l imited in their ability to generate greater efficiencies and to improve learning outcomes through the development o f incentives. These constraints and limitations mean that public HEIs are not fully accountable for the results o f the significant public investments made in them.

Implementing the HELTS wil l require adjustments to the legal framework to ensure the intemal consistency o f regulations and to align laws with the vision o f HE1 autonomy. This wil l include revising the overarching education law and aligning government regulations, finance law, treasury law, c iv i l service law, and administrative law. (See Annex Table 1.2 on the legal framework.) I t will also require significant capacity building within DGHE, the BAN-PT, and the HEIs themselves. The government wil l need to come up with new and expanded financing mechanisms to provide higher education institutions with the incentives to improve their governance, efficiency, education quality, and equity. These issues form the core o f the government’s strategy for higher education and provide the orientation for the design o f this project.

Institutional autonomy for HEIs i s the cornerstone o f this strategy - to give institutions not only the freedom but also the management capacity required to become less bureaucratic, more responsive to change, and better able to become more efficient and improve learning outcomes. The DGHE also seeks to balance the autonomy rights o f HEIs and their increased responsibility to the public - thus making HEIs more accountable for the results that they achieve in their use o f public resources. This i s a goal not only o f the DGHE but also o f the MOF. Finance Law 17/2003 o f Indonesia seeks to enhance the accountability and performance o f al l public sector institutions across the country.

In the government’s move toward decentralization, its decision to grant autonomous (BHMN) status to public HEIs was made in the absence o f the comprehensive changes to the legal framework that would facilitate this autonomy. The regulatory environment should be amended in order to permit and sustain the ambitious governance and finance innovations in the higher education sector. For example, State Finance Law 17 / 2003 does not recognize the public funding for BHMN institutions, yet Education Law 20 / 2003 requires al l public HEIs to be given BHMN status. This legal gap has yet to be filled and could prevent BHMN HEIs from receiving government funds and from managing their finances unless an intermediary law i s put in place. Also, HEI’s l imited capacity to manage their own human resources i s exacerbated by limitations imposed o n them by the C iv i l Service L a w 43/1999. Despite o f their legal independence, the staff of the newly autonomous HEIs continue to be employed as c iv i l servants, which limits the extent to which the leaders o f these institutions to adopt flexible human resource policies and fiscal rewards for staff performance. Thus, i t is vi tal that the legal framework for higher education be adjusted to facilitate the introduction o f autonomy and performance-based funding in HEIs.

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Funding mechanisms to transfer public resources to HEIs Governments have at their disposal a wide range o f financing mechanisms to transfer public resources to the higher education sector. These range from supply-side financing, in which the government transfers funds to institutions directly (for example, through traditional line-item budgeting, block grants, formula funding, competitive finding, or performance-based funding) to demand-side financing, in which the government channels funds to institutions indirectly through students (for example, through scholarships, vouchers, subsidized student loans, or service commitments). Each mechanism has benefits and drawbacks - though some methods have proved to be more effective than others depending on their intended purpose and whether the government or the HE1 i t se l f i s making the assessment. Each scheme also incurs certain transaction costs related to the method o f allocation; some o f these costs are financial and related to administration and are borne by different points in the system, whereas other costs are political. As countries move away from funding public higher education through traditional line- i tem and negotiated budgets and toward block grants and other methods, they generally experiment with various financing innovations over time and develop a unique blend that endeavors to combine supply-side with demand-side financing. The Indonesian government has taken this approach by gradually introducing innovative ways to provide support to HEIs.

Gradually introducing a variety of funding mechanisms is desirable I t i s clear from experience worldwide that i t is desirable to have a variety o f different public funding mechanisms for higher education. There are several reasons for this. First, this gives the government the flexibility to adapt its funding to i ts own evolving priorities (for example, financial awards that can be modified to encourage institutions to invest in important public goods or to support public objectives l i ke ensuring the survival o f areas o f study that might not have immediate benefits for the labor market in the short term but that are vital for the country’s long-term development). Second, i t gives the government the opportunity to use i t s finding to promote certain kinds o f behavior at both the central and institutional levels (such as collaboration, transparency, accountability, and the inclusion o f stakeholders). Third, the government can use certain funding mechanisms to reward institutions for quality outputs or to signal to stakeholders the quality o f an institution’s outputs. Fourth, having a variety o f finding mechanisms can prevent budget instability at the institutional level, which can occur when governments tie too large a proportion o f institutional budgets to only one sort o f resource- distribution procedure. I t i s in the government’s interest to develop stable, more sustainable public institutions; infusing public higher education with a variety o f effective and efficient funding mechanisms i s one way to support that objective. There i s no ideal mix, and each country must determine on its own which financing mechanisms and what combination o f mechanisms work best in the given context. Innovations should be introduced gradually and prudently so the impact o f each new mechanism can be assessed, lessons can be learned from i t s ini t ial implementation, and- based o n those lessons - adjustments can be made before scaling up the innovations to al l HEIs.

Competitive funding for higher education The Indonesian government began introducing variety into its HE1 funding mechanisms by experimenting with competitive finding under the URGE project in 1995. The GO1 has gradually scaled up the practice under two subsequent World Bank projects (DUE and QUE) and one ADB project over the past 10 years. Competitive funding is a financing mechanism in

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which the government allocates a set amount o f resources for a kind o f grant dedicated to investments designed to achieve a specific objective or purpose. The government then invites HEIs or their individual departments to submit grant proposals that describe the applicant’s intended objective and set out the specific investments that will be made with the funds to achieve that objective. The proposals are then considered in a transparent, peer-reviewed, merit- based selection process. The Board o f Higher Education (BHE) holds proposal-writing workshops to help HEIs to prepare acceptable proposals to submit. The reviewers are al l required to adhere to a strict code o f conduct that, among other things, mitigates the chance o f conflicts o f interest arising. Upon receiving their funds, the winning institutions or departments must demonstrate or develop sufficient financial management and procurement capacity to administer the grant funds. The competitions are generally “tiered” so that institutions compete for grants with others with the same level o f capacity. This competitive funding mechanism permits the GO1 to provide institutions with incentives to pursue activities that are in accordance with the national strategies for both higher education and overall national development. The implementation completion reports (ICRs) o f the projects that have used competitive funding show that the pluralistic approach to grant selection draws a wider range o f participants into the decisionmaking process and promotes collaboration among the central authority (DGHE), the institution, the faculty, administrators, and students. In many cases, i t has also encouraged teamwork and innovation between different academic disciplines that have traditionally worked in relative isolation. This has served to rationalize pockets o f public expenditure by involving the end users (students) and the frontline service providers (academic departments and faculty) in the design, financing, and execution o f activities and investments with the goal o f improving education quality.

Investment versus institutional development While competitive grants to HEIs support specific investments, they also support the institutional development o f HEIs by encouraging a collaborative proposal writing process, by encouraging open competition among institutions for public resources, by encouraging transparency in the selection process, and by encouraging the development o f management capacity (in administering the grant) in the institutions as wel l as accountability for the outputs from the investment. One lesson that can be learned from reviewing World Bank ICRs o n higher education competitive funds worldwide i s that competitive funding in higher education i s as much about the ultimate investment i tself as i t i s about the process o f competition and the mode o f financial transfers and management o f the funds. Competitive funding in Indonesian higher education has not only rationalized significant portions o f public financing but also altered the organizational behavior within the DGHE and within the HEIs themselves in a positive way.

The institutional development benefits o f competitive funding in higher education have been recognized by the DGHE, and the practice has become internalized and mainstreamed to the point that approximately 25 percent o f the investment budget allocations f rom the GO1 to HEIs are awarded on a competitive basis. W h i l e some o f these competitive funds are administered by the central administration o f public HEIs, in many cases these funds are administered by individual study programs and departments within HEIs. Competitive funding has helped to create enclaves of budget rationalization, financial management capacity, and accountability for results within the public HEIs. Experience shows that competitive funding works best when i t supports pockets of funding for specific purposes. This limitation, however, makes it difficult to

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scale up this particular funding mechanism to HEIs in general and thus impedes a wider, more systemic improvement in management capacity. The DGHE i s eager to expand i t s operations f rom nurturing only disparate enclaves o f good governance and financial management within selected departments o f HEIs to supporting systemic capacity building across al l public HEIs through targeted investments aimed at improving the quality o f education.

Effective autonomy The GO1 is moving toward decentralization o f many public services. In most instances, this entails devolving responsibility for the oversight and management o f public services to regional governments. However, responsibility for the public higher education sector will not be devolved to regional governments. Instead, legal autonomy wil l gradually be given to HEIs, making each institution a non-profit state enterprise. After this autonomy idea was introduced in 2000, six o f the country’s 81 public HEIs have been made legally autonomous. However, due to their many years o f centralized management and oversight, they lack the managerial and administrative capacity at the institutional level to exercise their autonomy in an effective manner. Although boards of trustees have been established for autonomous HEIs and the rectors and presidents o f public HEIs are elected by the boards o f trustees rather than being appointed by the Minister o f Education, these new leaders are faced with a conundrum - their newly autonomous institutions have insufficient capacity to to operate autonomously. To move forward with its long-term strategy and to fill these important capacity gaps, the DGHE must provide the necessary support to help these institutions to become effectively autonomous.

To be effectively autonomous, HEIs should be: Capable o f independent financial management Capable of independent human resource management Capable of independent physical plant management Capable o f independent decision making Capable o f sufficient cost recovery Accountable to Board o f Trustees for results.

Performance-based funding - a key financing innovation for Indonesia Under HELTS , autonomous public HEIs are to become more accountable for their institutional performance. The DGHE intends to accomplish this parallel goal by introducing a new financing innovation - performance-based finding for HEIs. Performance-based fimding wil l tie a portion o f public spending for higher education to institutions’ performance. However, a l l newly autonomous public HEIs in Indonesia lack the capacity to successfully implement a performance-based funding mechanism. Therefore, building HE1 management capacity i s a vital prerequisite to initiating a performance-based funding mechanism. Only when sufficient management capacity i s in place at the newly autonomous HEIs can the DGHE introduce the new financing innovation to transfer government resources based on promised results for improved service delivery. Meanwhile, a l l other public HEIs (those that have not yet been granted autonomous BHMN status) will continue to have access to competitive grants to fund investments in disciplines and activities that are consistent with the country’s development objectives.

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The GO1 seeks to leverage public HE1 autonomy by promoting financial incentives for improved institutional performance. This wil l be achieved by gradually introducing performance-based funding for a portion o f a public HEI’s government allocation in an effort to give institutions an incentive to manage their operations in pursuit o f specific goals and results.

Performance-based funding There are many forms o f performance-based funding with many different names. The basic principle behind al l such funding i s that a portion o f public resources i s allocated based on the achievement o f specific measurable outcomes (’post hoc) or based on a contractual agreement between the institution and the government to produce such outcomes by a future date (pre hoc). The objective i s to give the government an additional way to monitor the achievements o f public sector institutions, and this can be done by providing institutions with discretionary authority over an additional amount o f government resources and pegging those resources to specific performance indictors. Many OECD countries have experimented with various forms o f performance-based funding across a variety of public sector institutions at various levels (for example, national, regional, and municipal) and in various types o f institutions (for example, government agencies, hospitals, and schools). The extent o f the implementation o f performance- based funding may be limited by a lack o f the political wil l on the part o f the central authority to cede some o f i t s budgetary discretion to institutions or by a lack o f capacity within the target institutions to manage their resources and monitor their own performance. As there are as yet no standard implementation practices for performance-based funding, it i s important to design a mechanism that takes into account for these possible limitations.

Performance-based funding for public higher education has taken many different forms and many contexts. Nevertheless, there are some key universal lessons that can be leamed from assessing the various schemes. First, the performance indicators must be agreed upon up front between the government and the institution. Second, the performance indicators should be l imited in number so that there i s a clear link between Performance and funding - too many indicators tend to dilute the effectiveness o f the mechanism. There i s no ideal number, but it has been suggested that anywhere from one to six indicators i s optimal. Third, the funding l inked to performance should be supplemental and not part o f the core recurrent budget o f the institution - core budgets should be predictable f rom year to year to ensure regularity o f operations. Fourth, the amount o f funding should be sufficient to provide incentives for improved performance, yet not so significant that any reduction or loss o f such funding would create budget instability from year to year. There i s no ideal amount, but in higher education performance-based funding should generally account for 3 to 10 percent o f the part o f the institution’s government allocation over which i t has discretionary authority. Fifth, performance-based funding in higher education i s more likely to succeed when faculty and administrators are directly involved in the process o f deciding on performance indicators and in deciding o n the investment. strategy for enhancing the institution’s performance in those areas. Sixth, performance data must be completely reliable and o f high quality. Finally, there should be a clear institutional strategy for investment o f the supplemental resources that l i n k s investments to intended improvements in performance.

While the l i n k s between performance-based funding and institutional performance are not automatic, there are several important benefits to implementing such a system, in particular the promotion o f good governance through the development o f incentive mechanisms and o f positive

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organizational behavior. These benefits are yielded when the govemment collaborates with institutions to develop the system and select the performance indicators, when there i s a system- wide focus o n outputs over inputs, when institutions have enhanced discretionary authority over their resources, when staff are fully engaged in institutional investment decisions, and when there i s transparency and accountability in the f low o f funds and in service delivery. Performance-based funding does not only devolve responsibility from the central authority to the institutions; it does so while demanding accountability for results and encouraging public institutions to link strategic planning to service delivery.

Indonesia 's High er Education Long- Term Stra t e a The World Bank team's appraisal concludes that the HELTS provides a theoretically coherent strategy for reform. It draws fi-om international best practice in higher education management. I t applies lessons from other higher education governance reforms, such as those that have taken place in Lat in America, Australia, and the UK. The HELTS was formulated after wide consultation among key stakeholders in Indonesia and builds o n local experience in the design o f competitive funding mechanisms, the pacing o f reform, and the accreditation o f study programs. Implementation i s designed to proceed at a measured and reasonable pace. The DGHE plan divides HEIs into two levels: non-autonomous HEIs will participate in grant programs designed to build their management capacity and academic quality while the stronger, newly autonomous HEIs wil l implement higher-order innovations to build models o f good practice for autonomy.

However, the HELTS i s not without risk. Autonomy i s designed to improve decisionmaking, but it i s a risky proposition for those institutions that are not wel l prepared for managing their own affairs, Competitive funding involves the r i s k that resources will be concentrated in the most capable and elite institutions or departments. There i s also the r isk that performance-based contracts for HEIs will be implemented without sufficient management capacity in place. The HELTS and this project include measures to mitigate these risks. Most importantly, the grant programs are structured to encourage the building o f planning and financial management capacity in HEIs. Grant competitions are stratified by tiers so that institutions o f roughly equal capacity wil l compete with one another for separate pools o f funding. The implementation o f the HELTS will, therefore, require careful monitoring, evaluation, and adjustment as it moves forward.

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Annex Table 1.2: Key areas for Adjustment of the Higher Education Regulatory Framework in Indonesia

L a w Issues o f concern Possible resolution Locus o f action

Government Regulation 6111999, refers to former Education L a w 211989

Government Regulations 152, 153, 154, 155 I 2000

L a w 2012003 Education L a w

L a w 1712003 State Finance

Created the possibil i ty o f autonomous public HEIs by al lowing for a new legal status known as BHMN. But there i s no l a w that governs the operation o f these new, autonomous BHMN institutions. Until 2000, a l l public HEIs held the legal status o f state HE1 or PTN. Then with the issuing o f four new GRs, four HEIs had their legal status transformed into BHMN (public autonomous HEIs). But there i s s t i l l n o l a w that governs the operation o f these new institutions even though they are n o w in existence. They therefore operate outside o f a clear legal framework. Autonomous HEIs cannot receive government funding under the current legal structure, though they s t i l l do. They are s t i l l treated very much as part o f the GO1 despite their lack o f legal status. These institutions are also constrained by c i v i l service laws as most staff are c i v i l servants. Requires the development o f a new l a w that establishes independent B H P legal status o f a l l education institutions in Indonesia (public and private). BHP creates entities that are distinct f r o m government agencies, independently holding and controll ing separate assets. B H P institutions do no t yet exist because the l a w to establish them has yet to be passed. Once t h i s i s passed, BHMN HEIs wil l become a subset o f BHP. This has yet to

Does no t recognize b lock grant financing, therefore l ine-i tem financing i s the only option for transfer o f publ ic expenditure to HEIs. There i s also n o Drovision

occur.

A new education l a w that covers BHMN should b e created and passed by the GOI.

A new l a w must be passed that provides BHP with a legal status.

A new B H P l a w must b e passed to establish the independent legal status o f a l l education institutions in Indonesia (public and private), thereby making BHMN HEIs a legal subset o f BHP.

This l a w must be amended to permit for government financing o f education legal entities, and to permit for b lock grant financing.

MONE and Parliament

M O N E and Parliament

MONE and Parliament

MONE, MOF and Parliament

for government financing to BHMN or even B H P institutions.

In addition, a new l a w o n non- prof i t legal entities must b e passed to permit government funding o f

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L a w Issues o f concern Possible resolution Locus o f action

L a w 112004 State Treasury

L a w 4311999 Civil Service

Draf t L a w under debate within the MONE o n B H P (one o f the missing laws that will create a proper enabling

Permits the establishment o f publ ic service agencies (BLU) that are part o f the government. T h i s i s one possibil i ty for legal status for HEIs, but no HE1 has adopted this legal status. BLU status, however, would prevent true autonomy as it establishes government agencies and l i m i t s institutional managerial freedoms. Centralized management o f c i v i l servants does not a l low individual HEIs to manage their own human resources. This has yet to b e submitted for review by Indonesia’s House o f Representatives.

non-profit legal entities. Ths law must be amended to al low for government financing o f education legal entities and to permit b lock grant financing.

MONE, MOF, and Parliament

HEIs should be given the freedom to manage their own human resources.

MONE, BKN, and MenPan

Appropriate provisions must b e included and the passage o f the l a w must be streamlined to ensure rapid passage.

MONE and Parliament

environment.)

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Annex 2: Major Related Projects Financed by the Bank and/or other Agencies MANAGING HIGHER EDUCATION FOR RELEVANCE AND EFFICIENCY

There are a number of projects in Indonesia that use the competitive grant mechanism to allocate public resources toward the improvement o f higher education quality and the enhancement o f efficiency. HEIs prepare grant proposals, which are reviewed in a transparent competitive process. The awards are then made to those institutions or departments with the strongest proposals. There were three such projects funded by the World Bank: URGE (University Research for Graduate Education), DUE (Development o f Undergraduate Education), and QUE (Quality o f Undergraduate Education).’

There has also been a competitive grant project f h d e d by the Asian Development Bank, Technological and Professional Skills Development (TPSD), as well as several other competitive grant initiatives that have been fully funded by the GO1 (for example, DUE-l ike and Hibah Kompetisi).

TPSDP (2000-2006): The overall objective of the ADB’s TPSD project is to improve the country’s human capital to help to achieve sustainable economic growth and to reduce poverty by reducing inequities. The project has two inter-related parts: (a) strengthening the governance and management capacity of the public and private higher education system, improving equity for disadvantaged students, and supporting a ski l ls retooling program; and (b) strengthening existing study programs and supporting new study programs in priori ty disciplines, upgrading study centers for women, and strengthening community and industrial relations. The TPSD project i s formulated as a sector loan and will cover six years o f the government’s Long Term Higher Education Development Plan. The project supports 75 grants based on proposals that were selected competitively according to agreed guidelines and procedures.

Due-like (1999 - 2008): The initiative i s named after and uses the same approach as the World Bank-funded DUE project. The project provides block grants to weaker HEIs to improve the quality o f their undergraduate education, the relevance o f their study programs, and the efficiency o f their operations. In addition, the project also supports the newly autonomous public HEIs (UI, UGM, ITB, and IPB) to develop programs in priori ty areas.

Program Hibah Kompetisi (PHK): This G O I - f h d e d initiative consists o f four distinct kinds o f competitive grants (A-1, A-2, A-3, and B). Each kind o f grant i s targeted at a different t ier o f HEIs. Program A - 1 i s aimed at building institutional capacity in study programs that have scored an accreditation ranking of C (satisfactory) from the BAN-PT. Program A-2 i s aimed at

OED ratings for the listed projects were as follows: URGE satisfactory, DUE satisfactory, and QUE not yet available. Additional higher education projects in other parts o f the world have promoted different kinds of competitive funding to rationalize public investment in higher education and make supply-side financing of such investments more transparent. The World Bank has experience with competitive funding from projects in a number o f developing countries such as Chile (OED rating: highly satisfactory), Argentina (OED rating: satisfactory), Colombia (OED rating: satisfactory), Ethiopia (DO rating: satisfactory), Ghana (DO rating: satisfactory), Guinea (DO rating: satisfactory), Jordan (DO rating: satisfactory), Mozambique (DO rating: highly satisfactory), Romania (OED rating: satisfactory), Sri Lanka (DO rating: satisfactory), Tunisia (OED rating: satisfactory) and Vietnam (DO rating: satisfactory). In al l cases, competitive fimding has helped to increase the efficiency and improve the quality o f the tertiary education system.

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increasing the internal efficiency o f study programs with an accreditation rank o f B (good). Program A-3 i s aimed at increasing external efficiency in study programs that have received an accreditation rank o f A (very good). Program B i s aimed at promoting excellence in undergraduate/graduate programs that have not only an accreditation rank o f A but that have also been in operation for five years.

