Document of

The World Bank

FOR OFFICIAL USE ONLY

Repor No. P-4047-IND

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED LOAN

IN AN AMOUNT EQUIVALENT TO US$147 MILLION

TO THE

REPUBLIC OF INDONESIA

FOR A

SECOND UNIVERSITY DEVELOPMENT PROJECT

May 1, 1985

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CURRENCY EQUIVALENTS

Currency unit = Indonesian Rupiah (Rp)

US$1.00 = Rp 1,100Rp I million = US$909

GOVERNMENt .OF INDONESIA FISCAL YEAR

April 1 - March 31

ACADEMIC YEAR

July 1 - June 30

PRINCIPAL ABBREVIATIONS AND ACRONYMS USED

CPIU - Central Project Implementation UnitDGHE - Directorate General of Higher EducationGOt - Government of IndonesiaIOU - Indonesian Open UniversityIPS - Institut Pertanian Bogor (Institute of Agriculture,

Bogor)ITB - Institut TeknoLogi Bandung (Institute of TechnoLogy,

Bandung)IUC - Inter-University CenterLPIU - Local Project Implementation UnitMEC - .Ministry of Education and CultureNGEC - National Graduate Education Council-REPELITA - National Five-Year Development Plan (Repelita I, 1969-

74; Repelita II, 1974-79; Repelita III, 1979-84;Repelita IV, 1984-89)

Si - Undergraduate degree programS2 - Master's degree programS3 - Doctoral degree programUCH - University of Cadjah Mada -

Ui - University of Indonesia

FOR OFFICIUL USE ONLY

INDONESIA

SECOND UNIVERSITY DEVELOPMENT PROJECT

Loan and Project Summary

Borrower: Republic of Indonesia

Amount: US$147.0 million equivaLent

Terms: Repayable in 20 years, including five years of grace, at thestandard variable rate

ProjectDescription: The overall long-term objective of the project would be to

develop Indonesia's capacity to train its own universityteachers and researchers. This would be accomplished by:(a) development of new graduate-level programs in selectedfields of study and research; (b) initiation of five special-ized undergraduate fields of study which are currently notavailable in Indoneska; and (c) strengthening of overalluniversity planning and management. The project would financeabout 845 graduate fellowships; about 1,000 research grants;about 3,000 differing prototype instructional materials;facilities and equipment for 16 inter-university graduateeducation centers; and related technical assistance. The mainbenefits of the project would be to increase the proportion ofuniversity teachers holding advanced degrees from 15% to 35%;improve the quality of educational materials, teaching methodsand research; and increase management capacity for administra-tion and pLanning of higher education. A major risk is thedifficulty in coordinating implementation by the variousparticipating entities, especially to ensure program qualityand spread of impact throughout the university system. Toreduce this risk the project would strengthen existingarrangements for managing graduate studies. For example, aNational Graduate Education Council would be established, withrepresentatiot. from all major universities, key governmentpolicy makers and outstanding authorities in their respectivefields, to facilitate coordination and provide high-levelpolicy and technical advice. In addition, the project wouldinclude in-depth annual implementation reviews.

This document has a resricted distribution and may be used by recipiets only in the performance |of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

Estimated Costs: /a Local Foreign Total…(Us$ million) -

Development of graduate educationOverseas Graduate Degree Training 1.4 28.5 29.9In-service Non-degree Training 9.8 13.2 23.0Instructional Materials 6.8 5.0 11.8Graduate Level Research 4.1 3.0 7.1Physical Facilities and Equipment 12.7 29.7 42.4Visiting Scholars 5.6 7.1 12.7Incremental Staff Salaries, ConsumableMaterials and Operation and Maintenance 38.7 8.2 46.9

Subtotal 79.1 94.7 173.8

Improvement of undergraduate educationOverseas Graduate Degree Training 0.3 6.2 6.5Curriculum Development /b - 0.7 0.7

Subtotal 0.3 6.9 7.2

Strengthening of planning and management /c 0.8 0.7 1.5

Total Baseline Cost 80.2 102.3 182.5

Physical contingencies 8.0 10.2 18.2Price contingencies 21.5 22.3 43.8

Total Project Costs 109.7 134.8 244.5

Financing Plan: Local Foreign Total---- (US$ million) -

IBRD 12.2 134.8 147.0Government 97.5 - 97.5

Total 109.7 134.8 244.5

/a Import duties or taxes would be negligible and hence have not beenidentified separately in project costs.

/b Costs for this activity are the visiting scholars who will assistcurriculum and materials development.

/c Includes US$0.3 million for visiting scholars.

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EstimatedDisbursements:

Bank FY 1986 1987 1988 1989 1990 1991 1992------------ --- TUS$ milio- --- -

Annual 4.5 13.6 22.6 29.4 36.2 36.2 4.5Cumulative 4.5 18.1 40.7 70.1 106.3 142.5 147.0

Rate of Return: Not applicable.

Staff Appraisal Report: No. 5354-IND, dated April 26, 1985.

Map: IBRD No. 18230- Location of Project Institutions.

REPORT AND RECOMMENDATION OF THE PRESIDENTOF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLICOF INDONESIA FOR A SECOND UNIVERSITY DEVELOPMENT PROJECT

1. I submit the following report and recommendation on a proposed loanto the Republic of Indonesia for the equivalent of US$147 million to helpfinance a Second University Development Project. The loan would have a termof 20 years, including five years of grace, at the standard variable interestrate.

PART I - THE ECONOMY V

2. A basic economic report, "Indonesia: Growth Patterns, Social Pro-gress and Development Prospects" (No. 2093-IND dated February 20, 1979), wasdistributed to the Executive Directors on February 26, 1979, and a countryeconomi= memorandum has been prepared in each subsequent year. The latest ofthese, entitled "Indonesia: Policies and Prcspects for Economic Growth andTransformation" (No. 5066-IND dated April 26, 1984), was distributed to theExecutive Directors on May 2, 1984. Annex I gives selected social and econo-mic indicators for the country.

Background

3. The Republic of Indonesia is a highly diverse country spread acrossan archipelago of more than 13,000 islands with a land area of about two mil-lion sq km. It now has a population of over 155 million, growing at about2.1Z p.a., and is the world's fifth most populous nation. The country has adiversified resource base, with plentiful primary energy resources, signifi-cant mineral deposits, large timber potential and a developed system of agri-cultural commodity production and export. A high proportion of these primaryresources are located on the sparsely populated islands of Sumatra anaKalimantan, while two-thirds of the population live on Java, which has areaswith some of the highest rural population densities in the world. About aquarter of the population lives in urban areas, and the current rate of urbanpopulation growth is about 4Z p.a. The 1983 estimate of GNP V r capita isUS$560, which places Indonesia among middle income countries.-

1/ Substantially unchanged from the President's Report on the FourthPopulation Project (No. P-4026-IND), circulated under cover of R85-104,dated April 18, 1985, and submitted to the Executive Directors forconsideration on May 7, 1985.