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Annex 3: Results Framework and Monitoring

MANAGING HIGHER EDUCATION FOR RELEVANCE AND EFFICIENCY The project wil l assess the progress made by Indonesia toward meeting each o f the five key project indicators by regularly monitoring the set o f specified intermediate indicators presented in the results framework o f this annex. Project monitoring wil l also include the regular assessment o f the two grant programs operating under Components 2.1 and 2.2 to measure progress toward the fulfillment o f the grant objectives, as well as improvements made in management capacity. The Annual Report o f Project Progress (ARPP) will provide a yearly summary o f al l indicators; the reported data wil l serve as the basis for regular project supervision. The DGHE will establish baseline data on al l indicators listed in the tables o f this annex. These indicators wi l l be monitored consistently throughout the l i fe o f the project. The ARPP will also include annual technical and financial audits o f the grant programs operating throughout this project; these audits will monitor related management capacity.

The BHE will be responsible for overseeing the project monitoring and evaluation (M&E) plan using information provided by the MONE, the NISHE, the BAN-PT, and al l public HEIs. The DGHE-IU will carry out the administration necessary to ensure the completion o f the M&E plan to the satisfaction o f the BHE, including the drafting o f TORS and issuing o f contracts. The N ISHE will collect data on al l indicators from al l institutions. Data collected from both beneficiary and non-beneficiary institutions wil l lay the foundation for evaluating the project. The key project evaluation activity will be a comparison o f competitive, performance-based, and traditional funding models in terms o f their effectiveness in improving outcomes and building capacity, Outcomes wil l be measured with reference to the Development Objective, which ultimately seeks improvement in quality, relevance, efficiency, and equity. Capacity building in the autonomous public HEIs will be measured by their progress in building capacity for autonomous management (see Annex 2).Capacity building in the less-developed HEIs wil l be measured by their progress in building their basic financial management, procurement, and planning capacity.

The evaluation wil l proceed along three lines o f inquiry: (1) did the various financing mechanisms implement as intended - according to operational procedures, in a timely fashion, and without leakage of funds; (2) how did each funded program contribute to agreed outcome and capacity indicators (compared with a control group o f non-beneficiary institutions); (3) what can be deduced about the effectiveness o f each funding mechanism for achieving results and the efficiency o f each funding mechanism for allocating and managing public resources? The evaluation wil l require the DGHE to establish baseline data o n the outcome and capacity indicators listed in Annex 2 and to monitor those indicators consistently throughout the l i f e o f the project. The design and preparatory steps for this evaluation wil l be supported by a PHRD grant for project preparation. The tasks to be undertaken prior to project effectiveness will include: the development of Terms of Reference for evaluators and enumerators; the production o f interview protocols, data collection instruments, and enumerator handbooks; the training o f evaluators and enumerators; and the collection o f baseline data. Resources for conducting the project evaluation are provided under Component 1.1.

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Annex Table 3.1: Project Results Framework PDO

i n enabling environment for the xolut ion o f autonomous and iccountable public higher education nstitutions and a set o f effective jupport mechanisms for improving :he quality, relevance, efficiency, ind equity o f higher education.

Outcome Indicators Use of Outcome Information The draft law on education institutions (BHP) i s passed by 2010. (Baseline: April 2005 draft was ready for interdept discussion; approval to initiate the draft had been issued by government )

The National Information System for Higher Education develops the capability to conduct and report on regular graduate tracer studies by 2010. (Baseline: In 2005 HE1 departments participating in DUE, QUE, DUE-Like, PHK, and TPSD projects have been conducting graduate tracer studies, i.e., about 90% o f public HEIs and about 30 % o f Study Programs; and about 3 % o f private HEIs. Nevertheless, a standardized methodology for conducting graduate tracer studies had not been established by the DGHE. )

Institutional accreditation i s awarded to 5 percent o f al l HEIs (public and private) by 2010. (Baseline: 2005 None)

Unqualified opinion awarded by external auditors o n financial audit to five public HEIs, and 90 percent o f procurement by the participating institutions i s awarded within the bid validity period by 20 10. (Baseline: 2005 None)

A comprehensive process evaluation o f l i ne item financing, competitive grants and performance-based contracting i s completed by 2010. (Baseline: 2005 None.)

Monitor progress toward the PDO

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Intermediate Results One per Component

Component 1: Reform and Dversight of the Higher Education system

Vodernization of higher education rector oversight and management

Support for the transition of the quality assurance system toward emphasizing institutional accreditation and licensing of professional fields

Development and adoption of a comprehensive revitalization plan for the Open University of Indonesia

Intermediate Results One per Component

Component 2.1: Grants for Responsive and Efficient Allocation of Resources - Expansion o f competitive grants to publ ic and private H E I s

Improved education quality and increased social responsibility

Results Indicators for Each ComDonen t

Use of Results Monitoring

Component 1 :

The draft l a w o n education institutions (BHP) i s passed by 2010. (Baseline: April 2005 draft was ready for interdept discussion; approval t o initiate the draft had been issued by government )

The number and accuracy o f higher education indicators i s centrally updated in a t imely manner every six months. (Baseline: 2005 no t available.

A comprehensive process evaluation o f l ine i t em financing, competitive grants and performance-based contracting i s completed by 2010. (Baseline: 2005 None.)

Institutional accreditation i s awarded to 5 percent o f a l l H E I s (public and private) by 2010. (Baseline: None)

Revitalization p lan for the Open University and i ts Regional Learning Centers adopted. (Baseline: N o t yet available)

Results Indicators for Each Component

Component 2.1 :

0 GPAs for students in grant- recipient programs increase. (Baseline: Data wil l b e contained in the grant proposals submitted by each HEI.) The percentage o f students f rom disadvantaged backgrounds at

Component 1:

Prepare lawmakers to take actions that wil l modernize and strengthen the higher education system. Assist HEIs to operate more independently. Data to b e used to improve decisionmaking in the higher education sector and to determine accurate baselines and milestones for evaluating the impact o f competitive grants and performance-based contracts.

Ensure enhancement o f the accreditation system.

Ensure responsiveness and modernization o f the Open University.

Use of Results Monitoring

Component 2.1:

0 Target each round o f the competitive fimd to areas cri t ical t o Indonesia’s social and economic development.

36

grant-recipient institutions increases. (Baseline: Data wil l be contained in the grant proposals submitted by each HEI.)

Component 2.2: Grants for Responsive and Efficient Allocation o f Resources - Grants for strengthening institutional management and for init iating performance-based contracts at autonomous public HEIs.

Improved institutional management at less-established public HEIs

Strengthened management OB autonomous public HEIs

Targeted performance-based contracts at autonomous public HEIs

Component 2.2:

Copy o f SK Rektor o n the establishment o f internal audit function (Baseline: SKs wil l be available pr ior t o the signing o f Grant Agreements between DGHE and individual HEIs)

Unquali f ied opinions are awarded by external auditors o n financial audits to f ive publ ic H E I s by 2010. (Baseline: 2005 None.)

Institutions successfully complete their contract obligations by achieving or exceeding their agreed targets o n four performance indicators. (Baseline: 2005 not yet available.)

Component 2.2:

Moni tor ing progress in building capacity for institutional autonomy.

Moni tor ing progress in building capacity for institutional autonomy

Moni tor ing effective autonomy

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Annex Table 3.2: Institutional Building for Financial Management at Participating HEIs

Regulatory Framework 4. Issu ing S K R e k t o r 6 o n the financial management policies, systems, and procedures covering at least the following: a. Preparation and execution o f the HE1 budget b. Adoption o f double entry accounting standards c. Requirement that a l l HEI ’s bank accounts be opened only with writ ten authority f r o m the Rector (SK Rektor) d. Requirement for a l l unitdfaculty within the HE1 to declare annually in the f o r m o f a statement o f responsibility signed by the unidfaculty head that a l l revenue collected and donations received are deposited in the authorized HE1 bank accounts e. Clear segregation functions o f the HE1 Finance Unit (which will b e responsible for the issuing o f the payment instructions) and HIE Treasury unit. f. Instruction to HE1 Finance Unit to undertake periodic comprehensive reconcil iation o f cash and bank accounts within the HE1 covering accounting records, bank statements, off icial and temporary p roo f o f collections, and actual cash collection practice g. Instruction to a l l faculties/ units within the HE1 to: - Discontinue separate facultyiunit treasuries. - Discontinue receiving o r holding cash beyond petty cash needs.

F inanc ia l Management Inst i tu t ional Building Obiective

Increased transparency and accountability, including improved financial management processes at the participating higher education institutions (HEI).

I m p a c t Ind icators

1

1

Appropriate enabling regulatory framework for financial management Enhanced accountability o f faculty heads for compliance with HE1 regulations o n financial management Improved financial controls over management o f public fimds Greater transparency in financial management More effective internal and extemal audit functions.

1

1

1

NIA V V NIA

SK Rektor i s an off icial decree f r o m the rector o f a publ ic higher education institution.

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Performance Indicators Applicable to Implementing Agencies* DGHE I UI,ITB, I Other I Non

~

Financial Management System Implementation 5. Implementation o f items no. 4 a to g: a. Preparation and execution o f the HE1 budget b. Adoption o f double entry accounting standards c. Requirement that a l l HEI's bank accounts be opened only with written authority f r o m the Rector (SK Rektor) d. Requirement for a l l units/faculty within the HE1 to declare annually in the f o r m o f a statement o f responsibility signed by the unit'faculty head that a l l revenue collected and donations received are deposited in the authorized HE1 bank accounts e. Clear segregation functions o f the HE1 Finance Unit (which shall be responsible for the issuing o f the payment instructions) and HE1 Treasury unit. f. Instruction to HE1 Finance Unit to undertake periodic comprehensive reconcil iation o f cash and bank accounts within the HE1 covering accounting records, bank statements, off icial and temporary p roo f o f collections, and actual cash collection practice. g. Instruction to a l l faculties/ units within the HE1 to: - Discontinue separate f a c u l t y h i t treasuries. - Discontinue receiving or holding cash beyond petty cash needs. 6. Prepare auditable financial statements

7. Make available to students and c i v i l society details o f budget and audited annual f inancial report

IIPB,UGMI BHMN I BHMN C. By the End of the Project

Internal & External Auditing 8. Establish internal audit function within HE1 responsible to the head o f V V V

9. Arrange for the private auditor to conduct annual independent audit o f V V V the institution N/A

financial statements for the institution.

N / A V

V

v NIA

Note: * Verif icat ion wil l be defined further o n the O P M .

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I +

c

0 d

Annex 4: Detailed Project Description MANAGING HIGHER EDUCATION FOR RELEVANCE AND EFFICIENCY

This project consists o f two components with a total baseline cost o f US$98,267,000: (1) higher education system reform and oversight; and (2) grants to improve academic quality and institutional performance. The activities and investments in this project represent a more comprehensive approach to reform than has been taken in the past. They focus on constructing an enabling environment at the central level while strengthening institutional management and supporting innovation to improve Performance and results.

Proiect Component 1 : (US$7,779,000) Higher education system reform and oversight: This component wil l support the government in implementing the HELTS by refining the legal framework for higher education, strengthening the management and administration o f the DGHE, assisting the BAN-PT to develop an institutional accreditation program, and developing a strategy to revitalize the Open University, Indonesia’s largest institution o f continuing education.

Sub-component 1.1 - Modernization of higher education sector oversight and management (US$4,001,000): This sub-component wil l address key capacity constraints in the oversight and management o f the higher education system. Implementing the HELTS requires an enabling framework that permits the DGHE to encourage a results- oriented culture that aims to improve quality and efficiency across al l HEIs. To make the move toward institutional autonomy more effective, several changes must be made and management must be strengthened as follows: (a) developing a revised legal framework for higher education govemance, financial management, and personnel management; (b) improving financial management both within the DGHE and within public HEIs; (c) expanding the data collection capacity o f the NISHE, and (d) developing a strategy for scaling up reforms based on evidence o f their effectiveness, with particular attention given to financing innovations.

1.1 a Development of a revised legal framework for higher education governance, financial management, andpersonnel management: Current education, finance, treasury, c iv i l service, and administration laws contain conflicting provisions and gaps that prevent autonomous institutions from fully implementing the reforms in a sustainable manner. (See Annex Table 1.2 outlining the laws and regulations considered for reform in Annex 1). This sub-component wil l support the DGHE in carefi l ly assessing the legal constraints, examining other govemance systems around the world, and proposing revisions to existing laws and government regulations so that the system can better respond to the challenges o f HE1 autonomy and o f the introduction o f performance-based financing. This will allow the DGHE to shift i t s role f rom controlling to overseeing the system. It will allow institutions to become more flexible and make i t possible to develop incentives for improved institutional performance. Activities under this subcomponent include the training o f key personnel, technical assistance, and stakeholder consultation. In addition, studies will be conducted o f the current

42

c iv i l service system and i t s implications for the management o f public HEIs. The sub-component wil l also support studies that wil l examine in detail the funding system for autonomous HEIs. The recommendations in these studies wil l reflect consultations with the relevant govemment agencies, HE1 administrators and personnel, and students. The output o f this sub-component will be a set o f revised draft laws for higher education in Indonesia that wil l then be submitted to the relevant government agencies for review.

1.1 b Improvement of management capabilities in the DGHE and at publ ic HEIs: The DGHE and public HEIs currently lack sufficient staff with adequate knowledge and skill to oversee the management o f a decentralized higher education system. Some o f these capacity gaps are immediate and others are anticipated in the long-term as the higher education strategy i s implemented in full. Capacity building will be carried out at the govemment and institutional levels to strengthen the capacity o f institutions for strategic planning, financial management, and human resources management across the system. This sub- component will fund technical assistance to the DGHE and HEIs in areas such as financial management, procurement, pol icy design, pol icy implementation, and monitoring and evaluation. I t wil l also support degree and non-degree training for public HE1 staff in the aforementioned areas as well as training at HEIs to improve data collection. The capacity required to complete the competitive grant selection process will also be covered under this component. The sub-component will support the necessary training and the technical assistance needed to ensure the smooth operation and monitoring o f the competitive grants.

1.1 c Expansion and improvement of the National Information System for Higher Education (NISHE): The current central system for collecting data on the higher education sector - including both statistical data o n students, information on graduates, and financial data on institutions - is l imited in terms o f the number o f indicators that it collects, the speed and accuracy with which it collects them, the software and hardware with which it processes them, and i ts ability to analyze them. The system is, therefore, inadequate to allow a full assessment o f the state o f the higher education sector, to monitor institutional performance, or to meet the needs o f a revised accreditation process and the demands o f performance-based financing. This sub-component wil l fund the expansion and improvement o f the NISHE and provide training to key personnel in the Ministry o f National Education. Support will be provided to enable data from a l l public and private HEIs to be collected centrally and updated in a t imely and efficient manner. This sub-component will include technical assistance to design the system expansion as well as support for the development o f the hardware and software necessary to install a system adequate for the comprehensive monitoring o f institutional performance indicators. I t will also include the technical assistance and activities necessary to identify new performance indicators and to collect a comprehensive benchmark of baseline indicators. The system will be operated and maintained by the DGHE which, in close consultation with key stakeholders, will be responsible for establishing standardized national indicators for higher education - including

43

systematic graduate tracer studies and labor market analyses o f higher education graduates. These indicators wil l cover financial, input, process, output, and outcome indicators. These indicators must be relevant for supporting: (a) sector oversight and decisionmaking, (b) quality assurance processes, (c) the allocation o f funding based on institutional performance, and (d) HE1 management and planning. To the extent possible, once the data definitions have been defined and mutually agreed, they should not be changed. OECD definitions or other recognized definitions for higher education indicators can serve as a reference point to ensure that the indicators that are chosen are intemationally comparable. The software that supports the information system should be based o n open standards in order to facilitate exchange o f data between systems. The collected data wil l be validated by the DGHE and published annually.

I. I d Policy and program development for higher education based on evidence from project monitoring and evaluation: The DGHE’s long-term strategy wil l be implemented in phases. The current plan i s to assist a small number o f HEIs to acquire the full management capacity needed to operate effectively as autonomous institutions so that they can then serve as models for other HEIs in the system. The DGHE will assess the reforms, paying particular attention to the impact o f competitive fbnding and performance-based contracting. In addition, the DGHE will carefblly examine various methods o f demand-side financing for higher education (such as scholarships, vouchers, and student loans) for potential introduction into the sector in the future. This sub-component seeks to help the DGHE in developing a concrete strategy for scaling up the capacity o f those institutions that are l ikely to be implementing the next steps o f the reform program, with particular reference to the coherence and phasing o f interventions. Included in the development o f an overall strategy are: (i) the monitoring and evaluation o f proj ect activities, (ii) the examination, analysis, and pilot-testing o f demand-side financing options to support disadvantaged students to attend public or private higher education, (iii) stakeholder dialogue to inform the HEIs and the public about current activities and next steps, and (iv) the development o f an overall implementation strategy for subsequent phases o f the reform. This sub- component will fund technical assistance in the design o f surveys and the collection o f data, the preparation o f technical studies, training, and materials, the conduct o f stakeholder dialogue, and preparation for the completion o f the subsequent phases o f the higher education strategy.

Sub-component 1.2 - Supporting the quality assurance system in changing its emphasis to the institutional accreditation and licensing ofprofessional fields (US$448,000): The current higher education quality assurance system in Indonesia functions well but i s overburdened, largely due to i t s emphasis o n the accreditation o f study programs. This focus has created an overwhelming volume o f reviews that the agency must undertake each year across nearly 2,000 public and private HEIs. The BAN-PT and the DGHE have recognized the unsustainable nature o f the current structure but wish to retain many o f i t s established good practices. With support from the ADB, the BAN-PT and DGHE authorities have completed a thorough examination o f how best to restructure the

44

accreditation system - not only to make the load manageable but also to make the system more aligned with the move toward HE1 autonomy and to provide information that wil l support the introduction o f performance-based financing. Moreover, the BAN-PT i s poised to acquire i t s own institutional autonomy and must find ways to sustain i t s activities more independently o f the govemment - including generating revenue to support i ts mission. The main objective o f this sub-component i s to strengthen the existing quality assurance system in higher education and help it to make an important transition from emphasizing the accreditation o f study programs to emphasizing the accreditation o f overall institutions and professional disciplines (such as architecture, engineering, or medicine). In collaboration with the DGHE, the ADB has been supporting the initiation o f this transition with US$880,000 as part o f loan project whose implementation wil l continue until 2007. The proposed World Bank project seeks to leverage the progress made in changing the BAN-PT’s emphasis and continue the process beyond the life o f the ADB’s support. An important part o f this wil l be to integrate professional licensing with the BAN-PT accreditation system. This sub-component also seeks to increase the ownership o f the quality assurance system through stakeholder participation and further strengthen transparency and accountability in accreditation. The adjustments made to the accreditation process wil l have a direct impact on the entire higher education sector, as the BAN-PT accredits both public and private institutions. To achieve these objectives, technical assistance, training, and materials will be funded under this sub-component to: a) conduct participatory action planning to assist the BAN- PT in building an institutional accreditation system, b) develop a strategy and strengthen management systems for the financial sustainability o f the quality assurance system, c) strengthen HE1 management and administration to help them complete the institutional accreditation process, d) strengthen professional associations to assume a key role in the assessment process needed for licensing fields, and e) support the development o f teacher certification..

1.2a Participato y action planning to explain the changes in the quality assurance system: The gradual transition o f the accreditation system wil l require broad consultations with stakeholders to explain the need for transition and to discuss the steps that must be taken by HEIs to prepare for institutional self evaluation, for the introduction o f a quality assurance fee structure, for the need to collect better data o n their operations, and for the need to build their capacity to support licensing. Investments under this sub-component wil l include support for multiple stakeholder consultations and study tours as wel l as the hiring o f intemational consultants to provide guidance to the BAN-PT, the DGHE, and individual institutions. A principal output o f this sub-component will be agreed standards and practices for institutional accreditation and professional licensing.

1.2b Increasing thefinancial autonomy of the quality assurance system: The BAN-PT i s currently supported exclusively by govemment resources. To help the quality assurance system to develop greater independence and to encourage HE1 ownership o f the accreditation process, the BAN-PT will develop a fee structure and a financial management system. This activity wil l fund the training,

45

materials, and technical assistance needed to design, install, and implement cost- recovery strategies for the BAN-PT to make it self-sustaining and accountable.

1 . 2 ~ Capacity building in HEIs and in professional associations to support the licensing of professionalfields: The quality assurance system in Indonesia currently focuses on the accreditation o f study programs. Whi le the shift to emphasizing the accreditation o f institutions i s a prudent strategy, there are several key professional fields that should continue to be monitored more closely than institutional accreditation wil l allow. These are fields in which graduates need to be licensed as an assurance that they have the necessary competencies to complete work in that chosen field. This sub-component will fund the training and technical assistance needed to develop standards for licensing and to build the staff capacity in HEIs and in professional associations that i s necessary to ensure that each o f the institutions can conduct the new accreditation activities necessary in the fields subject to licensing. I t wil l also support the dialogue required to integrate the results o f professional licensing into the operations o f the BAN-PT.

1.2d training i s another field in Indonesia that lacks professional certification or licensing. The GO1 i s currently in the process o f developing teacher training certification standards and practices for graduates who will enter the workforce as primary and secondary school teachers. This sub-component will fund stakeholder dialogue with teachers’ associations, along with the training and technical assistance needed to complete the development o f a teacher certification program. I t will also support the dialogue required to integrate teacher certification results into the operations o f the BAN-PT.