2/ On the basis of the World Bank's system of country classification andAtlas methodology for calculation of GNP.

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Macroeconomic Developments and Resource Management

4. Until 1981, the economy had been growing at almost 8% p.a. for overa decade. This growth was associated with rapid increases in public expendi-tures, total investment and savings. The initial impetus for this occurred inthe period of recovery from the turbulence of the mid-1960s. The Governmentof Indonesia (GOI) took effective action to restore macroeconomic stability,liberalize the economy, rehabilitate infrastructure, and provide incentivesfor domestic and foreign private investment. Hovever, the dominant externaLinfluence over the past decade has been the huge expansion, and significantvariability, in foreign exchange earnings from oil. Net exports from the oiland gas sector rose from US$0.6 billion in 1973/74 to US$10.6 billion in1980/81, when the current account enjoyed a surplus of US$2.1 billion. Oilreceipts also provided about 60% of Central Government receipts by 1980/81 andhelped finance a sustained increase in demand. The pattern of expenditureshas also helped foster diversified growth. Of particular note has been thesupport for agriculture, through investment in infrastructure, support ser-vices and effective use of subsidies to maintain producer incentives. Thissupported an agricultural growth rate of almost 4% p.a. over the past decade,and movement towards self-sufficiency in rice. Manufacturing also enjoyed ahigh growth rate during the 1970s (of about 14% p.a.), although this was froma very low base and predominantly oriented toward the protected domesticmarket.

5. During 1982, the Indonesian economy was affected adversely by theprotracted international recession and the accompanying decline in exportearnings, especially from oil. These developments led to a sharp turnaroundin Indonesia's external resource position and a fall in real per capitaincomes. In response, the Government acted promptly to ensure that thecountry's balance of payments situation was manageable and to provide a basisfor longer-term structuraL transformation. Particular attention was raid toreducing Indonesia's dependence on oil for export earnings and publicrevenues. Specific measures introduced over the past two years include:

(a) a 287. devaluation of the rupiah against the US dollar in March 1983,without any change in the policy of full convertibility;

(b) a major rephasing (postponement/cancellation) of large-scale andimport-intensive public investments, especially in the industrialsector;

tc) successive price increases for petroleum products, which havelargely eliminated domestic subsidies;

(d) a far-reach.ng financial reform, including the liberalization ofinterest rates and the abandonment of credit ceilings; and

(e) introduction of a comprehensive tax reform program, aimed atincreasing government revenues by broadening the tax base,simplifying the structure of rates and improving administration.

6. These measures, aided by more favorable trends in the world economy,are already having their desired impact. Non-oil GDP rose by an estimated 4Zduring 1983 and the balance of payments situation is improving. In particu-lar, the current account deficit was reduced from US$7.3 billion (8.4% of GNP)in 1982/83 to an estmaced US$2.7 billion (3.5% of GNP) in 1984/85. The majorfactors responsible for this improvement are import cuts, resulting from theGovernment's efforts to curb aggregate demand, and higher export earnings fromnon-oil products, due to recovery in the industrial countries and the Govern-ment's policies to promote non-oiL exports. The Government's restraint is alsoevident in the budget, where real expenditures have probably fallen over thepast three years. This fiscal discipline, in turn, helped keep domesticinflation down to about 12% in 1983 and 9% in 1984, despite the inevitablepressures associated with the 1983 devaluation and the petroleum priceadjustments.

Policies for Medium-Term Growth and Transformation

7. Sustained growth of the nonoil economy by at least 5Z p.a. is proba-bly necessary to have a significant impact on employment creation and povertyalleviation over the remainder of this decade. To promote such a growth rate,without generating unmanageable balance of payments pressures, is one of themajor challenges facing the Government. Successful transformation of theeconomy will require continued action in three key policy areas: managementof the public investment program (and improvements in the regulatory/policyenvironment for private investment), rationalization of the external traderegime and development of the financial sector.

8. The projected import constraint imposes serious limitations on therate at which Indonesia can undertake new invescments over the next fewyears. At the same time, some reallocation of resources towards agricultureand the social sectors might be justified, in order to reduce the import con-tent of investment while still meeting the Government's employment objec-tives. It is therefore important that mechanisms are established to facili-tate orderly and rational adjustments to the public investment program. Pos-sible options include preparation of multi-year expenditure plans (at leastfor the larger projects), identification of a core program of high priorityprojects and strengthening of project appraisal/selection procedures. TheGovernment is also considering ways to improve project implementation, so thatinvestment returns can be realized more promptly. Given the budgetary con-straints, it is expected that the private sector will be called upon to playan increasingly important role in capital formation. To encourage this pro-cess, the Government announced in August 1983 that there would be a majoroverhaul of the regulatory framework for private investment, with the objec-tive of simplifying and streamLining the licensing system.

9. The recent decline in the price of oil has clearly demonstrated theimportance of reducing the economy's heavy dependence on a single source offoreign exchange and, more generally, the need to rationalize the externaltrade regime. The Government has set a target of doubling non-oil exports innominal terms over the next five years. This target should be attainableprovided that economic recovery in the industrial economies is sustained,Indonesia's access to those markets is not constrained by protectionist

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measures and, most importantly, Indonesia follows appropriate trade andexchange rate policies. The Government has already introduced a range ofexport promotion measures intended to improve export incentives, ensure readyaccess to finance for exporters, raise product quality and enhance marketingcapacity. However, over the longer term, there is no effective substitute forcomprehensive trade reform. On the import side, Indonesia's trade regime hasbeen characterized by a predilection for high tariffs and quantitativerestrictions. The difficult external payments situation faced by the countrysince 1982 has reinforced this tendency. There are strong arguments foradopting trade and industrial policies which provide more equal incentives forsupplying the domestic and export markets. A comprehensive program of importpolicy reforms might incLude a rollback of import bans, gradual reductions intariffs, adjustment assistance to industries affected by import liberaLizationand anti-dumping legislation to protect domestic industries from unfaircompetition. Such measures would help to improve the efficiency and competi-tiveness of the economy.

10. The Government's decision to move towards a more liberal financialenvironment raises a number of issues relating to resource mobilization,financial intermediation and credit aLlocation. Over the longer term, as thescope for subsidized credit is reduced, the banking system will have to playan increasingly important role in mobilizing domestic resources. However,during the transition period, some potential conflicts between the resourcemobilization and credit allocation objectives could arise. For example, theincrease in deposit rates following the recent financial reforms, whileencouraging resource mobilization, has also led to high real lending rateswhich have tended to dampen investment and credit demand. This in turn mayrestrain economic activity. It is therefore important to find ways to reducethe high intermediation costs of banks. Consideration should also be given toother ways of mobilizing financial resources, including development of acapital market, expansion oE the banking network (especially in rural areas)and selective relaxation of restrictions on private banks (combined withincreased bank supervision).

Incomes, Employment and Human Development

11. Indonesia's physical, human and economic resources are very unevenlydistributed between irs main regions. Java, for example, accounts for almost50% of Indonesia's GDP and 62% of its population, but only 7% of its Landarea. Although all five of the country's main regions experienced rapid percapita growth in the 1970s, regional differences in output tended to widen.To a large extent, differences in performance are associated with the impor-tance of the mineral sector, particularly petroleum. However, there are twoimportant processes at work in Indonesia which enable the benefits of growthto be more evenly spread than indicated by output trends. The first of theseis migration. Between 1971 and 1980, 4.3 million people (or 16Z of the natu-ral increase in population) resettled permanently in provinces outside thoseof their birth. Approximately 1.7 million people moved from Java to the OtherIslands, of whom one million were resettled through the official transmigra-tion program. There has also been substantial rural-urban migration bothbetween and within provinces. The second process is the redistribution ofincome through the government budget. Regional variations in per capita con-

sumption are much less pronounced than differences in per capita output. Thisis largely due to the impact of taxation on the oil sector.

12. An analysis of household expenditures indicates that Indonesia'srapid economic development has been accompanied by significant progress inreducing poverty. Between 1970 and 1980, the proportion of the populationliving in poverty declined from 57% to 40%; the decline was particularly rapidin the Other Islands and in urban areas. The core of the poverty problem con-tinues to be in rural Java, where landless laborers form a large, and possiblyrising, proportion of the population and where, for most of the 1970s, thereis little evidence of any rise in real agricultural wages. The 1979-81 bumperrice harvests appear to have led to improvements in wages and incomes in Java,while agricultural incomes in parts of the Other Islands dependent on exportcrops declined. This situation may have been reversed following the 1983 de-valuation, but evidence on this is still inconclusive.

13. In the future, the availability of productive employment wiLl be akey determinant of income distribution. As compared to the 1970s, the growthin the labor force is expected to increase over the next decade (to about 2.7%p.a.) while economic growth will be lower. The resultant squeeze in the labormarket is not expected to lead to a dramatic increase in unemployment butthere is a serious risk of stagnant or declining labor income in both ruralareas and the urban informal sector. Given the balance of payments constraintfacing the country, Indonesia's empLoyment outlook depends crucially on thepattern of economic growth. Although over the long term the structural shiftin employment away from agriculture should continue, this sector will. stillaccount for half or more of total employment and the growth in agriculturalincomes will be an important determinant of job opportunities elsewhere in theeconomy. It is therefore important to maintain an appropriate policy on agri-cultural mechanization (e.g., by ensuring purchases of equipment are at econo-mic prices), to -?read labor demand on Java throughout the agricultural year(e.g., by improving water resource management and development) and to encou-rage agricultural development on the Other Islands. It is also important thatpublic expenditures are increasingly directed toward sectors, such as socialprograms and rural infrastructure, which generate employment or ease the bur-den of adjustment on the poor. For the private sector, the Covernment needsto ensure that incentives appropriately reflect the priority for labor-intensive investments.

14. There has been substantial progress in extending the provision ofsocial services throughout the population. Universal enrollment in primaryeducation has been virtually achieved and the enrollment rate in secondaryschools is now about 35%. However, the weak educational base of the popula-tion continues to be a major obstacle to rapid economic development and asubstantial further expansion of secondary and tertiary education will benecessary as well as a major effort to raise the quality of the wholesystem. In the health sector, there has been a large expansion in facilities,notably at the sub-district level, but continued investment and an improvementin quality will be necessary to increase effectiveness. This will have to becomplemented by a major expansion in water supply and sanitation if theimprovement in indices of mortality and morbidity during the 1970s is to bemaintained. By 1981, only 18% of the rural and 40% of the urban population

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had access to safe water, compared with government targets of 60% and 75%,respectively, for 1990.

External Capital Flows

15. The recent improvement in Indonesia's balance of payments situationis evidence of the Government's commitment to manage short-term economicshocks. The ongoing program of economic reforms should also help to hold thecurrent account deficit to sustainable levels over the medium term. Even so,continued resource transfers from abroad will still be essential if theCovernment's modest growth targets (5X p.a.) for the next five years are to beachieved. Staff projections indicate that new public medium- and long-term(MLT) borrowing will have to average about US$5.2 billion p.a. over the nextthree years, including about US$2.5 billion p.a. of official development assi-stance and the balance from import-related credits and untied borrowing.Indonesia is well placed to arrange the necessary financing on reasonableterms; the profile of existing debts is good and a comfortable level of exter-nal reserves has been rebuilt over the past year.

16. Total public debt outstanding at the end of 1983 was estimated atUS$21.7 billion, with an additional US$13.0 billion of undisbursed commit-ments. Of the total debt disbursed and outstanding, official assistance (in-cluding non-concessional multilateral aid) accounts for 50% and obligations atvariable interest rates for only 23%; there is no short-term public debt. Theaverage maturity of public MLT debt at the end of 1983 is estimated at15 years. The Government continues to manage its external debt quite prudent-ly. Until 1982, Indonesia had succeeded in maintaining its public debt serviceratio, based on net exports (i.e., net of oil sector imports), at or below20%. However, because of the sharp drop in oil export receipts over the pastthree years, the ratio rose to 26% in 1984. With the projected levels andcomposition of borrowings and export earnings, Indonesia's public debt serviceratio, again based on net exports, would rise to about 30% in 1989 and thengradually decline in later years. With private MLT debt included, the totaldebt service ratio, based on the conventional concept of gross exports, wouldrise from 21% in 1984 to around 24% in 1989 and decline back to 21% by 1995.While debt management will require careful attention in the coming years, theprojected debt service ratios are not excessive by international standards.