Capacity building for the development of teacher certijlcation: Teacher

Sub-component 1.3 - Development and adoption of a comprehensive revitalization plan for the Open University of Indonesia (US$3,330,000): The Open University (OU) i s the largest HE1 in Indonesia, delivering diploma and degree programs through distance learning. The OU serves 225,000 students each year, almost al l o f whom (nearly 90 percent) are working adults, and most o f whom are in-service teachers and c iv i l servants pursuing a required mid-career credential. The programs are thus largely supply-driven by government directive rather than demand-driven by student or local labor market needs, yet the OU serves an important segment o f the population that i s not served by traditional HEIs - working adults. The OU also reaches students in remote regions where the options for higher leaming are limited. The headquarters o f the administration o f the OU and i t s production center for academic materials are in Jakarta, delivering texts and exams to students affiliated with 35 regional leaming centers (RLCs) across Indonesia. The majority o f learning at the OU is completed through traditional correspondence methods, with a l imited number o f tutorials and very limited use o f modem (computerized) instruction. The Open University plays an important equity and access role in Indonesian higher education, but the institution i s in need o f a comprehensive revitalization to modernize i t s govemance, finance, outreach, content, and delivery. The strategy and plan to revitalize the institution has not yet been agreed upon. This sub-component will fund studies and technical assistance to examine the various

46

options for revitalization. It will also support consultations to generate a consensus between stakeholders and the DGHE on the future direction and mandate o f the institution. This sub-component wil l also fund the subsequent technical assistance, staff training, and materials for preliminary capacity upgrading as determined by the eventual agreed strategy.

Project Component 2 - (US$87,338,000) Grants to improve academic quality and institutional performance There i s overall underinvestment in the public higher education sector o f Indonesia, and much o f the current spending i s made o n a centralized, line-item basis from the DGHE. The predominance o f this traditional funding practice has prevented the widespread development o f incentives for HEIs to improve improving quality, increase efficiency, and align with government priorities. The goal o f the HELTS i s to develop and expand financing mechanisms that wil l provide HEIs with incentives to improve academic quality and increase efficient institutional performance. The GO1 move to grant autonomy to public HEIs will provide those institutions with more management flexibility, which will make it possible for the government to introduce further financing innovations containing incentives for institutions to strive for better results. This component wil l support the implementation o f HELTS by improving the quality o f higher education through targeted investments and by increasing management capacity at HEIs. This wil l be achieved by expanding competitive grants to HEIs and by introducing management capacity grants and performance-based contracting for newly autonomous HEIs. Performance- based financing will be pilot-tested in those public institutions with the strongest management capacity. If successful, the pilots could then be scaled up to al l autonomous HEIs in the subsequent phases o f reform.

Sub-component 2.1 - Competitive grants to public and private HEIs (US$60,816,000): The DGHE has considerable experience with competitive finding as a mechanism for transferring government resources to cover specific investments made by HEIs. Through this mechanism, the DGHE provides financial incentives to the HEIs to improve the quality o f their institutions and programs in alignment with the HELTS. The BHE initiates the grant award process with a call for proposals. HEIs can submit proposals for one o f two kinds o f grants aimed either at improving education quality or at increasing the employment o f HE1 graduates. To submit a proposal, institutions must meet stated eligibility criteria. These include demonstrating sufficient management capacity to administer the grant finds and to procure goods and services according to guidelines that ensure fairness and accountability. Institutions must also demonstrate that any study programs to be supported under the grant have been accredited by the BAN-PT. Within each grant window, competition i s stratified according to tiers o f HE1 capacity so that the process does not favor only the strongest institutions. These tiers correspond to the size, mission, and management capacity o f HEIs. The BHE oversees the selection o f the winning grant proposals.

The proposal review process ensures transparency by adhering to the principles o f extemal peer review and by engaging a range o f proposal reviewers from a cross-section o f HEIs and from abroad. The reviewers must adhere to a strict code o f conduct that ensures, among other things, that review panelists avoid any potential conflict o f interest

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by recusing themselves from grant reviews related to their own institutions or programs. These review panels are comprised o f faculty, administrators, and students. The review panels assess the proposals according to their strengths and to the inclusion o f the fol lowing elements: (a) a clearly articulated link between the proposed investments and anticipated outcomes, (b) an appropriate monitoring and evaluation plan, and (c) a demonstration o f sufficient institutional capacity to manage the grant. To ensure transparency, the results o f panels’ deliberations are made public. All proposals must include an 8 percent matching commitment o f HE1 counterpart finding as a demonstration of i t s institutional commitment. To increase equity across a l l grant- winning institutions, al l grant proposals must include a plan for developing an outreach program to increase study opportunities for disadvantaged students. All HEIs applying for such grants must agree and cooperate with the monitoring and evaluation o f their proposed programs. Private HEIs may apply only for grants intended to improve teacher training programs.

The DGHE has identified a set of academic fields in higher education that need to be improved in order to produce better-qualified graduates and research that will contribute to Indonesia’s economic and social development. In particular, Indonesia lacks sufficient human capital in engineering, sciences, and teacher training. Evidence f rom the sciences indicates that the faculty in these fields are less productive as measured by numbers o f intemational publications than their counterparts in other countries in the region and that students perform less well than their counterparts in some key disciplines. Projections show that the fiture supply o f teachers is uncertain, which jeopardizes the continuation o f universal primary education and increasing participation in secondary education. The quality o f teachers emerging from teacher training programs has also been l o w as i s clear from their declining scores on examinations. Unless Indonesia invests in these priori ty areas, i t will continue to produce too few skilled workers and to hamper the growth o f the economy. This sub-component supports the introduction o f competitive grants to public and private institutions to fund promising proposals for enhancing the quality o f study programs in identified fields. In addition to the standard eligibility and selection criteria for competitive grants, HEIs competing for these grants window must include a sustainable equity initiative in their proposal, such as the development o f outreach programs and remedial programs for disadvantaged students or activities aimed at increasing the transition rates between secondary schools and higher education. HEIs may also submit proposals asking for finding to pilot-test student voucher or scholarship programs. To be eligible for these quality-enhancement grants, institutions will need to prove that they have the necessary management, financial, and procurement capacity at the time that they submit their proposals.

Sub-component 2.2 - Grants for promoting good governance in public HEIs and initiation ofperformance-based contracts at autonomous HEIs (US$26,522,000): The DGHE seeks to develop a system o f autonomous public HEIs with good governance practices and organizational cultures that focus o n education quality, institutional efficiency, and active efforts to increase the participation o f disadvantaged students. In 2000, six public HEIs were granted autonomous legal status. The GO1 is eager to introduce perfonnance-based financing at these institutions to increase their

48

accountability for quality, efficiency, and equity. Although these HEIs are legally autonomous, they lack the capacity to manage their own finances, personnel, and procurement effectively. The remaining 75 public HEIs do not yet have autonomous status but must also begin improving their management capabilities in anticipation o f being granted that status in the future. This component focuses o n strengthening institutional management and on improving the institutional Performance o f a l l public HEIs, with the objective o f preparing them for eventual receipt o f performance-based financing. Once autonomous HEIs have sufficient management capacity in place, they wil l be eligible to participate in the initiation o f a performance-based grant financing system that wil l provide them with budget support conditional o n them meeting agreed performance targets. The limited number o f autonomous HEIs participating in the init ial phase o f performance-based financing wil l serve as pi lot institutions for testing the practical application o f autonomy and performance-based grants before extending them to al l HEIs. This component provides support for:

(a) Competitive grants for strengthening institutional management in non-

(b) Proposal-based grants for strengthening institutional management at autonomous

(c) Performance-Based Contract (PBC) grants for autonomous public HEIs.

autonomous public HEIs;

public HEIs;

2.2a Competitive grants for strengthening institutional management in non- autonomous public HEIs (these wil l operate in the same manner as the other competitive grants): Public HEIs in Indonesia face several key capacity constraints, particularly in their ability to manage their operations independently. This i s a particular problem given the move toward institutional accreditation and the GO1 initiative to provide al l public HEIs with autonomous legal status. Most public HEIs lack sufficient capacity to manage their finances, human resources, procurement, or quality assurance effectively in the new framework. For the move toward autonomy and institutional accreditation to be successful, HEIs must build this capacity. Grants funded through this sub-component will support technical assistance, training, and materials (particularly software and hardware) to help public HEIs to develop greater management capacity. To be eligible to compete for these grants, institutions wil l be required to prepare a detailed institutional development plan aimed at strengthening their central management capacity in ways that will improve their operations.

2.2b Proposal-based grants for strengthening institutional management at autonomous public HEIs: These grants wil l be available to the autonomous HEIs and will be awarded on the basis o f a proposal review conducted by the BHE with the participation o f external peer reviewers. Proposals must articulate a three-year institutional plan to build the central management capacity that the institution requires to conduct i t s operations independently. Each HE1 implementing a three- year management capacity grant will undergo an annual technical and financial audit to assess how much capacity it has built. Those HEIs that build sufficient management capacity wi l l be deemed eligible to begin participating in the performance-based financing system. Management capacity grants wil l help

49

autonomous HEIs to make progress toward making their autonomy truly effective by supporting the development o f

-Management information systems and I T infrastructure -Financial management systems -Procurement systems -Human resources management -Non-tuition revenue generation related to academic activities.

For HEIs to be eligible to submit a grant proposal, they need to issue a Rector’s decree outlining their relevant reform objectives, articulating the necessary policies, systems, and procedures for achieving these goals, and describing the constitution o f reform committees for each o f the respective management areas. The policies, systems, and procedures outlined in the decree must be in accordance with existing government regulations and must satisfy the relevant reform agenda proposed in the HELTS. The proposal must include a phased plan o f activities showing how the institution wil l progress toward its stated objectives along with a clarification o f the related investments and a precise description o f the incentive system that wil l be put into place to encourage the adoption and sustainability o f the new capacity. The DGHE will require al l proposals to include an 8 percent counterpart funding commitment for the HE1 to demonstrate ownership and to ensure proper grant administration. All proposals must include performance indicators for the grant and a clear M&E plan. Each proposal will also include an information dissemination plan to inform stakeholders about the institution’s performance.

2 . 2 ~ Performance-Based Contract (PBC) grants for autonomous public HEIs: PBC grants will encourage institutions to exercise their autonomy more effectively by giving them more discretionary authority over their budgets and by making them more accountable for results. PBCs wil l be given only to those HEIs with the strongest management capacity as determined by a review by an external panel o f the annual technical and financial audits completed as part o f the management capacity grants. The criteria for capacity will be clear, transparent, and publicly announced well in advance o f the audits. Each institutional review panel will have 25 percent intemational representation. The f i rst rounds o f PBCs will allow HEIs to focus their performance targets on a specific subset o f departments or faculties. The intention i s - in the subsequent phases o f reform - to gradually scale up the practice to cover the entire institution and to apply any lessons leamed.

The PBC negotiations between the DGHE and the HE1 will take place in a transparent fashion and include one international peer representative for each party to ensure accountability. Contract negotiations wil l base goals and agreed improvement targets on performance indicators that can be applied either institution-wide or to sub-units o f HEIs according to the agreed activity and investment plan. The institutions must negotiate a precise indicator for each o f the fol lowing four Performance categories: good governance, external efficiency, internal efficiency, and social responsibility. The contracting institution must show a specified degree o f improvement (agreed upon during contract negotiations) in al l o f the indicators. The activities and

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investments needed to achieve these better performance indicators wil l be articulated as part o f the contract. An explicit and transparent monitoring and evaluation plan i s required as part o f the PBC. All HEIs entering into a PBC must publicly disclose their performance results as part o f their contractual obligation and provide an explicit dissemination plan to inform stakeholders about the institution’s Performance.

Contracts will be negotiated for a minimum disbursement period o f one year and a maximum disbursement period o f three years, with al l investments being concluded by the project completion date. However, provision for continued long-term data collection and for the monitoring and evaluation o f the agreed performance indicators should be made during contract negotiations in order to ensure that the impact o f the financing mechanism is adequately evaluated over time. The contracting institutions wil l be subject to sanctions for under-performance, ranging from a warning and guidance to reductions in funding in subsequent tranches o f the grant and even possibly to the revocation o f future PBC grant allocations. HEIs wil l be rewarded for reaching or exceeding their Performance targets with a pre-determined increase in funding in subsequent tranches or grant allocations.

Proiect Component 3 - (US $3,150.000) Project Management Project implementation wil l be managed and administered by the DGHE Implementation Unit (DGHE-IU).

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Annex Figure 4.1: HELTS Framework

Enabling Environment

Effective Institutional Autonomy

I I I

Shift from traditional line-item financing to block grants

I Competitive funding I Performance-based contracting

I I I

Demand-side financing mechanisms

I I I

\ Governance and Decision making / \ Financial Management /

Procurement Management Human Resources Management

Performance Measurement

Legal Framework National Information System for Higher Education

Institutional Quality Assurance

52

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Annex 5: Project Costs

Managing higher education for relevance and efficiency

Annex Table 5.1: Project costs by currency basis (in US$ ,000) Local Foreign Total"

us $,OOO us $,OOO us $,OOO Project Cost By Component and/or Activity

1. Higher education system reform and oversight 1. Modemizing higher education sector oversight and management 3,501 500 4,001 2. Supporting the transition o f the quality assurance system toward emphasizing institutional accreditation and licensing o f professional fields 327 121 448 3. Developing and adopting a comprehensive revitalization plan for the Open University o f Indonesia 2,730 600 3.330

I Subtotal Component 1 6,559 1,221 7,779 I 2. Grants for responsive and efficient allocation o f resources

1. Competitive grants to public and private HEIs 55,216 5,600 60,816 2. Grants for promoting good govemance in public HEIs and initiation o f performance-based contracts at autonomous HEIs 23,642 2,880 26,522

I Subtotal Component 2 78,858 8,480 87,338 I 3. Project Management Costs 3,150 0 3,150

1 Subtotal Component 3 3,150 0 3,150

I Total Baseline Cost 88,566 9,700 98,267 1 Physical contingencies 630 89 719 Price contingencies 11,390 54 1 1,444

1 Total Project Costs 100,587 9,844 110,430 1 Financial charges during implementation

Total Financing Required 104,444 10,094 114,537

Annex Table 5.2: Project costs by financier (in US$ ,000) Cost by Financier (US $ ,OOO)"*

Activity IDA IBRD GO1 Total 1. Higher education system reform and oversight

1. Higher education institutional modemization 442 731 3,250 4,424 2. Supporting the transition o f the quality assurance system toward emphasizing institutional accreditation and licensing o f professional fields 48 79 3 57 483 3. Developing and adopting a comprehensive revitalization plan for the Open University o f Indonesia 3,904 3,904

1 Subtotal Component 1 490 810 7,511 8,811 I 2. Grants for responsive and efficient allocation o f resources

1. Competitive grants to public and private HEIs 20,655 34,480 13,206 68,340 2. Grants for promoting good govemance in public HEIs and initiation o f performance--based contracts at autonomous HEIs 8,855 14,461 6,221 29,537

I Subtotal Component 2 29,510 48,940 19,427 97,877 1 3. Project Management Costs 3,742 3,742 1 Subtotal Component 3 3,742 3,142 1

Total Financing Required

Notes: * Contingencies listed as a separate line item. ** Costing includes physical and price contingencies. 30,000 50,000 34,537 114,537

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Annex 6: Implementation Arrangements


In l ine with the project’s objectives, institutional arrangements for the project’s implementation are designed in such a way that management capacity is built at the institution level throughout the project’s implementation. I t i s therefore very important that the implementing unit develops clear measures and strategies to institutionalize the sk i l ls gained from implementing this project.

At the central level, the project funds wil l be transferred into the integrated budget (DIPA) o f the Directorate General o f Higher Education (DGHE). Accordingly, the Director General as the head o f the working unit (Satuan Kerja) o f the Directorate General o f Higher Education o f the Ministry o f National Education (MONE) will be responsible for the overall implementation o f the project. A Project Steering Committee wil l be convened by the Director General with representatives from the DGHE, the BHE (see below), the MoF, and Bappenas to provide the DGHE with guidance and strategic direction throughout the project’s implementation. The DGHE will be supported in i t s functions by the Board o f Higher Education (BHE), which wil l be responsible for monitoring and evaluating the project, establishing the grant selection criteria and overseeing the selection process for competitive grants, and advising the DGHE in negotiating performance-based contracts. The BHE will also oversee the necessary studies on the project.

The Director General wil l assign the Director of Academic and Students Affairs o f DGHE to oversee the administration of the IMHERE Project. The Director General will also establish the DGHE Implementing Unit, which wil l absorb the existing capacity o f the Central Project Coordinating Unit (CPCU) o f the former and ongoing Wor ld Bank and ADB projects. The implementing unit’s responsibilities wil l include managing the project’s activities and project monitoring at the central level, overseeing the selection process for awarding competitive grants to HEIs, coordinating the negotiations for the performance-based contracts with HEIs, producing the required project reports, and ensuring that the project achieves the agreed objectives.

As for those HEIs receiving competitive grant awards and performance-based contracts, there wil l be two different arrangements for two types o f institutions: (i) autonomous HEIs and (ii) non-autonomous public HEIs and private HEIs.

At autonomous public HEIs, the HE1 Rector wil l have overall responsibility for implementing the proposed activities, administering the grants (including financial management and procurement), ensuring the achievement o f agreed objectives, monitoring and evaluating grant activities, and producing comprehensive reports as required. The grant will be integrated into the budget o f the HEI. Likewise, the administration o f the agreed grant activities wil l be integrated into the existing central administrative and management structure o f the HEI. The units that will assume these roles o f must be designated in the grant proposal and in the grant agreement. Where necessary, the DGHE will provide technical assistance to ensure that the necessary capacity for grant implementation and management i s in place within the central administration o f the HEI.

At non-autonomous public HEIs and at private HEIs, the Rector wil l have overall responsibility for implementing the activities to be financed by the grants, administering the grants, ensuring

56

the achievement o f the agreed objectives, monitoring and evaluating the activities, and producing comprehensive reports as required. The grant wi l l be integrated into the institution’s official account. In accordance with the grant contract agreement between the institution and the DGHE, the Rector will establish (by issuing a Rector’s decree) an ad hoc implementation unit. However, the institution should have developed a systematic program and action plan to integrate the capacity built under the project into i t s central structures by the end o f the project.*

The Director General wil l assign the Director o f Academic and Students Affairs o f DGHE to oversee the administration o f the IMHERE Project. The Director General wil l also establish the DGHE Implementing Unit, which wil l absorb the existing capacity o f the Central Project Coordinating Unit (CPCU) o f the former and ongoing Wor ld Bank and ADB projects. The implementing unit’s responsibilities wil l include managing project activities and project monitoring at the central level, overseeing the selection process for awarding competitive grants to HEIs, coordinating the negotiations for the performance-based contracts with HEIs, producing the required project reports, and ensuring that the project achieves the agreed objectives.

Private HEIs in Indonesia are governed by an external foundation.

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Annex Figure 6.1 : Organization structure for project implementation

Vice Rector 1

At the DGHE:

Vice Rector 2 ~

I I Director General of Hieher Education

r I I I I

I I secretary^^^^ I Director Academic and Student Affairs + 1

I 1 I ' I Board o f Higher Education

Steering Committee

I I I

Secretary General

At the Particiuating HEIs

Request for Payment (SPP)

I

Accounting I I

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Annex 7: Financial Management and Disbursement Arrangements

MANAGING HIGHER EDUCAITON FOR RELEVANCE AND EFFICIENCY

The FM assessment was carried out in accordance with Assessment o f Financial Management Arrangements in Wor ld Bank-financed Projects, Guidelines to Staff issued by the Financial Management Sector Board in October 15,2003. The appraisal team reviewed the operations o f the DGHE as the implementing agency. In addition, the team made assessment site visits to several HEIs in Indonesia: Gajah Mada University (UGM), the University o f Indonesia (UI), the University o f Padjadjaran (WAD), University o f Airlangga (UNAIR), the Bandung Institute o f Technology (ITB), the Bogor Agriculture Institute (IPB), and the University o f Surabaya (UBAYA).

The overall r i s k level o f the project is considered to be high. This i s due mainly to: (i) weak environmental controls throughout the system; (ii) the heterogeneity o f capacity at eventual grant-recipient institutions; (iii) the unknown capacity o f the eventual grant recipients to successfilly administer grant funds; and (iv) the generally weak financial management capacity observed by the appraisal team at the sample HEIs that they visited. This means that i t i s vital that the implementing agency and the HEIs that receive grants commit to increasing their financial management capacity. Such capacity building i s also an important technical aspect o f the project design itself.

Despite the high risk rating for financial management, i t should b e noted that the DGHE project preparation and implementation team has demonstrated strong commitment to building financial management capacity at a l l public HEIs. Moreover, the DGHE has had years o f experience in implementing World Bank-financed projects. To lower the FM risk, the DGHE project preparation team adopted a FM capacity building action plan in consultation with the World Bank FMS (see Annex Table 7.2 for precise details.) This has given the Wor ld Bank task team confidence that - given strict adherence to the action plan - the financial management risk o f the project can be reduced significantly. The World Bank task team concluded that completing the proposed actions wil l ensure that the project wil l satisfy the Bank’s financial management requirements as stipulated in OP/BP 10.02. The appraisal team recommends that the Financial Monitoring Report (FMR) be used during project supervision as the basis for disbursement as the findings o f the FMR should provide an adequate amount o f data for appropriate FM monitoring during project implementation.

Risk Analysis Risk Analysis - Country Level The Country Financial Accountability Assessment (CFAA) carried out by the Bank in 2000 concluded that the control environment in Indonesia is not strong despite the commitment o f the government to improving it. Also, the ADB Country Govemance Assessment Report (September 2002) concluded that there i s a need to reform the national financial management system following the recent move toward devolving responsibility for many centralized public services to regional and district governments across Indonesia.

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Under the leadership o f a Committee for Financial Management Reform, the M O F issued a Whi te Paper in M a y 2002 that laid down the principles for the reform o f public financial management. Since then, there has been some progress on putting in place the regulatory instruments needed to initiate reforms. The Parliament has passed State Finance L a w no. 17/2003, State Treasury Law no. 1/2004, and the Public Accountability Law no. 15/2004, which provide a legal basis for improving the country’s public financial management.

Fol lowing the enactment o f these laws, the GO1 budget proposal for 2005 introduced functional and program classifications based on specific sector strategies. These classifications focus on the outputs and performance o f government budget authorities, requiring that they use the international standard GFS200 1 classification to present their financial information. In addition, the system o f State Treasury Management and Budget Execution i s about to be modernized with the upcoming automation o f treasury operations and the introduction o f a Treasury Single Account. The MOF has been reorganized so that the ministry can focus on i t s core functions more effectively. Most noteworthy i s that the budget and treasury functions have been separated into distinct Directorates in l ine with international good practice.

Despite making outstanding progress in many areas o f fiduciary control, Indonesia s t i l l has an ambitious finance reform agenda to implement. The next phase o f the reform wil l focus on streamlining the implementation o f recent laws by issuing corresponding regulations, including: (i) the revitalization o f the government financial management information system and the adoption o f Government Accounting Standards, (ii) the establishment o f a National Procurement Policy Office, (iii) the effective operation o f an Anti-Corruption Commission and the Anti- Corruption Court, (iv) the establishment o f an effective Judicial Commission, and (v) the strengthening o f the Supreme Audit Board and elimination o f the overlaps in the mandates o f various internal audit institutions. The GO1 has committed to implementing this reform agenda with the support of the World Bank and other donors under the newly signed loan, the Government Financial Management and Revenue Administration Project (GFMRAP).

In the medium term, the GO1 must s t i l l create incentives for c iv i l servants to support the implementation o f the reform agenda. Until al l o f the proposed reform agenda i s completed, the risk rating for Indonesia’s financial control environment wil l remain high.

Risk Analysis - Implementing Unit The Directorate General of Higher Education in the Ministry of National Education wil l be the implementing entity for the IMHERE project. The DGHE has extensive experience in implementing World Bank-financed projects through the URGE, DUE, QUE, and Global Development Learning Network Project (GDLN) projects. The GDLN project i s st i l l ongoing, and the project management capacity remains in place. The audit reports for a l l projects have been received on time. However, requests for follow-up action o n the recently closed QUE project have been only partially met. There also remains an unresolved issue o n the GDLN project. lo

Pending items on the QUE project are related to project administration, unclaimed penalty on a delay, and overpayment due to incorrect tax calculation.

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The Central Project Coordination Unit (CPCU) o f the former projects and o f the GDLN was the central implementation authority that conducted the financial management o f the projects. However, recent changes in Indonesian law require that future donor-financed projects be implemented and managed by the technical ministry responsible for the project. The project management capacity o f the former CPCU wil l therefore be integrated as a working unit into the DGHE’s administrative structure for the proposed IMHERE project. For the proposed project, this will be done by establishing a DGHE Implementation Unit (DGHE-IU). This unit wil l coordinate the central activities o f the project and provide oversight, technical support, and training to the grant-recipient HEIs and their respective HE1 Implementation Units (HEI-IUS).

The MONE has i ts own internal financial audit unit (IG), which i s authorized to conduct audits o f donor-funded project operations. The MONE- IG generally conducts operational audits on al l units under the MONE, included those operating under donor financing. A s part o f the capacity building objectives o f this project, the World Bank task team recommends that the MONE- IG conduct an internal audit o f the project in general and o f the grant implementation under Component 2 in particular. To complete this recommended audit, the MONE- IG wil l receive technical assistance to prepare an operational manual outlining the specific steps needed to complete such an operational audit. In addition, staff training wil l be provided to support this effort.

Risk Analysis - HEIs The HEIs to receive grants under this project wil l be selected after project effectiveness. Since the identity o f the grant-recipient institutions i s not known in advance, i t was necessary to survey the financial management capacity o f a representative sampling o f HEIs. The Wor ld Bank’s task team consulted with the DGHE- IU to identify a sample o f HEIs to undergo apre-hoc assessment. The selection o f HEIs was based on their legal status (autonomous public HEIs, non-autonomous HEIs, private HEIs, and the Open University). This sample was selected to represent a range o f possible degrees financial management capacity. After the assessments, the task team’s findings were discussed within the DGHE-IU.

All o f the HEIs assessed by the task team had weak financial management systems but to varying degrees. Most o f the HEIs that were visited by the task team were then in the process o f improving their financial management. One problem that was common to a l l HEIs was the lack of income reporting by departments within each HEI. Ideally, fiscal controls should ensure that al l income-earning units within each HE1 report their financial activities (revenue and expenditures) to the HEI’s central financial management authority for consolidation purposes. The appraisal team observed that non-tuition, self-generated income was under-reported in al l of the sample HEIs because each individual unit within an institution typically maintains i t s own separate bank account outside the centralized financial management authority o f the HEI. None o f the sample HEIs has an internal audit unit, although several o f the autonomous and private HEIs expressed an intention to establish an audit unit in the near future. The task team found that the most compliant of the sample HEIs was the ITB. The Institute has recently put in place a

lo The pending item on the GDLN project i s related to a delay in the procurement process. At the time o f t h i s assessment, the issue i s still awaiting follow-up action (a second request for follow-up action was sent to the GO1 in November 2004).

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new accounting system, which increases the likelihood that the ITB wil l be able to have i t s complete FY 2004 financial statement audited by independent auditor. The audit i s scheduled but not yet completed. The remaining sample HEIs have either engaged technical assistance to upgrade their financial management capacity or they are in the process o f selecting technical specialists to provide technical assistance in the future.

Annex Table 7.1: Financial Management Status of the HEIs Visited HEIs Financial Management Status

UI

ITB

UI has engaged a consultant to develop an integrated financial management system; implementation i s planned for 2006. There i s still reluctance on the part o f individual units to share information on revenue generation. ITB management has demonstrated a strong commitment to improving its financial management capacity, putting the Institute’s Finance Manager in charge o f implementing the new system. I T B intends to have i t s annual financial statement for F Y 2004 audited for the first time by an extemal agency. A number o f steps have been taken to lower the resistance o f individual departments to share financial information. Nevertheless, the effectiveness o f such measures i s s t i l l unclear. UNPAD has recently engaged a consultant, yet has appointed a medical doctor to handle financial management upgrading for the university. The task team found this to be a potential s ign o f weak institutional commitment to management capacity building at UNPAD. UNAIR has held staff consultations on upgrading the university’s financial management capacity. Definite steps to improve the existing system, however, s t i l l remain to be taken. IPB has taken definite steps toward improving i t s financial management capacity. The Institute has an operational manual in place, but the Bank’s Task Team found the manual to be technically weak. While IPB continues to demonstrate strong commitment to academic improvement, its commitment to improving its central financial management capacity appears to remain limited. U G M i s struggling with the implementation o f bottom-up budgeting, having difficulties coordinating the University’s disparate accounting units (faculty, research units, f i rms, etc). UBAYA has demonstrated a strong commitment to improving i t s central financial management capacity. University management i s working to ensure that all sub-units share their financial information.

UNPAD

UNAIR

IPB

U G M

U B A Y A

At the institutional level, the Rector o f each HE1 will ultimately be the person responsible for implementing any grants awarded through this project. H e or she must establish an HEI-IU to implement and administer the grant. The implementation units at autonomous HEIs wil l use the existing central management capacity o f the institution to ensure that the capacity built under the project wil l be sustained by the permanent administrative staff.

In their previous experiences in implementing Bank projects, the DGHE and the MONE! have demonstrated that they have sufficient capacity to manage this project. Moreover, the DGHE has experience in providing grant-recipient HEIs with the technical assistance necessary for them to make effective use of the grant funds disbursed under a Wor ld Bank project. As mentioned above, because it i s not yet known which HEIs wil l receive grants, their precise capacity remains unknown and are l ikely to be weak.

Proiect Design Under Component 2 o f the IMHERE project, the DGHE will invite HEIs to submit proposals to compete for grants. Transparent proposal reviews and award determinations will be overseen by the BHE (although the technical aspects o f the selection process will be administered by the DGHE-IU). Each HE1 that wins a grant must enter into a contract with the DGHE, which will reflect the yearly grant budget proposed by the HEI. This yearly budget must f i rs t be reviewed and approved by the DGHE before becoming part o f the contract.

One o f the objectives o f these grants i s to strengthen the financial management capacity o f HEIs. For this reason, the task team has included a set o f financial management capacity requirements as part o f the proposal selection criteria in Component 2: Grants for Responsive and Efficient Allocation Resources. Annex Table 7.2 provides a detailed list o f the kinds o f financial management capacity that HEIs need to have and the indicators that demonstrate that they have

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sufficient capacity in place. An HE1 will need to demonstrate that they have these kinds o f capacity in place in order to be eligible for a performance-based contract. A less stringent minimum set o f kinds o f financial management capacity i s part o f the eligibility criteria for the competitive grants available to public and private HEIs.

The highest financial management risk o f this project i s at the institutional level, specifically in the implementation o f grants under Component 2. There wil l be two types o f grants under this component: (i) competitive grants for public and private HEIs and (ii) performance-based contract grants between the DGHE and autonomous public HEIs. The grants will be awarded based on proposals prepared by HEIs. The proposals wil l ini t ial ly be reviewed by the BHE to assess institutional eligibility. The DGHE will articulate the basic principles guiding the grant selection process and the criteria for this review in the PIP. The specific operational details o f selection process will be clearly articulated in the project OPM." The World Bank will review and approve the OPM prior to loan effectiveness. Competitive grants wil l be awarded to several types o f beneficiary institutions (non-autonomous public HEIs, private HEIs, and the Open University) that each has i t s own specific set o f financial management capacity requirements for eligibility. These eligibility criteria wil l reflect the wide range o f institutional characteristics, The financial management capacity requirements for HEIs applying for a performance-based contract grant, however, wil l be o f a higher standard. The objective o f a PBC i s to encourage HEIs to improve the quality, efficiency, and equity o f higher education. PBCs provide HEIs with a great deal o f discretionary authority over the funding that they receive to enable them to achieve specified results on their performance indicators. Strong financial management is a prerequisite for this sophisticated financing innovation,

Because the overall financial management r i s k for this project i s considered to be high, the commitment o f HEIs to increasing their financial management capacity i s an important aspect o f the project. The DGHE will be responsible for building such capacity. To guide this capacity building, the task team has designed a financial management action plan in consultation with the DGHE project preparation team (see details in Annex Table 7.2). The fact that the DGHE has adopted this action plan has given the World Bank task team confidence that - with strict adherence to the action plan - the financial management r isk o f the project can be reduced.

'' The OPM must include: a clear description o f organization structure, j ob descriptions, and criteria o f DGHE-IU and L P I U staff, budgeting, procurement, record management, assets management, flow o f funds, draft format o f the Financial Monitoring Report (FMR), accounting, reporting (FMR preparation), FMR publication and dissemination plan, interim audit arrangements for the grants, annual audit arrangements, annual FM training plan for DGHE-IU staff, draft FM supervision plan for the LPIUs, a governance and disclosure requirement for the project, and a monitoring and evaluation mechanism for the FM system. Detailed arrangements for the operation of: (i) the competitive grants for public and private HEIs, (ii) the initiation o f performance-based contracts between the DGHE and autonomous HEIs, and (iii) the financial management performance indicators and entry conditions to be met by each HEI.

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Annex Table 7.2: A Financial Management Plan for the DGHE Objective Action Due Date

Negotiations Proiect organization DGHE will issue a decree that sets out the J W

Project staffing

Operational Procedures Manual

organizational structure for project implementation. DGHE will issue a decree appointing project management staff. Draft OPM acceptable to the Bank.

Negotiations

Negotiation

Interim audit arrangements for those HEIs that will receive grants

Draft TOR acceptable to the Bank. Negotiation

Annual project audit arrangements

Operational Procedures Manual

DGHE issues letter to auditor (including TOR) confirming the audit arrangements. Adoption o f final OPM acceptable to the Bank.

Negotiation

Effectiveness

Financial management capacity in place Training in financial management for DGHE-IU and local project implementation unit staff.

After Loan Effectiveness

Audit Arrangements - - Interim Audit To support the DGHE-IU in monitoring the implementation at the HEI-IUS, this project wil l contain an interim audit arrangement. This arrangement i s required because o f the lack o f internal audit mechanisms within the grant-recipient HEIs. The TOR for the interim audit wil l be included in the OPM. The audit wil l be conducted by auditor acceptable to the Bank.

Previous Project Audits The most recent project audit o n other World Bank projects implemented by the DGHE o f the MONE for FY 2003 was for IBRD 4193-IND (QUE) and IBRD 4669-IND (GDLN). The audit reports were received on time. Requests for follow-up actions for both loans were s t i l l pending at the time o f this assessment, with a second request for follow-up action having been issued in November 2004.

FY LoaniCrediti Grant No. Type o f audit report Opinion 2003 IBRD 4193 Project Financial Statement* Unqualified

SNSOE account Unqualified IBRD 4669 Project Financial Statement Unqualified

Note: *A single audit opinion comprising a project account and SA/SOE account.

Proposed Project Audit The proposed project audits will be based on annual project accounts summarizing the quarterly FMRs. The DGHE (with the input from the HEI-IUS) wil l prepare the annual consolidated project account to be audited by an auditor acceptable to the World Bank. The auditor wil l then audit the DGHE and HEI-IU accounts and submit the reports to the auditors’ head office for the compilation o f a consolidation audit report. The annual audit reports will be given to the Bank not later than six months after the end o f the GOI’s fiscal year (June 30 o f the fol lowing year). The audit wil l be conducted in accordance with the agreed Terms o f Reference for audit. The auditor will also audit due process and due diligence and the attainment o f objectives according to the agreed financial management performance indicators.

Type o f Audit Report Executing Agency Due Date Project Financial Statement DGHE, M O N E Six months after the end o f the government’s fiscal year

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The DGHE/ MONE will establish a mechanism giving the public access to the annual audit report o f the project. After the auditor issues the annual audit report, the DGHEI M O N E wil l be required to provide adequate access for the public to read and comment on the audit report.

Flow o f Funds and Disbursement Arrangement Since the passage o f the new Finance and Treasury Laws, the GO1 has been restructuring i t s budgeting and accountability arrangements. This restructuring is l ikely to have an impact on the f low and disbursement o f project funds. However, the precise nature o f this impact i s not yet known as the GOI’s guidelines have yet to be finalized and related discussion within the GO1 i s ongoing at the time o f this report. Some GO1 finance procedures will continue to fol low past practices until the guidelines are issued and adopted. Therefore, changes in the current practice are likely to occur during the project’s implementation. For the time being, the f low o f fhds i s based on current practice but wil l be amended when the guidelines are issued.

To facilitate disbursement o f the loan, a Special Account (SA) denominated in U S dollars wil l be opened at the Bank Indonesia in the name o f the Ministry o f Finance. The management o f the Special Account will be the responsibility o f the MOF’s Director General for Treasury who wil l request an initial deposit to the Special Account based on the f i rs t FMR prepared by the DGHE- IU (with input from the HEI-IUS). With the finds available in the SA, the DGHE and the beneficiary HEIs can then start incurring expenditures for project activities and purchases made through approved procurement processes.

Expenditures: DGHE The DGHE- IU will be responsible for procurement practices and for the completion o f activities under their components in accordance with the agreed budgets. When bills are due for payment, the DGHE-IU will issue a payment request (SPP) to the appropriate finance uni ts within the MONE, which will then assess their eligibility. For eligible expenditures, the MONE finance unit wil l then issue a special payment order (SPM). The SPM together with the supporting documentation will then be submitted to the GO1 treasury office (KPPN), which wil l issue a remittance instruction (SP2D) to the Bank Indonesia to credit the payee’s account at the respective bank. The project Special Account will then be debited for the Wor ld Bank’s portion o f the expenditure.

Expenditures: HEIs A contract agreement wil l made between each participating HE1 and the DGHE. Each HE1 will prepare i t s f i rs t FMR to request the f i rst quarterly payment o f the contract. The subsequent payments wil l only be made if the HEIs submit subsequent FMRs, which will account for the HEI’s use o f the funds it received based on the previous FMR. Based on the HEI’s f i rst and subsequent FMRs, the DGHE-IU will submit an SPP to the appropriate finance units within the MONE for eligibility review. The finance unit then will issue an SPM. The SPM together with the supporting documentation will be submitted to the KPPN, which will then issue an SP2D to the Bank Indonesia to credit the payee’s account at the respective bank. The Special Account wil l then be debited for the Wor ld Bank’s portion o f the expenditure.

Further disbursements f rom the loan wil l be made to the Special Account based on the submission o f the subsequent FMRs prepared by the DGHE-IU (with input from the HEI-IUS’

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FMRs) duly approved by the M O F Director General for Treasury. Although the management o f the Special Account wi l l be under the responsibility o f the MOF Director General for Treasury, the DGHE-TU wil l be responsible for reconciling the SA with the FMR after receiving the SA statement from the M O F Director General for Treasury.

All documentation for the expenditures reported in the FMR will be retained by the implementing unit and wil l be made available to the auditors for the annual audit and to the Wor ld Bank and i t s representative, if requested. The World Bank’s disbursement wil l be for the six months o f projected expenditures as reported in the FMR.

The M O F Director General for Treasury wil l issue a circular letter to the relevant KPPN offices providing guidelines and criteria for eligible project expenditures in accordance with the L o an/Cr edi t Agreement .

Accounting Policies and Procedures The accounting policies and procedures for this project wil l follow standard GO1 procedures. Again, due to the recent passage o f the new Finance and Treasury Laws, the GO1 has been restructuring its budgeting and accountability arrangements. This restructuring is l ikely to have an impact o n accounting policies and procedures, though the precise nature o f this impact i s not yet known. The GO1 i s planning to complete and implement the new arrangement in FY 2005. Some GO1 accounting procedures wil l continue to fol low the past practices until the guidelines are issued and adopted. Therefore, changes in the current practice are l ikely to occur during the project’s implementation. For the time being, the accounting policies and procedures are based o n current practice but wil l be amended after the guidelines are issued.

Budgeting According to the new law, the GO1 agencies will have a unified budget rather than a budget that differentiates between recurrent and development expenditures. Traditionally, budgets for World Bank projects fal l under the development budget o f the country’s technical ministry. In the education sector, the Planning Bureau within the MONE at the central level prepares the budget to obtain an early indication o f what expenditures are l ikely to be needed in the subsequent year. Budget preparation starts in February and continues until June and takes into account the budget circular from the MOF Director General for the Budget, which contains guidelines to be used for costing operational expenses.

Budget proposals are submitted to the MOF Director General for Budget in June o f the preceding budget year. Upon receipt o f budget proposals, negotiations on costing issues take place between the M O F Director General for Budget and the MONE. The MOF Director General for the Budget sets budget ceilings in September. The MONE then prepares i t s budget in detail, with specific consideration o f HE1 budgets. Each HE1 submits a budget proposal to the DGHE, which then reviews and approves these budgets, including the allocation for grant awards under this project. The DGHE’s budget determination for each HE1 i s then submitted to the MOF Director General for the Budget and to the GO1 planning office (BAPPENAS) for clearance by both agencies. The M O F Director General for the Budget advises BAPPENAS o n the ceiling for the development budget, and the MOF Director General for the Budget and the MONE finalize the budget within this ceiling.

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The final budget for the project i s then ready to be submitted to the Wor ld Bank as the Annual Work Plan o f the project. The whole budget o f the country i s presented to the Cabinet in September and, following Cabinet approval, i t i s presented to Parliament.

The DGHE- IU wil l monitor the budget for the project through the FMR and the agreed project supervisiodtraining schedule. The DGHE-IU will periodically visit the HEI-IUS for monitoring and training purposes to ensure that the FMR i s reliable for monitoring purposes. This wil l make i t possible to identify any problems early, especially any shortcomings in budget execution.

Expenditure process - activities Based on the assigned budget, the DGHE-IU will be able to request an advance payment from the KPPN for up to one month’s projected cash needs. This advance wil l be maintained on an imprest (petty cash) fund basis. The DGHE-IU and the HEI-IUS can use the advance (of up to a maximum o f IDR5,000,000 per invoice) for project activities and administrative expenditures.

The DGHE-IU must account to the KPPN for the advance within one month or the KPPN wil l reduce the advance for subsequent months. The DGHE-TU or the HEIs will prepare an SPP for eligibility review by the appropriate finance units within MONE, which then issue an SPM. The SPM together with the supporting documentation i s then submitted to the KPPN, which then issues an SP2D to the Bank Indonesia. The Bank Indonesia wil l then transfer the funds to the bank account o f the DGHE-IU. Each SPP should cover at least 90 percent o f the advance amount or the amount o f the advance approved for the subsequent month will be reduced based on the project’s ability to absorb funds. Excess funds wil l be retumed to the KPPN, and at the end o f the fiscal year, any unused funds will also be retumed to the KPPN. The mechanism for HEI-IUS to request advance payments to finance project activities and administrative expenditures will be detailed in the OPM.

Expenditure process: suppliers, consultant contracts Payments to suppliers, consultants, and contractors (procured according to the procurement procedures specified in the loan agreement) wil l be made in accordance with the contracts with those entities. The payment wil l be transferred directly to the respective vendor, consultant, or contractor.