PART II - BANK GROUP OPERATIONS IN INDONESIA 31

17. As of March 31, 1985 Indonesia had received 48 IDA credits totallingUS$938.5 million (less cancellations), and 93 Bank loans amounting toUS$7,021.0 million (less cancellations). IFC commitments totalled US$163.2million. Annex II contains a surmmary of IDA credits, Bank loans and IFC in-vestments as of March 31, 1985. The share of the Bank Group in Indonesia's

3/ Substantially unchanged from the President's Report on the FourthPopulation Project (No. P-4026-IND), circulated under cover of R85-104,dated April 18, 1985, and submitted to the Executive Directors forconsideration on May 7, 1985.

total (disbursed) external debt outstanding at the end of 1983 was 13.1Z, andthe share of debt service, 10.3% compared with 13.3% and 7.92, respectively,in 1982. From 1968 untiL 1974, all lending to Indonesia was made through IDA.Due to the country's improved creditworthiness following the commodity and oilprice boom in 1973/74, the bulk of the Bank Group's Lending in the remainderof the 1970s was through IBRD loans, with a modest amount of IDA lending beingjustified primarily on poverty grounds, as the per capita GNP was well belowthe IDA cutoff level. IDA lending was discontinued in FY80. Given the criti-cal importance of agricuLture (including transmigraKcon) L£r employment, foodsecurity and exports, ovr- onc-third u: Bank Group-assisted projects have beenin this sector- In addition, loans and credits have been extended to virtual-Iy all other sectors of the economy, including transportation, education,urban development, water supply, rural development, industrial developmentfinancing (including small-scale industry), power, telecommunications, popula-tion and nutrition, and technical assistance.

18. During Repelitas I (1969-74) and II (1974-79), and in line with theobjectives of these first two Five-Year Plans, a high proportion of Bank Grouplending was directed initially toward the rehabilitation and then the expan-sion of infrastructure and production facilities. Special attention was alsogiven to meeting the shortage of skilled manpower and technical assistanceneeded for preinvestment studies and project execution. Repelita III (1979-84), published in early L979, stressed the need for continued high growth andstability, but departed from previous plans by placing special emphasis onmore equitable income distribution and poverty alleviation. This focus, whichwas fully in line with the conclusions of the basic economic report, requiredgreater attention to empLoyment generation (particularly in the industrialsector) and to improvements in basic public services. While Bank lending wasalready consistent with these objectives, increased emphasis has been given tothese priorities. However, the adverse economic developments that occurred inthe latter half of the pLan period and the measures taken to address them, ledto a reshaping of development objectives for Repelita IV (1984-89). Theseemphasize restoring growth of incomes and employment while continuing finan-cial prudence, promoting structural change toward a more diversified economy,and maintaining efforts to improve income distribution and alleviate pov-erty. This shift in focus has underscored the need to follow through onreforms that have already been initiated, seek increased efficiencies in theeconomy, mobilize domestic resources to finance needed investments andrecurrent expenditures, and foster a policy environment conducive to theachievement of required changes.

19. The Bank has geared its lending and economic work program to addressthese needs and to maintain a high level of resource transfer. The approachis to continue to emphasize the ongoing dialogue on economic policy that hasbeen a cornerstone of the Bank's relationship with the Government for manyyears, and to coordinate discussion of macroeconomic issues with advice oninstitutional and policy reform in important sectors and subsectors, coupledwith lending operations and technical assistance that meet priority needs andsupport institutional improvements in specific areas. Emphasis in economicwork is being given to trade and industrial issues, development of thefinancial system, and public resource management. In the lending program,agriculture continues to receive the most attention. However, the program is

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broadly based, and includes increasing emphasis on education and humanresource development. Continued attention is being given to power and energy,where the Bank is concentrating on policies to diversify Indonesia's energybase, rationalize pricing and improve sector planning. In transportation, theBank is focussing on efficiency improvements in the maritime sector and onimproving the national network of highways and rural roads. In urbandevelopment and water supply, lending is being directed more and more todeveloping innovative low-cost solutions, providing for cost recovery andstrengthening local institutions, in order to minimize demands on theGovernment budget and decentralize the responsibility for addressing basicneeds. In aLl, the Bank's lending program is intended to contribute about 20%of Indonesia's capital requirements during the next three years and isexpected to be an important catalyst in attracting other funds. Wherepossible, we are seeking also to widen the impact of Bank lending throughtechnical assistance, as well as complementary investments and coordinatedpolicy dialogue with other donors. This is especially true in our lendingprograms for power, urban development, water supply and transportation.

20. There haz,been a notable improvement in the Last few years in thedisbursement ratio-/ from a low of 132 in FY80 to over 19% in FY84. The poorFY80 ratio was in large part merely a result of the rapid increase incommitments during the FY77-79 period, when total Bank/IDA commitments toIndonesia increased by 122% compared to a Bank-wide increase of 831. However,it also reflected implementation difficulties arising out of the Government'sbudgetary, procurement and payment procedures, as well as the severe shortageof managerial and technical manpower in Indonesia. A number of steps havebeen taken by the Government and the Bank to address these issues. Severalspecial Bank missions have visited Indonesia to analyze the problems and makerecommendations for simplifying budgetary and financial procedures. TheGovernment and the Bank have also instituted formal and regular joint reviewprocedures to identify general and project-specific problems and work outcorrective measures. Procurement seminars were held in Jakarta in September1979, November 1981 and May 1984. As a consequence of these jointinitiatives, the Government has taken measures to streamline some of thecomplex budgetary and financial procedures affecting project implementation.In addition, in order to reduce disbursement delays due to initial projectimplementation difficulties, many operations are now being presented for Boardconsideration at a later stage in the project cycle. The combined effects ofall of these activities are reflected in the increase in disbursements fromUS$206 million in FY79 to US$764 million in FY84. It is nevertheless clearthat continued efforts to improve project implementation and the pace ofdisbursements are req,.ired, as Indonesia continues to show a disbursementratio below the Bank-wide average. A number of initiatives are underway. TheBank is helping the Covernment in a special effort to identify problems in theconstruction industry with a view to developing ap2ropriate remedial actionsand policies, as weaknesses in the domestic contracting industry have beenidentified as one of the major causes of implementation problems in

4/ The ratio of actual disbursements during the fiscal year to thecumulative undisbursed amount at the beginning of the fiscal year.

Indonesia. Efforts are also underway to develop standardized tender documentsin order to speed the procurement process, and to improve project monitoringand land acquisition procedures. It is the Bank's and the Government'sintention to devote continued attention to these and other aspects of projectimplementation in the coming year, in order to ensure that maximum benefit isrealized from the Government's investments.

PART III - THE HIGHER EDUCATION SUBSECTOR

Background

21. The shortage of trained manpower, especially technical, profes-sional, and managerial, constitutes one of the most pressing constraints tosustained economic development in Indonesia. If development programs are tobe implemented as planned, human resource development should continue toreceive high priority during the coming decade.

22. The educational system has made impressive gains during the last tenyears in expanding access to education and improving the skills of the laborforce. At the primary level, enrollments grew from 13.0 million in 1972 to24.7 million in 1982; universal access to grade one of primary school hasvirtually been achieved; and dropout and repetition rates have declined duringthe last decade despite rapid enrollment increases. Enrollment at the juniorsecondary level tripled from 1.4 million in 1971 to 4.3 million in 1982, andthe enrollment rate has reached 41Z of the age cohort. At the seniorsecondary level, enrollment grew from 0.6 million in 1971 to 2.3 million in19.2, about half of which is in public schools. The resuLting enrollment ratei 24Z.

23. ta.a number of university students increased from 10,000 in 1950 to250,000 in 1975 and 810,000 in 1983, equivalent to an annual growth rate ofabout 15% in the last decade. Nonetheless, university enrcllment is stillrelatively low, and much of the education has been of inadequate quaLity.Enrollments were only about 4Z of the total age cohort in 1983, which comparesfavorably with enrollment ratios in other countries in the region, except forKorea, the Philippines, and Singapore which have enrollment ratios of about22Z, 21X, and 8Z respectively. Ho-wever, in relation to the needs for skilledmanpower, the capacity of the higher education subsector is seriouslydeficient. Substantial investments are required, both to increase enrollmentsand to improve the quality of education.

24. There are about 480 tertiary institutions (universities, academies,colleges, and institutes) in indcnesia, of which more than 400 are private.The 30 public universities and 95 private universities had an enrollment in1983/84 of about 455,000 students and 355,000 students, respectively. TheGovernment has set an enrollment target of 8.2Z of the university age cohortfor the Fourth Five-Year Development Plan (Repelita IV, 1984-89). Reachingthis goal would require a twofold increase in enrollments to about 1.6 millionstudents over the life of the Plan. Rapid growth in public tmiversityenrollment is planned at all levels: undergraduate (S1) students in naturalscience, engineering, agriculture, economics, and social science would

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increase from about 200,000 in 1983/84 to about 330,000 in 1989/90; master'stS2) students in these fields from 1,750 to about 4,200; and doctoral (S3)students from 345 to about 635 during the plan period.

25. The development of the higher educatien subsector will require anincrease in the proportion of university teachers holding advanced degrees.At present, only about 15X of academic staff in the natural sciences and about9% in the social sciences hold advanced degrees (Master's or PhD). About8,100 additional university teachers will be required during the Plan period,and 3,200 of these will require advanced degrees.

26. Investments in higher education in Indonesia have a high social rateof return. Estimates based on 1978 data for urban males indicate social ratesof return to higher education of 15Z. Another estimate shows a social rate ofreturn to undergraduate education of 18%, and a rate of return to graduateeducation (S2 level) of 21%.

Issues in Higher Education

27. The basic issues in the higher education subsector incLude: (a) lowinternal efficiency; (b) staff shortages; (c) poor quality of instruction andresearch; (d) inadequate planning and management; and (e) underfinancing ofthe system.

28. Low Internal Efficiency. Owing to the low educational attainment ofthe faculty, insufficient time devoted by staff to teaching duties, inadequatephysical facilities, and limited financial aid for students, the ratio ofgraduating students to total enrollment is relatively low. The averagefaculty-student contact time has been as low as four instructional hours perweek. The average length of time for a student to complete a four-year degreeprogram is 6-8 years, due to the unavailability of senior professor- foradvice on thesis requirements, the necessity of many students to work to meetthe private costs of attending university, and the inadequacy of appropriatecourse offerings. Internal efficiency, however, has been improving since thelate 1970s, especially after the introduction of the credit system (whichprovides flexibility in meeting course requirements) and the reduction ofthesis requirements for graduation. Internal efficiency should improvefurther with the planned upgrading of teaching staff qualifications.

29. University Staff Requirements. The proposed expansion of theuniversity system further increases the demand for higher level universityteachers. Reaching the Repelita IV targets will require a massive effort:even if a large proportion of all new teaching staff have only SI degrees, theannual number of domestic S2 and S3 graduates must be increased substantiallyby 1988/89 and a large proportion of graduates retained as university faculty.

30. Quality of University Instruction and Research. The quality ofinstruction and research in higher education is adversely affected by thepaucity of inputs. There is a serious shortage of textbooks and otherinstructional materials in the Indonesian language. Library holdings are, ingeneral, extremely few in number and limited in scope. Students and facultyoften have little access to Laboratory facilities and limited opportunity to

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baLance theoretical cLassroom learning with practical applications. Theamount of graduate-level laboratory equipment is insufficient and much of whatis availabLe is obsolete or in need of repair. Compounding the problem ofinadequate physical inputs is the low level of educational attainment andscholarly productivity of university staff. A major means of improving thequality of university instruction would be to increase the number of staffholding graduate degrees. Graduate training programs were begun in Indonesiain 1975 in six universities and three teacher training colleges. Between 1976and 1982, only about 840 individuals received advanced degrees. While theestablishment of graduate programs is a major accomplishment, their currentquaLity and internal efficiency is insufficient given the overall demand foruniversity level instructors. In addition, the amount and quality ofscholarly productivity is low. A recent survey showed that less than one-fourth of faculty are actively conducting research. Such research istypically feasibility or evaluation studies and not the type of basic researchrequired to nurture the development of an active scientific community. Forthe most part, university research has been uncoordinated and determinedprimarily by the requirements of funding sources. It also lacks the means toestablish and maintain priorities and disseminate findings.

31. Inadequate University Planning and Management. Planning and manage-ment capacity is limited at both the national and local Levels. At thenational Level, the Directorate General of Higher Education (DOHE) is con-strained by the absence of a permanent cadre of professional staff andunderdeveloped planning, monitoring, and management information systems. Thisis compounded by weak lines of authority to the local level and inadequatequalitative and financial control. At the university level, the managementstructure suffers from limited administrative capacity, lack of a clear schemeof service, lack of continuity among managers, poor coordination amongfaculties and departments, and the absence of nationwide standards andperformance data. The Government is planning to address some of the moreurgent features of this problem through the establishment of Inter-UniversityCenters and a National Graduate Education Council (paragraphs 40 and 53-54beLow). The problem is also being considered under ongoing sector work.