To make payments f rom the DGHE level, the DGHE-IU wil l prepare an SPP for the finance unit within the relevant government institution (the DGHE or the MONE) asking them to issue an SPM. The finance unit then submits the SPM to the KPPN, which in turn issues an SP2D to the Bank Indonesia. The payment wil l then be transferred directly to the account o f the vendor, consultant, or contractor in question. The mechanism for making payments at the HEI-IU level will be detailed in the OPM.

Expenditure process: record keeping The M O N E finance unit and the DGHE-IU will maintain a general cashbook, supported by a petty cash book, a bankbook, a tax book, and budget monitoring books for each Tolok Ukur and MAK (government chart o f account). The DGHE-IU treasurers will record al l cash transactions (cash basis) in the general cashbook and i t s respective supporting books. All books wil l be closed

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on a monthly basis and be subject to review. The DGHE-IU will be required to report on i t s monthly cash and bank balances to the M O N E finance unit.

The K P P N will also maintain a budget realization records card specifically for the project. This card wil l be completed with information from advance and contract monitoring cards (one card for each contract).

Expenditure process: reporting To make it possible to budget and prepare reports efficiently using the required component and expenditure categories, the project component and expenditures categories (as per loan agreement) need to be harmonized with the GO1 chart o f accounts (Mata Anggaran Keluaran- MAK and Tolok Ukur) as part o f the O P M to be issued by the DGHE/ MONE.

The DGHE-IU will assist the HEI-IUS in preparing the FMR, which will then be used to ensure the loan fund i s available for the HEIs when bi l ls for expenditures are due for payment.

The FMR will indicate: (i) the sources and uses o f finds, (ii) a six-month forecast o f the funds required, (iii) the disbursement and expenditure status o f the competitive grant agreement, (iv) the Detail Expenditures for Contracts Subject to Prior Review (if any), (v) the Summary Expenditures for OthersKontracts No t Subject to Prior Review, (vi) the Output Monitoring Report (Unit o f Output by Project Activity), and (vii) the Procurement Management Report.

All reports received from the HEI-IUS will be compiled by the DGHE-lU in an FMR format acceptable to the Bank and submitted on quarterly basis to the Bank through the MOF. The FMR will be used as the basis o f disbursement. The quarterly reports wil l be accumulated annually for annual audit purposes.

Operation Procedures Manual (OPM) The O P M will document the system and procedures to be followed by the project administration staff o f the DGHE-IU and the HEI - IU to ensure that the project uses sound financial management practices. The OPM will include:

OPM - Part 1 An organization structure, j o b descriptions and criteria for the DGHE-IU and HEI-IU staff, budgeting, procurement, record management, assets management, f low o f funds, accounting, reporting (the FMR format and how to prepare it), an interim audit arrangement for the grant, an annual audit arrangement, a govemance/anti corruption and disclosure requirement (including an acceptable mechanism for publishing the audit report), and a mechanism for monitoring and evaluating the project’s operations (including a training plan and a supervision plan).

OPM - Part 2 Detailed arrangements for awarding: (i) competitive grants for public and private HEIs and (ii) initiation o f performance-based contracts between the DGHE and autonomous institutions.

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Reporting and Monitoring The financial monitoring report (FMR) will include: (i) a Financial Report, (ii) an Output Monitoring Report, and (iii) a Procurement Management Report. The FMR must be submitted to the Bank on a quarterly basis within 45 days o f the end o f the reporting period. The f i rs t report wil l include the planning part o f the report including Report 1 -C Project Cash Forecast for the amount o f the init ial deposit required for the f i rst six months o f the project’s implementation. The FMR draft format was expected to be submitted at appraisal and agreed at negotiation.

Supervision plan The DGHE should supervise each HE1 involved in this project at least twice annually. The Bank’s financial management specialist wil l j o in the twice-yearly supervision missions by the Bank. The DGHE should prepare and review annually a plan for the supervision o f the project.

Annex Table 7.3: Allocation of IDA Credit and IBRD Loan Proceeds Expenditures category Amount of the IDA Amount of the IBRD Yo of

Credit Allocated Loan Allocated Expenditures (Expressed in SDR (Expressed in Dollars) to be Financed

Eauivalent) Goods, works and consultants’ 330,000 810,000 100% services under Part A o f the Project

Grants 48’1907000 100% o f Grant amount 19,520,000

disbursed

Unallocated 750,000

250y000’2 Amount due under Section 2.04 o f the Loan Agreement

Fee

Total 19,850,O0Oi3 50,000,000

l2 The front-end fee i s generally 1 percent o f the IBRD loan amount. The Board o f Executive Directors has waived 50 percent o f that fee for al l projects approved in fiscal year 2005. This exceptional waiver makes the fee for this particular loan equal to 0.5% o f total loan. l3 US$30,000,000 at prevailing exchange rate at the time o f IDA credit negotiations (May 13, 2005) was equivalent to SDR19,850,000.

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Annex 8: Procurement Arrangements MANAGING HIGHER EDUCATION FOR RELEVANCE AND EFFICIENCY

A. General Procurement will be carried out by the DGHE and by the participating HEIs. The DGHE has had years o f experience in conducting procurement under World Bank-financed projects. However, at this time, most o f the participating HEIs do not have adequate capacity to conduct procurement independently. The procurement risk for this project is therefore rated as high. This rating i s due to the size o f the project, the low procurement capacity at HEIs, and the heterogeneity o f capacity in those HEIs expected to receive grants. To mitigate this risk, i t was agreed between the World Bank and the DGHE that the respective implementing bodies (whether the DGHE or the individual HEIs) wil l designate a unit to be in charge o f procurement and dedicate specialized staff to conduct procurement. Capacity for procurement wil l be built through training and technical assistance. Procurement practices will include systematic accountability measures and public participation in the procurement process to ensure transparency o f transactions. This annex (along with Annex 15 Corruption Prevention Action Plan) further describes the measures to be undertaken to mitigate procurement risk.

Procurement for the proposed project wil l be carried out in accordance with the World Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits” dated M a y 2004, “Guidelines: Selection and Employment of Consultants by World Bank Borrowers” dated M a y 2004 and the provisions stipulated in the Legal Agreement. The various items under the different expenditure categories are described in general below. For each contract to be financed by the loadcredit, the different procurement methods or consultant selection methods, estimated costs, prior review requirements, and time frame must be agreed between the Government o f Indonesia (GOI) and the Bank in the procurement plan. The procurement plan wil l be updated at least once annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

National competitive bidding procedures will fol low the “Pelelangan Umum” as defined in the Keppres 80/2003, subject to the clarification as defined in Attachment 1 below. This clarification has been agreed between the Bank and the GO1 in the last 2001 CPAR, and will be included as part o f the loan agreement.

Procurement o f Works: Works procured under this project wil l include construction work for upgrading the facilities of the participating HEIs. This may be a major rehabilitation o f the building, the construction o f a new building, or a series o f minor repairs. The procurement wil l be done using the Bank’s Standard Bidding Documents (SBD) for a l l ICB, the National SBD (for NCB), and standard requests for quotations (for shopping) agreed with or satisfactory to the Bank.

Minor repairs are normally packaged in smaller contracts, and therefore, they will be expected to cost less than US$50,000 (or equivalent) per package. The procurement for this type o f work wil l follow shopping procedures.

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Major rehabilitation and new building construction wil l be packaged in as practical a way as possible, and i t i s estimated that these contracts wil l not cost more than US$2 mi l l ion per package. All procurement for contracts above US$ 1 mi l l ion (or equivalent) per package wil l follow ICB procedures. Procurement for contracts o f less than US$1 mi l l ion (or equivalent) will follow N C B procedures acceptable to the Bank. Procurement for contracts less than US$50,000 (or equivalent) will fol low shopping procedures.

Procurement of Goods: Goods procured under this project are l ikely to include: equipment, fumiture, books, software, learning resources, and educational materials. The procurement wi l l be done using the Bank’s Standard Bidding Documents (SBD) for al l ICB, the National SBD (for NCB), and standard requests for quotations (for shopping) agreed with or satisfactory to the Bank.

Any equipment and fumiture that i s required for office use (such as computers and office fumiture) will be procured by each implementing agency. They are expected to be small (less than US$50,000 per package), and therefore, the procurement should follow shopping procedures.

HEIs are likely to purchase equipment, fumiture, leaming resources (such as overhead projectors), and educational materials as part o f their program. This wil l be procured and phased on an annual basis in accordance with the agreed contracts with each respective participating HEI. The procurement will be packaged to ensure competitiveness and efficiency. Contracts for less than US$200,000 will follow N C B procedures, and those for more than US$200,000 will fol low I C B procedures. Shopping procedures may be followed for purchases o f less than US$50,000 equivalent.

Library books (published by international publishers), software and educational materials, wil l be procured by participating HEIs and wil l be included in the procurement plan. The procurement procedures wil l follow Direct Contracting, and wil l be detailed in the Project Operation Manual acceptable to the Bank

Proceeds o f the loan and credit shall not be used to finance the procurement o f any books or publications from debarred f irms or o f any books or publications that debarred f i r m s publish, either directly or through intermediaries.

Selection of Consultants: Consulting services are required by the DGHE-IU for the fol lowing activities:

1 2 Quality Assurance (individual consultant) 3 4 5 6 Tracer study

Individual consultants for the drafting o f new legal and regulations

Strategic Planning and Budgeting (individual consultant) Development of teacher certification and licensure (individual consultant) Technical assistance for information system design and software development

The selection for the tekhnical assistance contract package for the Information System D e s i g n and Software Development will follow QCBS procedure; and for the Tracer Study wil l follow

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CQ procedure. The rest o f the technical assistance packages wil l follow the selection o f individual consultants in accordance with Section V o f the Bank Consultant Guidelines.

As part of their implementation programs under this project, HEIs may also hire f i r m s to support them. I t i s expected that no special services wil l be required for this purpose, and therefore the transactions wil l fol low QCBS procedures, except for those contracts below US$200,000, in which CQ procedures will be followed.

Shortlists o f consultants for services estimated to cost less than US$200,000 (or equivalent) per contract may be composed entirely o f qualified national consultants in accordance with the provisions o f paragraph 2.7 o f the Bank’s Consultant Guidelines.

I t may be necessary for the DGHE-IU or HEIs to hire HE1 lecturers/professors or to contract with HEIshesearch institutes. When and if this situation arises, DGHE-IU will explicitly describe this in the updated procurement plan, which i s regularly submitted to the Bank for i t s review and no objection. It is highly important that the DGHE-IU justify the nature o f assignment in view of the conflict o f interest principles in accordance with the Bank Consultant Guidelines.

Operating Costs: Consumable supplies for offices and the operation o f equipment, vehicles, and buildings under the project management category (incremental operating costs) wil l fol low government procedures that are acceptable to the Bank.

Others: Fellowships for PhD and master’s degrees in local/overseas institutions will fol low government procedures that are acceptable to the Bank.

The procurement procedures and SBDs to be used for each procurement method, as well as model contracts for works and goods procured, are presented in the “Indonesia-Managing Higher Education for Relevance and Efficiency (IMHERE) - Operation Procedure Manual (OPM) Books 1 and 2.”

B. Assessment of the agency’s capacity to implement procurement The DGHE-IU will handle procurement o f good and services purchased under non-grant components not implemented by HEIs, while public14 and private HEIs will handle procurement o f goods and services purchased under grant components. The DGHE-IU is staffed by a project manager (with equivalent positions at each HEI-IU), and the procurement function i s staffed by procurement officers.

The Bank carried out an assessment of the capacity o f the implementing agency (the DGHE-IU) to implement procurement actions for the project in January 2005. The Bank reviewed the DGHE-IU’s organizational structure for implementing the project and the interaction between the project’s staff responsible for procurement and the relevant MONE central unit for administration and finance.

l4 Public higher education institutions include autonomous institutions (referred to as BHMN)and non-autonomous institutions (referred to as non-BHMN).

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The Bank identified the following key issues and r isks concerning procurement in the implementation o f this project:

1) Corruption and Collusive Practices: This has been a nationwide issue, which has normally involved both bidders/consultants and government officials. The general procurement environment i s weak. Based on this init ial assessment, the corruption mapping areas and the proposed actions to mitigate this risk are included in Annex 15.

2) Procurement Delays: The most common reason for procurement delays i s the late availability o f the budget, which i s normally available no sooner than early March each fiscal year. This means that there are effectively only nine months left in the fiscal year for procurement purposes. Under the existing national regulations, this may also interrupt services during the period in which budget i s not available. Another source o f delay i s the late initiation o f the procurement process or a long evaluation process, especially in hiring consultants. These delays may involve attempts by higher-level staff than the project manager o f the DGHE-IU or by bidders or consultants to exert undue influence over the procurement process.

3) A lack o f independent iudmnent from the officials involved in making decisions about procurement: Although the DGHE-IU and the members o f the tendedevaluation committee are authorized to make their own independent decisions by Keppres 80/2003 , sometimes they can be influenced by other parties, such as: higher-level officials (for example, their bosses) or by external parties (for example, bidders or consultants). This can cause significant delays in the processing o f procurements, and can result in contracts being given to low-quality consultants and to the delivery o f low-quality services.

the staff o f the DGHE are familiar with the Bank’s procurement procedures. However, there i s n o guarantee yet that they wil l be assigned as procurement staff for this project since the decree establishing the team has not been issued yet. The staff at other implementing agencies may have very l i t t le capacity to carry out and supervise procurement contracts. Some officials may not understand the contract clauses or how to enforce them. There i s also an issue with regard to how the respective procuring units can effectively enforce the agreed procurement procedures, especially those that are s t i l l not consistent with Keppres 80/2003 (for example, N C B procedures that are acceptable to the Bank).

5) Uncertainty about the legal framework: The new L a w N o 17/2003 does not clarify how funds are channeled from the GO1 to BHMN institutions or indicate precisely how non- BHMN public HEIs should be financed by the GOI. This i s potentially in conflict with the current government’s regulation on BHMNs as it appears that different government agencies have a different understanding o f these issues. In addition, the new Finance and Treasury L a w which i s into effect this year o f 2005, may significantly affect to the uncertainty of the project implementation.

6) Unavailability of detailed implementationlprocurement plans at ini t ial stage o f implementation: This r i s k i s particularly associated with the grant component to HEIs. The names of participating HEIs along with their procurement packages which will be included in the grant proposal may not be identified at time o f negotiation or even at Loan Effectiveness.

4) Low capacity o f the procuring units to carry out and supervise larger contracts: Some o f

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The procurement complaint handling mechanism wil l follow the one stated in the Keppres 80/2003, wh ich wil l be detailed in the project Operation Manual acceptable to the Bank for things particularly related to this Project. I t i s agreed there wil l be a particular existing unit within each implementing agency which wil l be assigned to record the complaints and the follow up actions, including referral to the respective procuring units. The procuring units wil l be responsible for ensuring that the complaint are handled and resolved in a timely manner. All procurement complaints are addressed to the procuring units, and if not resolved, then the complainant may send the complaint to the direct supervisors o f the procuring units. For complaints related to fraud and corruption, the complaint handling uni ts wil l have to refer the cases to the respective authorities in accordance with the national law and regulations.

The prior review thresholds that are established for this Project have already considered the above risk factors. During the Bank supervision missions, these thresholds wil l be assessed and reviewed from time to time, and if there are any changes, such changes will be reflected in the updated procurement plan agreed by both parties.

Annex Table 8.1 presents a list o f measures agreed between the GO1 and the BankJo mitigate these risks.

Annex Table 8.1: Agreed Corrective Measures Actions Due Date Responsible Unit

DG Decree to establish the project’s organizational structure and staffing, including procurement officer Decree to appoint HE1 procurement officer At least one procurement workshop conducted pr ior t o the project launch, attended by a l l implementing agencies and auditors Operation Procedure Manual developed to streamline a l l agreed procurement procedures and reporting under this project Procurement p lan for the f i s t 18-months o f implementation available

Standard Bidding Documents, request for quotation documents, and RFPs for procurement actions during the f i s t year available. TOR and detailed procedures for including independent members o f c i v i l society as observers for procurement process

Negotiation

Grant proposal date Agreed at Negotiation

Draf t at Negotiation, F ina l at Effectiveness Negotiation

Negotiation

Dra f t at Negotiation, F ina l at Effectiveness

DGHE

HEIs DGHE

DGHE

DGHE, HEIs DGHE, HEIs DGHE

In addition to the above, each implementing agency wil l also undergo procurement institution building activities (consistent with Table 3 .3), to ensure more transparent and efficient procurement system be sustainable. By fol lowing these activities, i t i s agreed that each implementing agency wil l achieve the indicators by each o f the stated time.

The overall project r i s k for procurement is HIGH.

C. Procurement Plan The GOI, at appraisal, developed a procurement plan for project implementation that provides the basis for the procurement methods. This plan has been agreed between the Borrower and the

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Project Team in February 2005 and i s available at the DGHE-IU. I t wil l also be available on the project’s database and on the Bank’s external website. The GO1 will update the procurement plan in consultation with the project team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

D. Frequency of Procurement Supervision In addition to the supervision to be carried out from Bank offices, the Bank will conduct annual supervision missions to review procurement actions in accordance with the recommendation o f made in the Bank’s capacity assessment o f the DGHE-IU.

E. Details o f the Procurement Arrangements Involving International Competition

1. Goods, Works, and Non-consulting Services (a) L i s t o f contract packages to be procured following international competitive bidding:

Contract Estimated Procurement P-Q Domestic Preference Review Expected (Description) cost Method (yes/no) By Bank Bid-Opening

(Prior / Post) Date IT Equipment &networks 427,670 ICB No No Prior July 2007

(b) Contracts estimated to cost more than US$300,000 (works) and US$lOO,OOO (goods) per contract, f i rst N C B contracts for goods and works implemented in each FY by each procuring entity, and al l direct contracting will be subject to prior review by the Bank.

2. Consulting Services (a) A l i s t o f consulting assignments with a shortlist o f international f i rms.

Expected Description of Assignment Estimated Selection Review cost Method by Bank Proposals Submission

(Prior / Post) Date TA for information system design and software 459,000 QCBS Prior Sept 2006 development TA for Tracer Study 182,000 CQ Prior Sept 2005

(b) Consultancy services estimated to cost more than US$lOO,OOO (f i rms) or US$50,000’5 (individuals) per contract and any single-source selection of consultants ( f i rms) wil l be subject to prior review by the Bank.

(c) Short l i s ts o f consultants for services estimated to cost less than US$200,000 equivalent per contract may be composed entirely o f qualified national consultants in accordance with the provisions o f paragraph 2.7 of the Consultant Guidelines.

l5 Note that the threshold for individual consultant contract has been established in response to the request from the Task Team due to the risk that i s anticipated in GoI’s hiring large value individual consultancy contracts.

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Annex 9: Economic and Financial Analysis


Introduction The economic retums from this project wil l consist o f the increased efficiency o f spending through the introduction o f performance-based funding mechanisms and through the increased employment o f university graduates who were able to benefit from the investments. Both are difficult to quantify given the lack o f available data. The analysis for the Implementation Completion Report o f the Bank’s previous higher education project suggested that some efficiency gains f rom the project were realized in one HE1 in terms o f a reduction o f about two months in the length o f time i t took students to earn a degree. time taken to earn a degree fel l during the init ial phases o f the project but increased in later years, but in this HEI, the reversal in the trend was accompanied by a r ise in test scores. The analysis was based on data from three out o f the eight HEIs that participated in the project and collected data o n graduates. N o data were available for the other HEIs.

At another HEI, the length o f

Retums to higher education This section focuses on trends in the labor market for higher education graduates and i s based on an analysis o f the Susenas household survey. Rates o f return to investments in higher education in the short run largely depend o n the demand for higher education graduates in the labor market. The general conclusion i s that the returns to higher education f e l l substantially after the Asian economic crisis but that in the past few years this trend has been reversed. This i s mostly due to the remarkable increase in employment prospects available to graduates o f higher education. In many instances, graduates seem to have taken over the jobs o f those with less education.

Estimates o f retums to education are usually based on wage data. Many Indonesians, however, work outside o f the wage sector and use their human capital in self-employment or agriculture. To capture this combined effect, we have estimated the relationship between the level o f education in the family and (log) per capita consumption for a series o f Susenas data starting from 1993. The regression corrects for family composition, household size, age, and whether the consumption data were collected using a short or a long consumption questionnaire. The level o f education o f the highest educated adult (age 18-60) male and female in the househo1dl6 are included as dummies. The excluded category is “completed primary education.” The estimated coefficients o f the education variables are presented in Annex Figure 9.1, They can be interpreted as follows. For example, a household in which the best educated male has completed junior secondary education has o n average 12 percent higher per capita consumption than a household in which the best educated male has completed primary education, holding al l other variables, including the education level o f the best educated female, constant.

These results indicate that the retums to higher education have fallen sharply since 1996 to a low around the year 2000. During these years, the returns to higher education fe l l much faster than those o f senior secondary education. The year 2000 saw an upturn in the returns to higher education, while the returns to senior secondary education increased only slightly. The trend

l6 The specification includes dummies indicating whether an adult male and female are present in the household. The education variables of the best-educated male and female are interacted with these dummies.

76

reversed again in 2003, but at this stage it i s too early to te l l whether this i s indeed a reversal or an anomaly in the data. The trends for males and females are similar, but overall the swings in the trends are weaker for females. There are also marked differences between males and females in the retums to different levels o f higher education. One- or two-year diploma courses taken by males have l i t t le effect on household consumption, whereas for females the retums are substantially higher. For females, there i s fairly l i t t le difference between the three-year diploma courses and the S 1 or higher levels o f education (which takes a minimum o f four years to complete). For males, however, S 1 gives substantially higher retums than three-year diploma courses.