32. Financing University Education. In Indonesia, education expen-ditures represent about 9Z of total central government expenditures, which issignificantly lower than in other middle income countries in the region, suchas Thailand (21%) and the Philippines (142). In 1984/85, the total routineand development budget of the DGHE was almost US$250 million, about 19% of theMinistry of Education budget.

33. The planned expansion of the university system will require a signi-ficant change in the composition of education sector finances, in favor ofhigher and secondary education and away from primary education. In recentyears, 87% of recurrent expenditures in public universities has been providedby Government. Although all universities charge tuition and entrance fees,moderate increases in tuition fees at public universities have not kept pacewith inflation. Opportunities for greater cost recovery from those who canshoulder the burden need to be explored. For those who cannot, student loanor scholarship schemes should be developed. Such adjustments would increasethe financial feasibility of a rapid expansion of public higher education, and

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at the same time, increase educational opportunity. While GOI is reluctant toincrease tuition fees further, mostly on equity grounds, there is a relativelymodest student loan program, which assists cost recovery. If this programwere expanded, tuition fees could be raised, increasing the level of costrecovery while granting student loans to the poorer students, giving access tohigher education to all groups and reducing subsidy levels. Students,however, have to pay private boarding costs, as most universitites lackresidential facilities, so there is virtually no subsidization of studentliving costs. The overall level of cost recovery in Indonesian higher educa-tion (public and private) is relatively high, since about half of all Indone-sian students are enrolled in private universities, where full cost recoveryis the norm. Financial aspects of higher education in Indonesia are beingreviewed (see paragraph 47 beLow), and this work should result in specificproposals for further improvements in cost recovery in the public system. Amajor expansion of investment in higher education will not represent a majorburden on the Government, if the education budget is reallocated from primaryto higher education, and efforts are made to support the dynamic privatesector, which accounts for about half of total higher education enrollment.

34. The Government recognizes the need for continued development of theprivate system. The Ministry of Education and Culture (MEC) providesnecessary subsidies, guidance, and encouragement through the Directorate ofPrivate Universities. This includes "seed money" to foster the growth of thesystem itself, provision of full-time lecturers, cash grants for buildings andrehabilitation, and the provision of classroom or laboratory equipment. Whiletheir routine operations are financed almost entirely from student fees,private universities are severely constrained in development funds. Expansionand improvements are limited by the unavailability of soft loans. Givenproper incentives and financial availability, the growth of the privateuniversity system could be accelerated, reducing some of the pressure on thepublic university system, and thus relieving the Government of a heavyrecurrent budgetary burden. The Government is currently studying possibil-ities for assisting the private sector further.

35. One consequence of inadequate financing for the subsector is thatfaculty salaries in the public universities are low in comparison to thoseobtained by professional and scientific manpower in the private sector. Mostuniversity professors hold several jobs and consultancies, cutting actualteaching and preparation time to only a few hours each week. Recent wageincreases for university faculty of about 27% should help to alleviate thisproblem. However, the Bank and the MEC continue to study the overallincentive structure for university employees through the sector work program.

Government Strategy

36. The Government's sector strategy is to provide a broad-based educa-tional system, formal and non-formal, which will produce the trained manpowernecessary for increasing national agricultural productivity, expanding indus-trial capacity and improving the country's basic infrastructure. In the nearfuture, expatriate manpower, short-term training programs, and on-the-jobtraining will help to bridge some of the gaps between supply and demand forhigher level manpower. In the long term, substantial investment in education

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beyond the primary level will be required to increase the output of profes-sional, technical and managerial manpower.

37. During Repelita III, the Government began to establish a cleardirection for higher education. The Bank also began to be involved throughfinancing the first University Development Project (Ln. 1904-IND) whichincluded agreement on several sub-sector policy targets. Progress in theachievement of these targets is discussed in paragraphs 44-45 below.

38. In an effort to alleviate manpower shortages, the Government has setambitious targets for the growth of the university system during Repelita IV,which imply rapid growth in all levels of public university enrollment. Forexample, the number of public university SI teachers in natural science,engineering, agriculture, economics, and social science wouLd nave to increasefrom about 12,000 in 1982/83 to over 18,000 in 1988/89.

39. To enhance the quality of public university teaching, the Governmentwishes to increase the proportion of university teachers holding advanceddegrees from 15% to 35% by the end of the decade. The most effective short-term means of doing this would be through the mounting of a large overseastraining program in conjunction with the expansion and strengthening ofexisting domestic graduate programs. In addition, the Government proposes toexpand its in-service faculty upgrading program, to increase the output oflocal instructional materials and to enhance scholarly productivity throughthe development of a competitive open grants research program. The Governmentplans to establish 16 Inter-University Graduate Education Centers (IUCs) asvehicles for implementing these programs.

40. Inter-University Centers. As early as the 1970s, the Government wasdiscussing the establishment of "centers of excellence." Effectively, thefirst IUC (center of excellence) was set up in forestry at Samarinda Univer-sity. IUCs are intended to concentrate resources, reduce duplication offacilities, and keep down the recurrent costs of higher education. An IUCwould consist of a complex of equipment, materials, facilities, and buildings,staffed by academic and technical experts belonging to related core disci-plines with the main purpose of supporting various programs of study andresearch at the graduate level. The IUCs would provide research support,develop instructional materials, service degree and non-degree training pro-grams for graduate students and faculty, and facilitate scholarly interactionamong faculty and researchers throughout the country. IUCs would be physicallylocated in and managed by a lead university. These centers would serve theneeds of several campuses in specialized fields (paras. 53-54).

Bank Group Role

41. Since 1977, the Bank has financed five higher education projects inIndonesia, involving total lending of about US$250 millioa. These include twoteacher training projects, two polytechnics projects, and a university devel-opment project. In December 1983, the Bank joined the Government in launchinga Higher Education Sector Study (para. 47 below). OED Project PerformanceAudit Reports (PPARs) have been prepared for two education projects in Indone-sia and the lessons learned have been incorporated in the design of the pro-

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posed project. The PPAR for the Technical Education Project (Cr. 219-IND)(No. 2998, dated June 2, 1980? SecM80-440) stressed the importance of includ-ing fellowships for development of teachers and school administrators andappointing key staff for project implementation in a timely manner. The PPARfor the first Agricultural Training Project (Cr. 288-IND) (No. 3508, datedJune 30, 1980, SecM80-527) stressed the importance of advanced preparation andthe need for carefully designed technical assistance components.