Figure 1: Regurns to Education on Consumption (“not completed” indicates “not completed primary education”)

females

I

The trends presented in Annex Figure 9.1 combine several effects. Changes in the relationship between the level o f education and per capita consumption may stem from changes in hourly wages and changes in unemployment. Annex Figure 9.2 presents trends in the employment o f higher education graduates and others. The results show a drop in the share o f higher education graduates working in wage employment f rom around 70 percent to about 62 percent. The share working in wage employment picked up in 2000 but did not yet reach the levels recorded before the crisis. The fal l in wage employment was at the cost o f a rise in self-employment and non- participation. Open unemployment changed l i t t le over the time period considered. Interestingly, the share o f wage jobs for other education categories started to fa l l in the year 2000, indicating that some o f the r ise in employment o f higher education graduates may have been at the cost of those with less education. Total wage employment has hardly increased since 2000 (see Annex Table 9.1).

77

Figure 2 Share o f Employment Categories by Level of Education (Adults “not” stands for N o t Participating)

others 0.8 , 0.8 1 0.8

t- self-employed

+wage w ork 0 7

0 6 - 0 6 I I I 1

unewloyed 07i-

0 6 not

0.5 1- a: 1- 0.5

0.4 0.4

Unemployment rate (%) *** 2.5 4.4 4.9 4.7 Underemployment rate (%) **** 37.7 36.8 38.8 36.7 Formal employment (% of total employment) 27.3 33.9 35.2 36.7 Urban informal employment (% o f total urban employment) 41.6 43.1 42.7 43.0

0.3 I--- - - ~ - 0~1- 0 2

0 3

0 2

0 1

0 1993 1995 1997 1999 2001 2003

0 2

0 1 --01

0- 0 4 year 1993 1995 1997 1999 2001 2003 1993 1995 1997 1999 2001 200:

year

5.5 6.4 6.1 8.1 9.1 9.5

40.0 38.4 37.4 33.5 34.0 33.3

34.6 36.0 35.1 35.0 30.4 29.2

45.7 45.8 45.5 46.6 49.1 49.4

Annex Table9.1: Summary of Labor Force Structure, 1990-2003 1990 1994 1996 1997 I 1998 1999 2000 2001 2002 2003

Working age population (million) * 135.7 147.8 154.5 157.4 Labor force (million) 73.9 85.8 90.1 91.3 Economically inactive (million) 57.9 62.0 64.4 66.1 Working (million) 74.1 82.0 85.7 85.4

Formal 20.2 27.8 30.2 31.8 Informal ** 53.9 54.2 55.6 53.7 Urban informal 7.6 10.5 11.8 12.7

Labor force participation rate (%) 57.3 58.0 58.3 58.0 Female labor force (%) 38.8 39.0 38.6 38.4 Urban labor force (%) 25.0 30.8 33.5 35.2

138.6 141.1 141.2 144.0 148.7 152.6 92.7 94.8 95.7 98.8 100.8 100.3

45.8 46.2 45.6 45.2 48.0 52.3 87.7 88.8 89.8 90.8 91.6 90.8 30.3 31.9 31.5 31.8 27.8 26.5 57.3 56.9 58.3 59.0 63.8 64.2 13.9 14.8 15.5 16.8 18.2 17.7

66.9 67.2 67.8 68.6 67.8 65.7 38.8 38.4 38.0 38.1 37.2 35.4 36.0 38.1 39.3 41.0 41.8 40.9

78

The returns to higher education in the wage sector (see Annex Figure 9.3), on the other hand, have remained almost constant since 1998. I t i s interesting to note that the returns to education in the wage sector differ fairly l i t t le by type o f higher education (diploma to S 1 level); only at the S2 level does the wage increase substantially. These results are based o n a regression o f the log hourly wage o n education and age.

Higher education in 2003 provides a private rate o f return o f 13.8 percent in the wage labor market. In comparison, the rate o f return to primary education i s 29.8 percent, to junior secondary 1 1.2 percent, and senior secondary 12.6 percent. However, the rate o f return to higher education i s l o w compared to the Asian average o f 18.2 per~ent . ’~ Vietnam’s private rate o f return to higher education i s similarly low at 1 1 percent.’* The Indonesian rates o f return are based on the 2003 Susenas and were calculated using a model identical to that used by Patrinos, Moock, and Venkataraman (1 999). More details are in the technical appendix available in the project file.

Thus, the upturn in the returns to higher education seem to be mostly due to an improvement in the employment prospects o f higher education graduates rather than to changes in the wage pattern. The new jobs for higher education graduates seem to have crowded out wage employment for those with less education.

Figure 3 Returns to Education in Wage Work by Year and Gender

males

2 ,

1.5

females

2m 1 5

I m

0.5

0 - 19

-0.5

year

+Not conpleted Rimary

--a- junior secondary School

senior secondary

-36- Diplom Wbachelor

--t Diploma NlSl

i- s2

i7 Patrinos, Harry Anthony and George Psacharopoulos, 2002. “Returns to Investment in Education: A Further Update” Policy Research Working Paper Series: 2881, the World Bank.

’* Patrinos, Harry Anthony, Peter Moock, and Meera Venkataraman, 1999. “Education and Earnings in a Transition Economy (Vietnam)” Policy Research Working Paper Series: 1920, The World Bank

79

Rate o f return analysis from the second higher education proiect This rate o f return analysis followed the same procedure as for the second higher education project. The method i s summarized below. The technical appendix wil l be available in the project file.

The rate o f return i s defined as the interest rate that sets the discounted net benefits equal to zero. The net benefit consists o f four components: (1) the increase in total wages as a result o f the project, (2) the reduction in the amount o f time it takes to find a f i rst j ob as a result o f the project, (3) the change in the number o f higher education graduates as a result o f the project, and (4) the negative benefit associated with the cost o f the investment.

Contrary to the model used for the second higher education project, we distinguish between the number o f years over which the project generates returns at the higher education level and the number o f years during which graduates enjoy returns from a better education in their working lives. In the model in the previous section, i t was assumed that there would be no retums after 20 years.

This analysis assumes that: 1. The project generates returns at the higher education level over 10 years. 2. Those who graduate from HEIs during those 10 years enjoy increased wages over a

working l i f e o f 30 years. 3. There are no benefits from the project in terms o f reducing the time needed to search for

jobs. 4. There are no benefits from the project in terms o f students switchingHEIs within the

project. 5. The mean yearly starting salary i s US$1,337 (obtained from Sakernas 2003). 6. The yearly real wage increase over a lifetime equals 1.03. The same assumption was used

for the economic analysis o f the second higher education project. 7. The number of graduates that benefit from the project i s 23,554 (compared with 11,532 in

the previous analysis - see explanation below). 8. The increase in the starting wage as a result o f the project i s US$200.55 (compared with

$120 in the previous project - see explanation below).

Assumption 7 -the number of beneficiaries Annex Table 9.2 l is ts the six types of higher education institutions included in the third higher education project and the expected number o f grant awards. The number o f graduates that will benefit f rom the project i s obtained by multiplying the average number o f graduates by the number o f awards.

W e assume that the total graduates benefited f rom the project are until the tenth graduation. Thus, the expected number o f graduates at time t can be formulated as:

6 -

G, = CNi * A i , t = 1,2, ..., 10 i=l (6)

= 0, otherwise

80

Where: Ni = the average number o f graduates per year from an educational institution o f type i Ai = the estimated number o f awards for an educational institution o f type i .

-

Assumption 8 -increase in wages

The analysis assumes that the increase in the starting wage resulting from the improvements in quality i s equal to the observed differences in wages between two and three years o f higher education. Annex Figure 9.1 shows that there was a 15 percent increase in returns to education from diploma VI1 to diploma I11 in 2003 (for both males and females). With a starting wage o f $1,337, this amounts to an absolute increase in the starting wage o f US$200.55 per year, dws = 200.55.

Cost and Efficiency gains The cost o f the project i s US$77.76 mi l l ion and it is expected to be spread out equally over the first four years. The efficiency gains are equal to US$8.6 mi l l ion and are expected to be spread out equally over the first 10 years.

Thus, the benefit i s defined as:

Where Et i s the efficiency gains at time t.

Rate o f Return

Given the assumption made about benefits, the rate o f return is estimated to be 50 percent.

81

Sensitivitv analysis The figures below show the sensitivity o f each o f the assumptions to the rate o f return o f the project, The rate o f return analysis is fairly insensitive to what assumption i s made about the number o f years over which the project yields benefits (Annex Figure 9.4). Reducing the number of years from ten to five years only reduces the rate o f retum to 43 percent. The rate o f return i s also insensitive to what assumption i s made about the number o f years students benefit from their improved education (see Annex Figure 9.4). sensitive to what assumptions are made about the number o f beneficiaries and the increase in the starting wage. Reducing the number o f graduates that benefit from the project from 23,554 to 1 1,532 - as assumed in the economic rate o f return analysis o f the previous higher education project - reduces the estimate rate o f return to 26.7 percent. Similarly, a decrease in the starting wage from US$200.55 to $120 - as in the previous economic analysis - results in a decrease in the rate o f return to 3 1.5 percent. The sensitivity analysis indicates that the economic rate of retum remains above 30 percent if one o f the assumptions i s adjusted downwards by a substantial magnitude.

On the other hand, the results are very

100.00% -

90,00% ~

80,00% - 70.00% -

E 60.00% - ; 50,00% -

f ::;::: I 20.00% -

10,00% ~

O,OO% 7

Annex Figure 9.4: Sensitivity Analysis

1

1 I

I

6 I I I

" I " , 0 10 20 30 40 50

Number of Years Students Benefit from

90,00% - 80,00% - 70.00% -

E

9

f J"

1

0% 0 5 10 15 20

Number of Years that the Project Yield Returns

20,00% - 10.00% -

82

Annex Table 9.2: Average Number o f Graduates Group Average Estimated

number o f number o f grant graduates awards

Public Polytechnics 414 Public HE1 (ex-IKIP and IKIP) 1,203 Art Institute 121 Public University ex-DUE or receiving 1,941 TPSDP >= 4 grants Lesser established public HE1 614 Newly established 0

3 2

Total graduates from HEIs 23,554

83

Annex 10: Safeguard Policy Issues


The safeguard team endorses the approach o f the task team and the proposed assignment o f Category C for t h i s project. Safeguard clearance o f the project, therefore, has been delegated to EASHD. There are no specific issues regarding indigenous peoples arising f rom the project that require actions under the Bank’s policy. The risk to the Bank’s reputation for this project i s rated low, as any risks have been reduced by applying lessons leamed from prior experience with similar projects undertaken by the Bank in Indonesia and elsewhere.

The project’s design addresses the issue o f the access o f the poor to higher education, especially government policies that might promote the access o f vulnerable and poor students to higher education. In particular, certain competitive funds and performance-based contracts wil l encourage the development o f admission policies that favor poor students. The Open University revitalization p lan envisions modemizing the govemance structure and financing o f the Open University while expanding i t s mandate to include a broader curriculum in a wider range o f locations and through a variety o f delivery modes. This wil l include outreach to remote locations that are not currently wel l served by higher education institutions to help to prepare students both for local employment opportunities and for further education in such institutions as the autonomous HEIs.

There i s the possibility that some grant money could be used for c iv i l works, but this would be f l imited to the rehabilitation o f existing classrooms or laboratories. Whether any such sub-

component activity will be included wil l only be known when the grant requests are submitted. For HEIs that request finds for rehabilitating their existing buildings, the safeguard concerns wil l be addressed through instructions in the grant application. In addition, the grant review committee wil l evaluate any infrastructure rehabilitation measures proposed by grant-seeking HEIs.

84

Annex 11: Project Preparation and Supervision MANAGING HIGHER EDUCATION FOR RELEVANCE AND EFFICIENCY

PCN review Initial PID to PIC Initial ISDS to PIC Appraisal Negotiations Board/RVP approval Planned date o f effectiveness Planned date o f mid-term review Planned closing date

Planned Actual March 11 , 2004 March 4, 2004 March 4,2004

Feb 10-15,2005 March 10-16, 2005 Feb 28-31,2005 May 13,2005 May 5,2005 June 9,2005 October 3 1 , 2005 October 3 1 , 2008 June 30,201 1

Key institutions responsible for preparation o f the project: Directorate General o f Higher Education, Ministry o f National Education, Indonesia

Bank staff and consultants who worked on the project included: Name Title Unit Susiana Iskandar Education Specialist EASHD Richard Hopper Yogana Prasta Christopher Thomas Vicente Paqueo Mae Chu Chang Rizal Rivai Novira Asra Rajiv Sondhi Titie Hadiyati Lauritz B. Holm-Nielsen Kristian Thom Steven Burgess Joseph Burke Juan Manuel Moreno Robin DePietro-Jurand Maria Jose LeMaitre Menno Prasad Pradhan Anne-Lise Klausen Kundhavi Kaderisan Rosita Van Mee l Peter Moock Kin Bing Wu Soren Nelleman Shahid Yusuf Govindan Nair Ompom Regel Elizabeth King Marlaine Lockheed Xiomara A. Morel

Education Specialist Sr. Disbursement Officer Sector Manager HD Sector Coordinator Education Sector Cluster Leader Sr. Procurement Specialist Financial Management Specialist Sr. Financial Management Specialist Consultant (Costing) Lead Education Specialist ET Consultant (Education) Sr. Social Development Specialist Consultant (Performance Funding) Sr. Education Specialist Consultant (Higher Education) Consultant (Quality Assurance) Economist ET Consultant (Civil Service) Portfolio Manager Senior Education Specialist Consultant (Economic Analysis) Senior Education Economist Senior Operations Specialist Economic Adviser Capacity Building Adviser Senior Operations Officer Lead Economist Consultant (M&E) Seiior Finance Officer

Bank funds expended to date on the project preparation: Total estimated costs up to approval: Estimated annual supervision cost:

EASHD EACIF EASHD EASHD EASHD EAPCO EAPCO EAPCO EAF'CO LCSHE LCSHE EASSD Extemal HDNED Extemal Extemal EACIF EACIF EACIF SASHD Extemal SASHD A F T H l DECRG EACIF EASHD EASHD Extemal L O A G l

US$247,489 US$400,000 US$75,000

85

Annex 12: Documents in the Project File


Allen, R., 1984. “New approaches to incentive funding” in Larry Leslie (ed.) Responding to New Realities in Funding. San Francisco: Jossey-Bass, Inc.

Banta, T., L. Rudolph, J. Van Dyke, and H. Fisher, 1996. “Performance Funding Comes o f Age in Tennessee” The Journal of Higher Education, 67( l), 23-45.

Barton, P., 1995. Learning by Degrees: Indicators o f Performance in Higher Education. Princeton, NJ: Policy Information Center, Educational Testing Service.

Bogue, E., 2002. “Twenty Years o f Performance Funding in Tennessee: A Case Study o f Pol icy Intent and Effectiveness’’ in Burke, Joseph and al, Funding Public Colleges and Universities for performance: Popularity, Problems, and Prospects, Albany, N e w York: The Rockefeller Institute Press.

Borden, V.M., and T.W. Banta, (eds.), 1994. Using Performance Indicators to Guide Strategic Decision Making. New Directions for Institutional Research, N o 82. San Francisco: Jossey-Bass.

Brinkman, P. (1984). Formula Budgeting, the Fourth Decade” in Larry Les l ie (ed.) Responding to N e w Realities in Funding, N e w Directions for Institutional Research, no. 43. San Francisco: Jossey-Bass, Inc.

Bruneau, W. and D. Savage, 2002. Counting Out the Scholars: The Case Against Performance Indicators in Higher Education. Toronto, Ontario: Lorimer.

Burke, Joseph, 2003. “The Benefits o f Multi-Year Contracts between the State and Public Universities: Linking performance, Funding, and Mission.” Council for Education Policy, Research, and Improvement, November.

Burke, J., 1997. Performance Funding Indicators: Concems, Values, and Models for Two- and Four-year Colleges and Universities. Albany: Rockefeller Institute, 1997.

Burke, J., 2001. “Paying for Performance in Public Higher Education” in Da l l Forsythe (ed), Quicker, Better, Cheaper? Managing Performance in American Government, Albany: The Nelson A. Rockefeller Institute o f Government.

Burke, J. et al. 2002. Funding Public Colleges and Universities for Perfonnance: Popularity, Problems, and Prospects, Albany, N e w York: The Rockefeller Institute Press.

Burke, Joseph and Henrik Minassians, 2002. Reporting Indicators: What do they indicate? Chapter 3 in Reporting Higher Education Results. Jossey-Bass.

Burke, J. and H. Minassians, 2002. Performance Reporting: The Preferred “No Cost” Accountability Program - The Sixth Annual Report, Albany: The Nelson A. Rockefeller Institute o f Government.

Burke, J. and A. Serban, 1997. Performance Funding and Budgeting for Public Higher Education: Current Status and Future Prospects. Albany: Rockefeller Institute.

Burke, J. and A. Serban, 1998. Performance Funding for Public Higher Education: Fad or Trend? San Francisco: Jossey-Bass Publishers.

Burke, J., H. Minassians, and P. Yang, 2002. “State Performance Reporting Indicators: What D o They Indicate?” Planning for Higher Education. 3 1 (1): 15-29

86

Caruthers, J. and D. Layzell, 1995. “Performance Funding at the State Level: Trends and Prospects.” Paper presented at the 1995 Annual Meeting o f the Association for the Study o f Higher Education, November 2, Orlando, 1995.

Cave, M., S. Hanney, S. and M. Kogan, 1991. The Use o f Performance Indicators in Higher Education: A Critical Analysis o f Developing Practice. London: Jessica Kingsley Publishers.

Cave, M., S. Hanney, M. Henkel, M. Kogan, 1996. The U s e o f Performance Indicators in Higher Education: The Challenge o f the Quality Movement. London: Jessica Kingsley Publishers.

Creech, J., 2000. Linking Higher Education Perfonnance Indicators to Goals (Educational benchmarks 2000 series). Atlanta, GA: Southem Regional Education Board.

Cuenin, S., 1985. The U s e o f Performance Indicators in Universities: an international survey. International Journal of Institutional Management in Higher Education 11.

Dochy, F., M. Segers, and W. Wijnen, 1989. Management Information and Performance Indicators in Higher Education: An International Issue. Assen, The Netherlands: Van Gorcum and Comp BV.

Education Commission o f the States, 1994. Charting Higher Education Accountability: A Sourcebook on State-Level Performance Indicators. Denver: Education Commission o f the States.

Ewell, P., 1994. “Developing Statewide Performance Indicators for Higher Education: Pol icy and Themes” in S. Ruppert (ed.), Charting Higher Education Accountability. A Sourcebook on State-level Performance Indicators. Denver: Education Commission o f the States.

Ewell, P., and D. Jones, 1994. “Pointing the Way: Indicators as Policy Tools in Higher Education” in S. Ruppert (ed.), Charting Higher Education Accountability. A Sourcebook o n State-level Performance Indicators. Denver: Education Commission o f the States.

“The Benefits and Threats o f PBB: An Assessment o f Modem Reform.” Public Budgeting and Finance 19(3): 3-15. 1999.

Fielding Smith, James, 1999.

Filmer, Deon, 2003. “Indonesia Labor Force Market Study” Wor ld Bank. Folger, J. (ed), 1984. Financial Incentives for Academic Oualitv. New Directions for

Higher Education, No. 48. Washington: Jossey-Bass. Gaither, G. (ed.), 1995. Assessing Performance in an Age o f Accountability: Case Studies.

N e w Directions for Higher Education, No. 91. San Francisco: Jossey-Bass. Gaither, G., B. Nedwek, and J. Neal, 2000. Measuring Up: The Promises and Pitfalls o f

Performance Indicators in Higher Education. San Francisco: Jossey-Bass, Inc. Gaither, G., B. Nedwek, and J. Neal, (eds.) 1994. Measuring Up: The Promises and

Pitfalls of Perfonnance Indicators in Higher - Education. ASHE/ERIC Higher Education Report, No. 5. Washington: George Washington University.

Goedegebuure, L., P. Maassen, and D. Westerheijden, 1990. Peer Review and Performance Indicators Oualitv Assessment in British and Dutch Higher Education. Utrecht: Uitgverij Lemma.

87

Hatry. H., 1999. Performance Measurement: Getting Results, Washington D.C.: The Urban Institute.

Herbst, Marcel, 2004. Govemance and Management of Research Universities: Funding and Budgeting as Instruments o f Change. Geneva, Switzerland: Center For Science and Technology Studies..

Japan Bank for Intemational Cooperation (2002). Sector Study for Higher Education In the Republic o f Indonesia: Final Report, 2003. Mitsubishi Research Institute, Inc. for Japan Bank for Intemational Cooperation (JBIC). JBIC Sector Study Series 2002-No. 1, March.

Johnes, J. and J. Taylor, 1991. Performance Indicators in Higher Education: UK Universities. Bristol: Society for Research into Higher Education.

Jongbloed, B. and J. Vossensteyn, 2001. “Keeping up Performances: An International Survey o f Performance-based Funding in Higher Education,” Journal of Higher Education Policy and Management, 23(2): 127-1 45

Kells, H. (ed.), 1990. The Development o f Performance Indicators for Higher Education: A Compendium for Eleven Countries. Paris: OECD.

Meisinger Jr., R., 1976. “State Budgeting for Higher Education: The Uses o f Formulas.” Berkeley, CA: Center for Research and Development in Higher Education.

Minnesota Laws, 1994. Chapter 532, Ar t ic le 3, Section 3 and 4. State Funding and State Goals: Linking Post-Secondary System Appropriations to Outcomes. Minneapolis, January 20,1994.

Morgan, A., 1992. The Politics and Policies o f Selecting Funding: The Case o f State-level Quality Incentives. The Review of Higher Education 15(3): 289-306, Spring.

Morrison, M., 1995. “Quality Assurance in U S Higher Education: A Case Study o f Tennessee’s Performance Funding Program with Leaming Points for the Development of Teaching Quality Assessment in UK Higher Education.” Unpublished report.

Moynihan, Donald P., 2003. “Performance-based Budgeting: Beyond Rhetoric,” The World Bank: PREM notes, February, No. 78

Ohio Board o f Regents, 1996. “Performance Funding for Public Higher Education Arrives in Ohio.” Unpublished report. Columbus, OH: Ohio Board o f Regents, April 19,1996.

Peterson, M., J. Erwin, and R. Wilson, 1977. “State-Level Performance Budgeting” in J. K. Folger (Ed.), Increasing the Public Accountability o f Higher Education. New Directions for Institutional Research, No. 16, San Francisco: Jossey-Bass.

Republic o f Indonesia, 2003. Higher Education Long Term Strategy (HELTS) 2003-201 0, - 2003. Directorate General of Higher Education (DGHE), Ministry o f National Education (MONE).

Indonesia Interim Poverty Reduction Strategy Paper. Government o f Indonesia, March.

Republic of Indonesia, 2003.

Republic of Indonesia. Statistical Yearbook. Central Bureau o f Statistics, 2002.

88

Rondinelli, Dennis A., John Middleton, and Adriaan M. Verspoor, 1990. Planning Education Reforms in Developing Countries - the Contingency Approach. Duke University Press. Durham, 1990.

Schein, Edgar H., 1997. Oraanizational Culture and Leadership. Jossey-Bass. San Francisco.

Smith, D., 2000. “How will I know if there i s quality? Report on Quality Indicators and Quality Enhancement in Universities: Issues and Experiences,” Council o f Ontario Universities, Toronto.

Stein, R. B., 1996. “Perfonnance Reportinghnding Program: Missouri’s Efforts to Integrate State and Campus Strategic Planning” in G. Gaither (ed.) “Performance Indicators in Higher Education: What Works, What Doesn’t and What’s Next?” Proceedings from the June Symposium, Washington, 1996.

Stein, R., and A. Fajen, 1995. Missouri’s Funding for Results Initiative” in G. Gaither (ed.), Assessing Performance in an Age o f Accountability: Case Studies, New Directions for Higher Education, No. 91. San Francisco: Jossey-Bass.

Taylor, B., 1993. strategic Indicators for Hipher Education: Improving Performance. Princeton, NJ: Peterson’s.

Thorn, K., L. Holm-Nielsen, and J. Jeppesen, 2004. “Approaches to results-based hnding in tertiary education: Identifying finance reform options for Chile.” World Bank Policy Research Working Paper 3436, October.

Trombley. W., 1996. “Performance-Based Budgeting: South Carolina’s New Plan Mired in Detail and Confusion.” National Cross Talk 6( 1).

Whalen, E., 199 1. Responsibilitv-centered Budgeting. Bloomington, IN: Indiana University Press.

World Bank, 2004. Education in Indonesia: Managing the Transition to Decentralization (vols 1, 2, and 3). August..

World Bank, 2003. Indonesia Country Assistance Strategy 2004-2007. Report Number 271O8-rNDy December 3,2003. Latest discussion o f CAS: November 23,2003.

89

Annex 13: Statement of Loans and Credits MANAGING HIGHER EDUCATION FOR RELEVANCE AND EFFICIENCY

Difference between expected and actual disbursements Original Amount in US$ Millions

Project ID FY Purpose IBRD I D A SF GEF Cancel. Undisb. Orig. Frm. Rev'd

PO59931

PO63913

PO73772

PO79156

PO76271

PO40578

PO72852

PO73970

PO40528

PO49539

PO73025

PO68949

PO68051

PO59930

PO59477

PO49545

PO641 18

PO41895

PO401 96

PO36049

PO55821

PO03967

PO03993

PO36048

PO36956

PO39644

PO40061

PO40062

PO48715

PO03987

PO04026

PO36047

PO41894

PO49051

PO37097

2003

2003

2003

2003

2003

2002

2002

2002

2001

2001

2001

2001

2001

2000

2000 2000

1999

1999

1999

1999

1999

1999

1998

1998

1998

1998

1998

1998

1998

1997

1997

1997

1997

1997

1996

ID-Water Resources & IrrSector Mgt Prog

ID-Java-Bali Pwr Sector & Strength

ID-Health Workforce & Services (PHP 3) ID Third Kecamatan Development Project

ID-PPITA

ID-Eastem Indonesia Region Transport ID-URBAN POVERTY I1

ID-GLOBAL DEV LEARNING (LIL)

ID-W. JAVA ENVMT M G M T

ID-PROVINCIAL HEALTH I1 ID-SECOND KECAMATAN DEVELOPMENT PROJECT ID-LIBRARY DEVELOPMENT PROJECT - LIL

ID-GEF-W. JAVA ENVT MGMT

ID-DECNT. AGRICULTURAYFORESTRY EXT

ID-WSSLIC I1

ID-PROVINCIAL HEALTH I ID-WATSAL

ID-SULAWESI BASIC EDUC. ID-SUMATRA BASIC EDUCUATION

ID-EARLY CHILD DEVELOPMENT

ID-URBAN POVERTY

ID-FIFTH HEALTH PROJECT

ID-SUMATRA REG'L R D S

ID - CORAL REEF MGM REHAB

ID-SAFE MOTHERHOOD

ID-W. JAVA BASIC EDUCATION

ID - BENGKULU REGIONAL DEVELOPMENT

ID - CORAL REEF M G M T REHA Indonesia - IIDP

ID-CENTRAL INDONESIA SEC. EDU.

ID-Railway Efficiency

ID-BAL1 URBAN INFRA. ID-SUMATRA SECONDARY EDUCATION BEPEKA AUDIT MODERNIZATION PROJECT

ID-E.JAVA SEC.EDUC.

45.00

141.00

31.10

204.30

17.10

200.00

29.50

2.66

11.70

63.20

208.90

0.00

0.00

13.00

0.00 0.00

300.00

47.90

54.50

21.50

0.00 44.70

234.00

6.90

42.50

103.50

20.50

0.00 34.50

104.00

105.00

110.00

98.00

16.40

99.00

25.00

0.00 74.50

45.50

0.00 0.00

70.50

0.00

5.75

40.00 111.30

4.15

0.00

5.00

77.40

38.00

0.00

15.93

20.10

0.00 100.00

0.00 0.00 0.00

0.00 0.00

0.00

0.00 0.00

0.00 0.00 0.00

0.00

0.00

0.00

0.00

0.00 0.00 0.00

0.00

0.00

0.00 0.00

0.00

0.00 0.00

0.00

0.00 0.00

0.00 0.00

0.00 0.00 0.00 0.00

0.00 0.00

0.00

0.00 0.00

0.00

0.00

0.00

0.00 0.00

0.00 0.00 0.00

0.00

0.00

0.00 0.00

0.00

0.00 0.00

0.00 0.00

0.00 0.00 0.00

0.00

0.00

2.54

0.00

0.00

0.00 0.00

0.00

0.00

0.00 0.00

0.00 0.00

4.10

0.00 0.00

0.00

4.10

0.00 0.00

0.00 0.00

0.00

0.00

0.00

0.00

0.00

0.00 0.00 0.00

0.00

0.00 0.00

0.00

0.00 0.00

0.00

0.00 0.00

0.00 0.00

0.00 0.00 0.00

10.65

0.00 5.01

50.00

0.00 9.15

3.76

5.00

0.00 8.50

0.00 47.33

36.03

0.23

1.77

3.90

70.09

141.00

110.73

249.38

16.01

84.25

102.33

2.13

14.94

103.81

223.63

2.31

2.72

5.80

62.58

25.34

150.00

20.13

11.41

2.78

20.45

11.01

20.74

0.69

3.76

2.21

8.77

0.53

2.39

11.37

3.51

9.12

4.51

2.42

8.13

0.00

0.00 -0.31

0.04

1.91

-0.75

17.26

1.16

9.29

57.34

-111.38

1.18

5.83

2.97

-21.28

7.41

150.00

20.88

9.86

13.44

20.03

16.01

65.49

0.69

12.92

-9.53

13.77

0.42

10.89

11.37

50.83

45.15

4.74

4.19

12.04

0.00 0.00

0.00

0.00 0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00 150.00

0.00

0.00 13.44

19.94

0.00

-7.26

0.69

6.92

0.00

8.77

1.81

2.39

0.00

-5.56

2.76

0.00

3.29

0.00

Total: ~~

2,410.36 633.13 0.00 10.74 181.33 1,510.98 423.86 197.19

90

INDONESIA STATEMENT OF IFCs Held and Disbursed Portfolio (in Mil l ions o f U S Dollars)

Committed Disbursed

IFC IFC

FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic.

1995

2000102

1997

1993196

1991195199/01103

1992196

1995

1997

2000

1998

1993

1996

1993

1997

2001

1992195

1997

2003

2001

2003

2003

1999

1985

2002

1997

1989

1997

1989/94/03

PT Astra Graphia

PT Astra Otopart

PT Bakrie Pipe

PT Bank NISP

PT Berlian

PT Bina Danatama

PT Grahawita

PT Indo-Rama

PT KIA Keramik

PT KIA Serpih

PT Kalimantan

PT Makro

PT Megaplast

PT Nusantara

PT Pramindo ka t

PT Samudera

PT Sayap

PT Sigma

PT Viscose

PT Wings

SMM Sunson

Verdaine

Buana Bank

ITCF LYON-MLF-Ibis

Manulife

P.T. Gawi

PT AdeS Alfindo

PT Agro Muko

PT Alumindo

PT Astra

Total portfilio:

0.00 0.00 23.71

0.00 5.95

8.92

0.00 5.00 1.65

4.50

20.00

0.00 5.25

7.63

0.00

0.00

5.00

0.00 15.63

4.34

12.00

12.41

14.00

0.00

40.00 2.01

0.00

1 1.50

0.00 0.00 10.15

0.00

2.00

1.07

0.00 3.59

17.58

0.00 0.00

0.00

0.00 0.00

15.00

2.61

2.50

0.00 1.82

5.00

0.00

3 .oo 0.00 0.00

0.00 0.00 0.00

15.36

0.00

0.00 0.32

0.00

6.98

2.20

0.00

1.29

0.00

0.00 9.53

0.00 0.00

0.00 5.00 0.00 0.00

0.00 0.00

0.00

0.00 0.00

0.00

0.00

0.00 0.00 0.00

0.00 0.00

0.00

0.00 0.00

0.00

0.00

0.00

0.00 0.00 0.00

0.00 0.00

0.00 0.00

0.00 0.00

12.24

16.93

0.00

0.00

53.49

49.50

2.09

0.00 0.00

5.93

0.00

0.00

0.00

0.00

14.58

0.00 0.00

7.85

0.00

0.00 0.00 2.01

0.00

10.00

0.00

0.00 4.00

0.00

0.00 0.00

23.71

0.00

5.95

8.92

0.00 4.88

1.65

4.50

20.00

0.00

5.25

7.63

0.00

0.00

5.00

0.00 15.63

4.34

9.00

12.41

14.00

0.00

0.00

2.01

0.00 5.35

0.00 0.00

10.15

0.00

2.00

1.07

0.00 3.59

14.24

0.00 0.00

0.00

0.00 0.00

15.00

2.61

2.50

0.00

1.82

5.00

0.00

3 .OO

0.00

0.00

0.00 0.00

0.00 15.36

0.00

0.00 0.32

0.00

6.98

2.20

0.00

1.29

0.00

0.00 9.53

0.00 0.00

0.00 5.00

0.00

0.00

0.00

0.00 0.00 0.00

0.00

0.00

0.00

0.00

0.00 0.00

0.00 0.00 0.00

0.00

0.00

0.00

0.00 0.00 0.00

0.00

0.00 0.00 0.00

0.00 0.00

0.00

0.00 12.24

16.93

0.00

0.00

53.49

49.50

2.09

0.00

0.00

5.93

0.00

0.00

0.00

0.00 14.58

0.00 0.00 7.85

0.00 0.00

0.00 2.01

0.00 4.65

0.00

0.00 4.00

0.00

209.65 80.32 14.53 178.62 160.38 76.98 14.53 173.27

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic.

2004 Ecogreen 0.03 0.00 0.00 0.00 2003 PT SPA 0.01 0.00 0.00 0.00

Total pending committment: 0.04 0.00 0.00 0.00

91

Annex 14: Country at a Glance MANAGING HIGHER EDUCATION FOR RELEVANCE AND EFFICIENCY

239 187 l 7 0 175 379 396 456 445 119 220 250 250

382 417 37 5 381

POVERTY and SOCIAL

2002 Po pulatio n, m id-year (millions)

Indonesia

2117 713 GNI percapita (Atlas method, US$)

GNI (Atiasmethod, US$ billions) 149.9

Average annual growth, 1998-02

Population (%) 13 Labor force (%) 2.2

Poverty (% of population belo wnationaipo vertyline) Urban population (%oftotalpopulation) 43

Infant mortality (per looolive bidhs)

Access to an improvedwatersource (%ofpopuiation) illiteracy (%ofpopulation age a+) P Gross primaryenrollment (%of schooi-age population) 10

M o s t recent es t imate ( la tes t year available, 1996.02)

16

Life expectancyat birth (years) 67 34

Child malnutrition (%ofchildren under5) 25 78

Male 111 Female 139

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1982 1992

GDP (US$ biiiions) 94.7 139.1 Gross domestic investmentlGDP' 27.8 30.5 Exports of goods and serviceslGDP 25.3 27.9 Gross domestic savings/GDP 29.0 33.4 Gross national savingslGDP .. 214

Current account balance/GDP -5.6 -2.0 Interest paymentslGDP 16 2.7 Total debtlGDP 26.5 63.3 Total debt service/exports 18.1 32.6 Present value of debVGDP Present value of debVexports

I *O

0

-20

-40

East A s i a & Low- Paci f ic income

1982-92 1992.02 (average annual growth) Agriculture 3.8 16 10 17 Industry 9.2 3.2 3.3 3.7

Manufacturing P.6 4.7 4.1 4.0 Services 6.5 2.3 4.6 4.4

Private cons~lmptlon 4.4 5.2 4.4 4.7 General government consumption 4.9 0.4 9.0 P.8 Gross domestic investment 9.6 -4.7 8.3 42.5 Imports o f goods and services 3 .O 19 8.1 -8.3

1,838 950

1,740

10 12

38 69 33 15 76 13

136 135 136

2001

1413 218 42.3 24.9 22.8

4.9 3.2

94.2 25.9 93.0

235.5

Growth o f expor ts and impor t s (%)

40

20

0

-20

-40

-60

-Exports -o - I rpo r t s --

2,495 430

1072

19 2.3

30 59 81

76 37 95 0 3 87

2002

172.9 202 35.4 211 17.1

4.3 18

74.5 23.7

1982-92 1992.02 2001 (average annuaigrowfh) GDP 6.9 2.5 3.4

2002 2003-07

3.7 3.9 GDP percapita 5.0 11 2.1 2 3 2.4

STRUCTURE o f the ECONOMY

(%of GDP) Agriculture Industry

Services

Private consumption General government consumption imports of goods and services

Manufacturing

Development diamond'

Life expectancy

-

GNI Gross per primary capita nroilment

I

Access to improvedwatersource

----indonesia ~ Lo w-income group

Economic rat ios '

Trade

Investment Domestic savings

Indebtedness

I -=-- indonesia __ Lowincome gram

19*2 lgg2 1 Growth o f Inves tment and GDP (Oh) I

67.3 7:,; 595 578 115 8.8 7 8

24.1 25.0 349 28.5 ----GDI -GDP

92

Indonesia PRICES and G O V E R N M E N T F I N A N C E

D o m e s t i c p r i c e s (%change) Consumer prices Implicit GDP deflator 6.1

1982

Government f inance (%of GDP, includes current grants) Current revenue Current budget balance Overall surplus/deficit

T R A D E

(US$ millions) Total exports (fob)

Fuel Rubber Manufactures

Total imports (cif) Food Fuel and energy Capital goods

Export price index (895=WO) Import price index(P95=WO) Terms of trade ( 8 9 5 = W O )

B A L A N C E o f P A Y M E N T S

(US$ miiiio ns) Exports of goods and services Imports of goods and services Resource balance

Net income Net current transfers

1982

1982

20,251 22,716 -2,465

-2,993 134

Current account balance -5,324

Financing items (net) Changes in net reserves

3,471 1853

M e m o : Reserves including gold (US$ millions) Conversion rate (DEC, local/US$) 661.4

E X T E R N A L D E B T and RESOURCE FLOWS

(US$ millions) Total debt outstanding and disbursed

1982

25.133 IBRD 1735 IDA 707

Total debt service IBRD IDA

3,856 207

8

Composition of net resource f l o w Official grants 92 Official creditors 1067 Private creditors 1,401 Foreign direct investment 225 Portfolio equity 0

World Bank program Commitments Disbursements Principal repayments

977 583

82

1992

7.6 5.4

I992

33,796 0,671

684 14.224

27,280 1,274 2,04 11,700

1992

37,?37 34,874

2,313

-5,664 571

-2,780

4,850 -2,070

2,029.9

I992

88,002 13,640

614

P,457 1,525

22

298 3,097 2,655 1,777

146

1,256 1003 692

2001

115 0.8

20.7 0 .o

-2.9

2001

57,364 t?,648

872 22,275 34,669 2,497 5,523 9,050

2001

62,864 50,549 q325

-8,143 2,728

6,900

-8,278 1,378

27,890 0960.9

2001

133,072 11,435

722

14,445 1,753

32

0 625

-6,t39 -5,877

1.145

645 585 853

2002

11.9 7.2

18.9 0.6 -1.7

2002

58,877 t?,139 1,238 %,18

35,805 2.852 6,558 8,606

2002

64,004 51,498 t?,506

-6,508 1,453

7,451

-3,430 -4,021

31911 9,311.2

2002

P8,765 a,729

794

13,893 1,905

33

0 -440

-2,925 -7,066

1,243

0 3 4 9

1065

In f la t ion (%) I

97 98 99 00 01

-GDPdeflator -CPI

Export and impor t levels (US$ mill.) “““““TI

mEXports mlrrports

98 97 98 99 00

Cur ren t account balance t o GDP (Oh)

6 7

4

2

0 98 99 00 O f 02

2

4

I composition o f 2002 debt (US$ mill.)

I A’ 10 729 I

I A - IBRD E- Bilateral B-IDA D-Othsmltilatetal F-Pr~vate C-IMF G - Short-term

93

Annex 15: Corruption Prevention Action Plan


General Overview This Corruption Prevention Action Plan (CPAP) recognizes the inherent r i sks o f implementing a project in higher education institutions (HEIs), which can be either public or private institutions, and in central management (Director General o f Higher Education or DGHE). The skills and experience available in some HEIs that have implemented previous projects has been high. However, to minimize the r isks o f the project and to avoid the possibility o f financial leakages and acts o f collusion, the project will commit to establishing the following CPAP. Risk management in this context includes measures related to procurement, financial management, and implementation.

The objective o f IMHERE CPAP i s to identify corruption r isks and mitigation measures. While more detailed, program-specific control systems are outlined in the Financial Management & Disbursement Arrangements and in the Procurement Arrangements, this action plan: (i) maps out the potential risks o f corruption; and (ii) presents the program activities designed to address these r isks.

The project follows a learning approach, and implementation experiences will be continually incorporated into the implementation processes. The CPAP should therefore be seen as a starting point and not an all-inclusive list o f mitigation measures.

Corruption Mapping: The matrix included in this CPAP identifies some potential r isks o f corruption and specifies some appropriate mitigation measures (see Annex Table 15.1 below). The mapping exercise wi l l be repeated annually during the lifetime o f the project to incorporate innovations and lessons learned.

The Action Plan: The strategy of corruption prevention has been developed for two separate entities, one at the central level (involving the DGHE as the Executing Agency and the DGHE Implementing Unit) and one at the level o f the HEIs as the beneficiaries o f the project as well as the implementing units o f the sub-projects.

The levels o f HEIs participation and empowerment are crucial to the success o f the project. Together, these factors will inspire greater accountability and better governance. This project empowers the HEIs to off icial ly manage the sub-projects and to be responsible for the technical quality o f deliveries and output at the department level. The design o f the project incorporates careful socialization and transparent management techniques that enable the necessary participation and empowerment. HEIs are expected to be active participants in the planning and developing o f the sub-projects. In addition, the project provides funds channeled directly to the HEI’s account based on the contracts signed by the RectorDirector o f the HE1 and by the Head o f the DGHE Implementing Unit (DGHE-IU) as approved by DGHE. Once the HEIs fulfill the draw down conditions, the funds are remitted f rom the Special Account within seven days. Finance Monitoring Reports (FMR) are used for recording and reporting the use o f funds. This format has been designed to avoid a huge backlog and to increase transparency and accountability.