42. Teacher Training. The first and seconc Teacher Training Projects(Ln. 1433-IND and Ln. 2101-IND) were designed to assist formal basic educationthrough an expansion of the system as well as the upgrading of teachers andeducational administrators. These projects supported the development andimplementation of new curricula, the expansion and improvement of facilitiesfor pre-service and in-service training, and the development of new curriculaand policies for special education.

43. Polytechnics. The two polytechnics projects (Cr. 869-IND andLn. 2290-IND) were designed to assist the Government to increase the supply ofmiddle-level manpower through the expansion and diversification of the poly-technic system. The first project initiated the construction, furnishing andequipping of six polytechnics, a Technician Educator Development Center, andfour Accountancy Development Centers. The polytechnics have been in operationsince September 1982, and their output is expected to increase the supply oftrained technicians by 45Z. The second project was designed to increase thenumber and distribution of polytechnics, broaden the curricula, and strengthenpoLytechnic planning and management capacities. The annual output ofpolytechnic diploma holders is expected to increase from about 1,500 in 1985to around 6,000 in 1989.

44. University Development. The first University Development Project(Ln. 1904-IND), in 1980, was designed as the first phase of a long-termprogram to strengthen university management and policy and raise the qualityand number of graduates in engineering, science, agriculture, and economics atthe Universities of Indonesia (UI), Gadjah Mada (UGM), and Andalas.

45. Most of the policy targets are well on the way to being reached. In1980, university instructors were teaching an average of four hours perweek. In 1983, DGHE Directive No. 48 stipulated that the teacher workloadshould be 12 hours per week. Staff to student ratios have improved from abouti:30 in 1980 to about 1:15 in 1984. The utilization rate for classrooms andlaboratories has increased over the past four years from below 50% to about70%. Standard student evaluation schemes have been introduced and a semestercredit hour system is replacing the old system which relied exclusively on afinal examination. As a result, internal efficiency is rising. For example,at Gadjah Mada University, the productivity index, which is the ratio ofgraduates to total enrollment in a given year, rose from 7.6% in 1976 to 9.8%in 1983, and the average length of study for 18 undergraduate programs wasreduced from 8.2 years in 1980 to 6.9 years in 1983. Gzants, scholarships andthe suspension of tuition fees for low-income students have been used toincrease access. University admission policies are undergoing major changesto take more account of high school performance and to increase geographicequity in university admissions. Based on a preliminary study financed under

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the project, a new admissions policy was introduced in 1984 revising themultiple entrance examination system into a single standardized system.Further work on examination reform is being financed under the recently-approved Secondary Education and Management Training Project (Ln. 2472-IND).Policies on staff incentives are still under study.

46. The first University Development Project has nonetheless encounteredimplementation problems. There was a two-year delay in the signing of thetechnical assistance contract with the Mid-Western University Consortium forInternational Assistance (MUCIA) in the United States, which delayed the ap-pointment of visiting professors. Progress was particularly slow in campusplanning and site development, resulting in slow formulation of buildingproposals. Two of the three universities have recently signed contracts forprofessional services to finalize detailed campus master plans. The next cri-tical step is the development of a strategy for the implementation of the cam-pus plan and the construction of the various building packages. Procurementof equipment and books has been slow, and subject to prolonged governmentscrutiny. Overall project management has been weak, especially in the coor-dination of activities and progress reporting. Financial management under thelocal Project Implementation Units (PIUs) is also weak, as is overall controlof the budget under the Office of University Planning and Development (P3T).Steps to improve coordination between P3T and PIUs in the proposed SecondUniversity Development Project would also benefit the first project. With thesigning of the technical assistance contract (representing about 38% ofproject expenditures), the appointment of a new project manager, and therecent completion of the University of Indonesia master plan, projectimplementation has recently begun to improve.

47. Higher Education Sector Study. DGHE, with Bank/UNESCO support, hasorganized a program of sector work in higher education, involving alL majordonor agencies. The program will gather basic data on the subsector, and helpin the identification of future investment priorities and the necessary poli-cies to make the system more efficient and financially sustainable. The pro-gram consists of eight studies, which will focus on the following topics: themanagement, efficiency and ptoductivity of higher education (public and pri-vate); the internaL efficiency of the university system; occupational outcomesof university graduates; university research activities; the development ofthe humanities and social science education; and mathematics and science edu-cation at universities and teacher training colleges. While the findings ofthese studies are important to future development of the subsector, the needsfor staff development and quality improvement, in general, are so great thatproceeding with project assistance in these areas is already clearly justified.

48. Research and Technology Development. In addition to developingresearch capacity in the university system, the Bank has recently appraised aResearch and Technology Training Project to strengthen the national researchinstitutes of the Ministry of State for Research and Technology. Linkages be-tween the national research institutes and the university research programswould be reinforced. Many institute researchers are part-time universitystaff. The sharing of research facilities and the intellectual exchangesamong research programs is common. Stronger ties between these domestic

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research programs and foreign institutions, and the strengthening ofprofessional standards and associations within the country, should also cata-lyze domestic research development.

Rationale for Bank Involvement

49. Higher education is a priority sub-sector for Bank participation,based on a review of development priorities in Indonesia. The firstUniversity Development Project was designed as the first phase in a longer-term assistance program to the Indonesian university system, in order toprovide sufficient output and quality of high-leveL technical, scientific, andmanagerial manpower needed for national economic arowth. Thc proposed projectwould emphasize staff and institutional develo-.uent tor graduate education,and thus prepare the way for the sustained development of the universitysystem in Indonesia, resulting in an easing of the skilled manpower shortageand the more efficient implementation of development projects and programs inall sectors.

50. Bank long-term involvement in Indonesia's university system througha parallel program of project assistance and sector analysis would continue tobe an important means of achieving gradual, but steady, progress in governmentpolicies related to staff development and incentives, student admissions andexaminations, and the efficient organization and management of costly facili-ties and equipment in the subsector.

PART IV - THE PROJECT

Background

51. Ine proposed project was prepared by the Ministry of Education andCulture, with the assistance of Bank and UNESCO staff. A Bank missionappraised it in June 1984 and there was a post-appraisal mission in November1984. Negotiations were held in Washington, D.C. on April 15-16, 1985. TheIndonesian delegation was led by Professor Sukadji Ranuwihardjo, Director Gen-eral of Higher Education in the Ministry of Education and Culture. The StaffAppraisal Report (No. 5354-IND) is being circulated separately. Supplementaryproject data are provided in Annex III.

Project Objectives and Description

52. The long-term objective of the project would be to strengthenIndonesia's capacity to train its own university teachers and researchers.This would be accomplished by: (a) the development of new graduate-levelprograms in selected fields of study and research; (b) iLitiation of fivespecialized undergraduate fields of study which are currently not available inIndonesia; and (c) the strengthening of overall university planning andmanagement.