94

Some o f the most important aspects o f the CPAP can be summarized into the six key elements that follow.

e Enhanced Disclosure Provisions and Transparency. The DGHE wil l disclose materials and make them readily available to the public. Salient information will be provided by a range o f means, including a public website and notice boards. Specific disclosure measures will include but not be limited to:

o Public disclosure o f annual procurement plans and schedules (and their updates), bidding documents, and requests for proposals.

o Disclosure to al l bidders o f the summary o f the evaluation and comparison o f bids, proposals, offers, and quotations after the successful bidder i s notified.

o Disclosure o f audit reports. o HEIs will send summary reports on a routine basis to the press and to relevant

c iv i l society forums (for example, NGOs, student g r o ~ p s ’ ~ and alumni groups). This wil l include details o f the management structure and key contact information, such as the names and positions o f responsible personnel.

o Progress reports will be read at annual accountability meetings at each participating HEI.

o Full documents wil l be made available in the HEIs’ libraries.

e Civil Society Oversight. The program recognizes that greater oversight by c iv i l society, especially lecturers, student groups and alumni groups, i s likely to reduce the risk o f corruption and misuse o f power. The program involves a high degree o f formal and non- formal participation by groups such as lecturers, student groups, students’ parents associations, professional associations, and alumni. These groups wil l participate in monitoring the sub-projects and evaluations o f the end results, observing the actions o f the tender committee, and evaluating the delivery o f procured services/products. Student groups will be expected to participate in the project implementation more intensively than other groups. For example, student groups wil l be invited to attend annual accountability meetings and routine sub-project coordination meetings held in the HEIs.

e Mitigating Collusion and Nepotism. The design o f the project i s very transparent and accountable, so the opportunities for collusion, fraud, and nepotism are very limited. Transparent and well-advertised procurement under the program, with appropriate oversight, wil l greatly reduce the r isks o f these forms o f corruption. The DGHE -IU will provide technical assistance by supervising and training the HEIs’ procurement and financial staff. The Wor ld Bank has also been requested to provide relevant training to staff, particularly concerning procurement rules. In each HEI, a group o f student group representatives, alumni, and lecturers wil l be formed to regularly observe and evaluate the performance o f the HEI-IU. This group o f observers will circulate the results o f their findings to the respective HEI, the CPCU, and the DGHE. If a case o f collusion, fraud, or nepotism should arise within a sub-project, the case will first be reported, discussed, and

l9 In the context o f ths Corruption Prevention Action Plan, the term “student group” refers to established bodies such as the Badan EhekutifMahasiswa (the Student Executive Body), the himpunan mahasiswa jurusan (student faculty groups), andpers mahasiswa (student press).

95

decided at a central level meeting involving the HE1 concerned, the DGHE-IU, the BHE, and the DGHE, prior to submitting the case to the Attorney General’s office. Experience in previous projects such as DUE and QUE indicates that many r isks can be avoided by the involvement o f effective observers in the bidding committees.

0 Mit igat ion of Fraud and Forgery Risks. Record keeping systems wil l tract the administration routine o f inputs to prevent implication o f payment. Monthly and quarterly reports will be tracked by DGHE-IU, which wil l investigate any problems. The BPKP and Inspectorate General wil l both hold annual audits, which wil l check receipts and journals. In addition, the BPKP wil l conduct an interim audit o n a semiannual basis to strengthen the project monitoring. If problems are found in the bookkeeping or record keeping, then hture cycles o f finding may be suspended or cancelled. Audits by institutions such as the BPK and KPK may be undertaken as deemed necessary.

0 Complaints Handling Mechanism. The processing o f al l serious complaints wil l be handled by a section o f the DGHE IU. This section wil l be responsible for codifying, recording, and maintaining a database o f a l l complaints and also tracking and reporting on the follow-up actions. The program i s designed to encourage the resolution o f complaints regarding the sub-proj ects through the correct channels. However, where problems cannot be resolved at the sub-project level or where there appears to be an abuse o f power, a solution will be found at the DGHE IU level by reinvestigating the problem in coordination with the BPKP and sub-project implementer. The BPKP and the DGHE may have to prepare an MOU to ensure that the BPKP will be able to audit the private universities, which might normally be outside o f their mandate. A respected, established student group (such as the student senate) wil l be requested to take the lead in forming a special unit to handle complaints in each o f the HEIs (sub-projects). These complaint handling units at the sub-project level wil l investigate and resolve the simpler complaints and problems. A formal agreement between the student group and the university wil l form an integral part o f the university’s proposal. An example o f a format for this agreement wil l be included in the project manual. The database o f complaints, the follow-up actions being taken, and the sanctions applied wil l be summarized and publicized o n the project website and through press releases to increase participants’ involvement and to increase the likelihood o f their lodging protests, thereby raising the social costs o f the misuse o f funds. Monthly reports from each o f these sub-project units will be routinely sent to the DGHE IU level unit, even when there has been n o change in the data from the previous month. This data will be fed into the central database to generate information concerning the project as a whole. The complaint handling mechanism developed under the project will establish and make widely known postal and email addresses for complaints to the HEIs IU and DGHE IU.

Sanctions and Remedies. Clear sanctions and remedies are important final steps in the effort to fight corruption. The HEIs are encouraged to impose reasonable sanctions on project implementers who abuse the power that has been entrusted to them, such as by decreasing their allocation or future grant eligibility. There i s an increasing wealth o f anecdotal evidence suggesting that such sanctions can be more easily applied and more effective than protracted legal proceedings, especially in smaller cases o f corruption. That

0

96

said, in accordance with the law in Indonesia, any allegations involving corruption, if substantiated, must be referred to the police and the relevant authorities for appropriate action. In al l procurement contracts, evidence o f corruption, collusion, or fraud wil l be grounds for terminating the relevant contract, possibly with additional penalties imposed (such as fines or blacklisting) in accordance with Bank requirements and the relevant laws and regulations. Disbursement can be suspended or stopped completely if cases o f abuse are not dealt with effectively. Furthermore, anyone hired under the program, including contractors and facilitators, wil l be subject to instant dismissal if proven guilty o f corruption, collusion, or fraud. Failure to report cases and take appropriate action wil l be fully investigated and may be grounds for instant dismissal or other forms o f disciplinary action. Information about any successfully prosecuted cases, where lessons are leamed and funds are retrieved, wil l be widely disseminated.

Conuption Prevention Focus The CPAP focuses on implementation arrangements and increasing transparency within the three primary entities benefiting from the project: the DGHE working unit, the HEIs, and the BAN- PT.

DGHE Working Unit. While the project i s modest in size, i t wil l be implemented locally by up to 81 public HEIs as well as some private HEIs. The IMHERE project i s building capacity at the level o f the DGHE (the central authority for higher education) to oversee and manage the sector above and beyond the capacity built in previous projects such DUE and QUE. Hence, the DGHE’s ability to follow up on the use o f funds and the result achieved with these funds wil l be strengthened. Project funds will be transferred directly from the DGHE to the eligible HEIs in accordance with a contract between the HEIs and the DGHE, thus eliminating delay or leakages that might otherwise occur in the transfer o f the funds. As a further safeguard, the DGHE-IU will closely supervise the implementation o f the sub-projects by periodically conducting site v is i ts and supervising the institutions involved in the funded sub-projects. The DGHE working unit wil l seek to consolidate procurement, financial management, and sub-proj ect indicators with disbursement decisions based o n the Financial Management Report (FMR). The DGHE has experience in successfully managing sub-projects, for example, in the DUE and DUE projects, and so the combination of stronger management capacity, greater transparency, and disbursements based on good management and targets met will mitigate the r i sks inherent in dealing with a large number o f institutions.

Higher Education Institutions. Competitive grants and performance-based contract funding are intended to give selected institutions the flexibility to determine precisely what they need to do - reorganize, operate, spend funds, hire, fire, or teach - in order to achieve the promised results. The point i s to encourage them to exercise their new legal autonomy by providing them with a high degree of discretion while continually emphasizing that they are accountable for results. Therefore, the selection process for competitive grants and perfonnance-based contracts wil l assess each institution’s capacity, including financial management, to implement performance-based contract funding, to implement sub-proj ects, and to ensure that grants are closely linked to measurable indicators. Funding will be awarded in tranches based o n the HEI’s proposed budget, and FMRs will be prepared for each sub-project to monitor the progress o f physical and disbursement achievements. The DGHE working unit, the BHE, and the Bank will

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monitor very closely the achievement o f the indicators proposed (component 2.1 .) and negotiate (component 2.2) between the awarded HEIs and the DGHE. Performance contracts, funding criteria, annual institutional performance reports, and al l studies conducted using project finds wil l be made publ ic ly available v ia the DGHE website with copies made publicly available in the libraries o f the HEIs, to ensure transparency in the management o f performance finding and to allow for greater public scrutiny. As with past projects in the higher education sector, al l activities and purchases with project finds wil l be audited, and necessary safeguards wil l be put in place to monitor activities. The initial performance-based contracts wil l build capacity for procurement and financial management and ensure that institutional budgets are fully auditable. Ensuring that books are fully auditable wil l allow project supervisors to match the goods and services procured to the expenditure o f funds so that any duplication o f expenditure can be exposed through proper fiduciary controls. Each HE1 will hold an annual public accountability meeting at which the HEIs ILJ wil l review the progress o f their sub-proj ect and openly account for al l financial aspects. Problems, complaints, and related fol low up wil l be discussed. Invitations to this meeting wil l be sent at least one month in advance to the DGHE, the DGHE Implementing Unit/CPIU, student groups, alumni groups, and lecturers.

Accreditation agency (BAN-PT). In the context o f accrediting educational institutions, quality assurance systems have always tended to develop a complex assortment o f checks and balances in order to ensure the objectivity and independence o f decisions. These measures have included transparent and public standards and procedures, the involvement o f teams o f reviewers (as opposed to assessments carried out by one evaluator), independent decisionmaking at the accrediting agency, and the publication o f accreditation results. These measures can also serve as mitigating strategies in the face o f corruption risks. The BAN-PT will take the fol lowing actions to mitigate corruption before i t has chance to take root and also to lessen concerns about degrees and certificates being bought on the market. The BAN-PT wil l i) publish al l standards and procedures and disseminate al l accrediting decisions in a public website; ii) establish strict and public norms relating to the conflicts o f interest; iii) require al l accreditation reports to be signed by al l review team members, and iv) establish a clear and effective system for appeals.

Lessons of DGHE experience. I t must be stressed that the DGHE has had experience in managing similar projects in the past. Nevertheless, the combination o f stronger management capacity and greater transparency should mitigate the r i sks associated with holding a large numbers o f institutions sufficiently accountable.

Corruption Mapping Matr ix Annex Table 15.1 i s a corruption mapping matrix that shows the corruption mapping area, the levels of risk, and the opportunities for corruption and mitigating actions. Limiting the occurrence o f corruption in this project starts with identifying potential r i s k areas - this i s called corruption mapping. This corruption incentive mapping and the identification o f opportunities for corruption will be repeated annually as the project progresses and lessons are learned.

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Annex Table 15.1: Corruption Mapping

Area PROCUREMENT Zapacity o f the DGHE- U'and ?ender/Evaluation Zommittee in HEIs

Preparation o f owner's cstimate

Preparation o f bidding documents for the selection o f consultants/ contractors)

Advertising

orruptio Level of

Risk

MEDIUM

MEDIUM

MEDIUM

MEDIUM

Mapping Matrix Opportunity for Corruption

Lack o f independent judgment in the consultant evaluation process. The decisions tend to bias toward consultants as "instructed" b y higher-level officials or other interested parties.

-Inclusion o f mark-ups in estimates and owner estimate information is leaked to contractors/consultants to ensure mark-up prices are inserted into the quotations/proposals.

establish an inflated owner's estimate for personal enrichment or to share profit with others.

- Collusion among actors to

- Criteridspecifications are made to suit a certain consultant' contractor.

- Lack o f capacity to formulate specification.

- Lack o f technical capacity/competence on the part o f the preferred consultant'contractor.

- Improper advertising (such as introducing requirements that limit competition, providing incomplete information, using newspapers with limited circulation etc.). Fictitious advertising.

Mitigation Action

Include representatives o f the faculty and stakeholders as observers.

Build capacity o f a l l actors involved in procurement, including certification o f staff in accordance with Keppres 8012003 if available.

Develop Operation Procedures Manual to streamline a l l procedures and sanctiodcomplaint handling mechanism. Make officials sign a letter o f commitment stating that they will not interfere in the procurement process for reasons o f personal gain or nepotism.

' Establish guidelines for the preparation o f owner estimates in the Operation Procedures Manual.

. Set up estimate (standard) costs for similar activities across the different project components.

- Maintain project price database from previous contracts obtained through competition.

- Require clear breakdown o f items, specifications, and price.

- Provide adequate documents o f standard price.

- Establish clear guidance on criteridspecification preparation in the OPM.

- For procurement o f standard items, require the use o f standard specifications that promote wide competition.

- Provide adequate supervision and training for committee members.

-Establish standard advertisement fo i the project agreed w i th the DGHE- IU and the Bank in the OPM. - Establish criteria on minimum requirements for newspapers to be used and guidelines on disclosing information on procurement packages in the OPM.

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Corruption Mapping Area

Shortlisting

Bid opening

Bid/proposal evaluation

Award of contract

Reputation of bidders

Quality o f delivered producthervices

Procurement planning

Level of Risk

MEDIUM

MEDIUM

HIGH

MEDIUM

HIGH

MEDIUM

MEDIUM

Opportunity for Corruption

Manipulation of information on the shortlisted f i rms or individuals to favor certain f i rms or individuals to be included in shortlist.

Manipulation of public bid opening records.

~ - Collusion between bidderdparticipants andor committee and bidders to agree on who will win and who will not win and that the winning bidder will share some of the profits with the losing bidders and committee members.

would benefit exclusive bidders/consultants.

- Proposals are rejected for reasons unrelated to the capacity o f the bidders in carrying out o f the contracts/services.

- False information about the information provided by the bidders.

- Delay in evaluation process that

T h e committee calls the prospective winner to negotiate the contract amount.

Bidders may have been in a conflici of interest situation andor involved in corruptlfraudulent practices in the past.

- The delivered products/services are of lower quality than the ones specified in the technical specification, and the official may take the difference as a kickback.

supervision of contracts and kickback from the contractors/suppliers/consultants.

- Intentional low quality o f

- Risk o f budget mark-up.

Mitigation Action

Require the projectlcomponentl ubcomponent to give a narrative ustification for each shortlisted idindividual.

)PM. Include this requirement in the

Require that bid opening records be ,ent to the Bank through DGHE -1U vithin two weeks for all prior review :ases. Invite stakeholders'

,epresentative(s) to observe bid )penings. Invite representatives of the users

o attend bid openings.

The procurement plan will be binding in the legal agreement and will be the basis for any procurement actions. ' Develop post-qualification system for NCB.

' Minimize pre-bid meetings, especially for procurement of equipmentlgoods.

- Allow no negotiation for

- Require approval from DGHE-IU

-As part of their submitted

competitive selectionhidding.

before awarding the contract.

proposals, require bidders to s ign a legal statement declaring that they have never been in a conflict of interest situation and/or been involved in corruptlfraudulent practices in the past or they wil l be disqualified and the government will pursue legal action.

-Involve stakeholders in inspecting the delivered productsiservices.

-Establish a committee for receiving the goods.

-Enhance complaint handling mechanism.

-Enforce reward punishment system as defined in Keppres 80/2003

-Mandatory review by DGHE IU and the Bank o f Procurement

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Corruption Mapping

management. Limited dissemination o f

Area

I LOW

Overall procurement


PROJECT MANAGEMENT The final l i s t o f DGHE-

staff wi th their (i) experiences in handling donor financing project and (ii) history o f project management and or treasury training

Please see comments below on appointment of project manager and treasurer.

Publication o f audit report

[U /CPIU, and HEI- IU

Sub-project accountability mechanisms Appointment o f project manager and treasurer. Note: this requirement would be limited only to private universities. For DGHE and public universities, the relevant government regulations must be followed concerning project

Level of Risk

MEDIUM

Level of Risk

MEDIUM

LOW

MEDIUM

LOW

information related to the project.


- Risk o f collusive practices to “award” the contract to “preferred” bidders who provide a lower quality o f products/services.


. Risk o f insufficient capacity o f DGHE-IU and HEI-IU staff.

Risk that information on the progress and result o f project implementation (including misuse, collusive and nepotism practice if any) may not be available.

Lack o f experience among HEI-IUS may result in misuse o f funds.

-Appointment o f unqualified candidates as project manager and treasurer. Selection is not based on capacity but on the closeness o f relationship between the candidate and the HE1 rector. -Project manager and other officials have other duties that take their time.

Information is l imited to HEI-IUS.

Mitigation Action

Planning, and assessable o f Procurement Plan for respective stakeholder.

-Enhance disclosure, complaint handling, and sanctions as in Keppres 80/2003.

-Enhance the capacity for the officials involved in procurement decisions, including hiring o f consultants.

-Approve al l documents f rom DGHE-IU at each step o f procurement process.

supervision. -Tighten DGHE I UiCPIU and Bank

Mitigation Action

Establish criteria and performance indicators for project manager, treasurer, planning staff, procurement staff, and financial staff.

. Make the O P M the guideline for project implementation.

- Require government project management, treasury, and O P M training for CPCU and HEI-IU staff. - Ho ld annual training as agreed by DGHE and the Bank for CPCU and HEI-IU staff. - Make audit report and al l formal responses o f the govemment publicly available promptly after receipt o f final report prepared in accordance with the loadcredit agreement.. - Make use o f project’s oversight and supervision provisions to minimize risks.

managerheasurer.

appointment o f officers i s valid until project completion, if necessary.

- Establish annual performance indicators for project managerheasurer and other key stafficonsultants.

-Establish agreed criteria for project

-Ministerial decree for the

- Disseminate the project’s objectives, and i t s ru les and regulations through meetings and

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FINANCIAL Payment

Fi l ing

Complaint handling

Selection o f HEI-IU staff

F low o f funds

Implementation o f the sub-project investments

Level of Risk

MEDIUM

MEDIUM

MEDIUM

LOW

MEDIUM

MEDIUM


Fictitious reporthupporting documents on, for example, travel expenditures

-Project documents (such as procurement, financial, contract, audit, implementation reports, physical and financial back-up data, incoming and outgoing letters, and quality control testing documents) are intentionally not made available to cover up corruption practices. Complaints are not handled appropriately

Non-transparent process for appointing HEI-IU staff, resulting in l o w participation o f stakeholders in the selection and appointment process o f staff. K i ck backs to government officials either From DGHE to HE1 level or f rom HE1 to contractors.

Misuse o f funds by sub-project.

Mitigation Action

workshops at department and HE1 levels toknsure that good practices developed as part o f the project can be adopted by other HE1 departments - Ensure that administrators and beneficiary groups know what their respective roles and responsibilities are and how to hold each other accountable for their actions.

- Provide guidelines (as part o f the OPM) for monitoring claims o f expenditures supported by relevant documentation, including reports on activities, evidence o f participation, ticket, receipts, etc (see OPM). - Compare price reports in different locations giving due attention to actual variations caused by Droblems _ . o f access, scope o f activities, etc. - Establish clear guidelines in the O P M on procurement and financial f i l ing and remedies if not maintained, including, as necessary, suspension o f payments and replacement o f personnel. - Establish guidelines on disclosing information on contracts that have been awarded. -

- Establish a detailed comdaints- handling mechanism, including tracking o f complaints and measures for monitoring the effectiveness o f its application. - Involve student groups, student senate, and BPKP investigation unit in following up on complaints.

- Select HEI-IU staff in a transparent and professional process w i th significant participation f rom the stakeholders and describe this process in detail in the OPM. - Define transparent criteria for payment o f grant tranches (from DGHE to the HEI) in the OPM.

- Require HEI-IUS to prepare and submit reports on progress and their use o f project funds using FMR format. - Ensure that a l l financial information i s accessible to stakeholders. - Set rules that al l financial

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I Corruption Mapping

Selection o f grantees r Award o f grants - Accreditation of study

Level of Risk

LOW

MEDIUM

MEDIUM


Lack o f transparency and unfair process. Conflicts of interest.

Non-transparent process o f award grants, which results in low participation o f HEIs.

- Non-transparent and non-

-Bribes to evaluator (peers) objective process of evaluation.

directly or indirectly in order to get a better evaluation.

Mitigation Action

ransactions require at least two ignatures, from executive director md finance officers of HEI-IUS. For mrchases above Rp.15 million each, he project requires HEI-IUS to :onduct a limited bid whereby potations must be read out in iublic. For smaller purchases, local shopping must be carried out by two ieople who wil l seek quotations ?om local suppliers. 'etty cash should be maintained for naximum o f IDRS million in each sub-project. A l l payments other than hrough petty cash should be made hrough bank transfers. 3EI-IUS' finances wil l be audited semi-annually and annually by BPKP and or Irjen. Audit results :including the audit findings and any follow-up actions) will be reported to the DGHE and the Bank and made iccessible to stakeholders. - Have independent reviewer

- Avoid conflicts of interest by conduct the selection process.

providing guidelines for reviewers (see OPM).

- Require that each HE1 be reviewed at least by three reviewers.

- Publish scores on public website. - Announce the selection o f grantees on website and in newspapers. - Publish standard of evaluations for selection process and the weight o f each component evaluation.

- Publish all standards and procedures. - Establish strict public norms relating to conflicts of interest. -Require that all accreditation reports be signed by all team members. - Publish and disseminate accreditation decisions. -Establish a clear and effective system of appeals. -Involve teams o f reviewers (at least three). - Publish accreditation results.

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MAP SECTION