53. The main thrust of the project would be the establishment of sixteeninter-university centers (IUCs) and the provision of graduate fellowships toabout 845 university teaching staff. The IUCs would be located at five

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universities - four of which are among the oldest and most prestigiousinstitutions of learning in the country: the University of Indonesia (UI) inJakarta, the University of Gadjah Mada (UGM) in Yogyakarta, the rnstitute ofAgriculture (IPB) in Bogor and the Institute of Technology (ITB) in Bandung.The fifth institution - the Indonesia Open University (IOU) - was establishedin September 1984 and would be the site of one IUC: a Center for thieImprovement and Development of Instructional Activities. Two of these insti-tutions - UI and UGH - are already receiving Bank assistance for undergraduatepurposes under the First University Development Project (Loan 1904-IND).These campuses were chosen as the focus of the proposed project as theyalready contain a critical mass of teaching staff, research programs andsupport facilities to permit the effective development of new graduateprograms and their eventual extension to other universities in the country.

Detailed Features

54. The project would consist of the following components and sub-components:

(a) Development of Graduate Education (US$173.8 million excludingcontingencies). The IUCs would be established in the followingfields - life sciences, engineering, biotechnology, electronics,food and nutrition, computer sciences, economics and social studies,and instructional materials development - and would be supported ina number of ways:

- overseas graduate degree traji (US$29.9 million): provisionof about 600 man-years of master s and 1,100 man-years ofdoctoral overseas training fellovships;

- in-service non-degree training (US$23.1 million): provision ofabout 1,600 man-years of in-service training to IUC staff, mainlyin curriculum development, instructional methods, researchmethodology and data processing, planning and management, andprofessional subject matter development (mostly withinIndonesia);

- instructional materials (US$11.7 million): support for thedevelopment of about 3,000 differing prototype instructionalmaterials in the Indonesian language (syllabi and lecture notes,books and monographs, laboratory manuals and workbooks, computermodules and audio-visual materials);

- graduate research (US$7.1 million): provision of grants, supportfacilities and expert guidance to about 800 graduate studentsundertaking thesis research in the areas of specialization of theIUCs, including reproduction and dissemination of the researchresults, and provision of research awards to about 270 universityteaching staff;

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- physical facilities and equipment (US$42.4 million):construction and equipping of classrooms, Laboratories, offices,libraries and storage facilities for the sixteen IUCs;

- visiting scholars (US$12.7 miLlion): provision of about 6,900man-months of technical assistance to support the implementationof in-service training, the development of instructionalmaterials and the research support program; and

- incremental staff, consumable materials and operation andmaintenance for the IUCs (US$46.9 million).

(b) rmprovement of Undergraduate Education (US$7.2 million excludingcontingencies). This component would support the establishment offive new undergraduate programs in computer and information scienceand technology, material science and technology, marine sciences,ocean engineering and gas technology. These programs would beestablished at three of the project universities (UI, ITB and IPB)and receive the following support from the project:

- overseas graduate degree training (US$6.5 million): 360 man-years of overseas graduate fellowships to teaching staff of thethree universities which should be sufficient to ensure aneventual output of 2,000 graduates per annum from the five under-graduate programs; and

- curriculum development (US$0.7 million): provision of about 70man-months of visiting scholars to support the development ofappropriate curricula and instructional materials for the newprograms.

'c) Strengthening of University Planning and Management (US$1.5 millionexcluding contingencies). This component would support the estab-lishment and strengther.iag of institutions to coordinate the devel-opment of graduate education in Indonesia - including the setting upof a National Graduate Education Council (NGEC). The project wouldprovide about 90 man-months of specialist services to assist DGHE inenlarging its mandate, as well as to develop an improved managementinformation system. The component would also finance an expandedmanagement training program for university administrators, involvingabout one-fourth of the existing rectors, deans and other seniorstaff at public universities within Indonesia. -

Project Implementation

55. Academic and physical implementation of the project would be coordi-nated by a Central Project Implementation Unit (CPIU) situated in the Direc-torate General of Higher Education (DGHE). It would support a Local ProjectImplementation Unit (LPIU) at each of the five project universities. The CPIUwould report to the Director General for Higher Education and submit quarterlyprogress reports to the Bank. Each LPIU would be responsible to the CPIU forthe implementation of the project components of IUCs in its field. LPIUs

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would have the same general organizational structure as the CPIU and would va-ry in size depending upon the field project size. The establishment of theCPIU and LPIUs, as well as the sixteen IUCs, would be a condition ofeffectiveness of the proposed loan (Section 5.01(a) of the draft LoanAgreement); all other project institutions would be established and fullystaffed, in accordance with a management structure and organizationsatisfactory to the Bank, by September 30, 1986 (Section 3.01(b) of the draftLoan Agreement). The project would be implemented over a period of about sixyears, starting in April 1985 and ending in December 1990. The Loan closingdate would be December 31, 1991.

56. The Central and Local Project Implementation Units wouLd be assistedby other bodies in supervising project activities. Staff developmentactivities, including the organization of fellowships, visiting scholars andin-service training, would be coordinated by the Technical AssistanceManagement Unit (TAMU) in DGHE. The development of prototype instructionalmaterials would be undertaken through collaborative workshops of staff fromthe various graduate academic programs (IUCs) and the pedagogicaL staff of theCenter for the Improvement and Development of Instructional Activities (CIDIA)established at the Open University, and would be coordinated by CIDIA. EachIUC would manage its own research program, in consultation with a Planning andReview Board (PARB) established for each field of study. The eligibilitycriteria for all research allocations would be determined by the IUC Directorand Program Secretary in consultation with the appropriate PARB, which wouldreview all IUC research proposals and recommendations. Research proposalswould be judged on the basis of national development objectives and the IUC'sresearch priorities, their feasibility, clarity and size of budget, theirprospective contribution to knowledge, the capability and potential of theresearcher, and the contribution to student training. The introduction ofimproved physical facilities and equipment at the IUCs would be coordinatedthrough the establishment or improvement of central analytical laboratories,whose heads would be appointed by and report to the respective Deans ofGraduate Studies. These arrangements should serve to prevent possibleduplication of equipment and operating personnel on the university campuses.Centers for Instrumentation and Technical Services would be established andfunded under the project at ITB, UGM and IPB to provide maintenance and repairservices for the IUCs and, eventually, to meet the needs of a wider researchcommunity. The development of the new undergraduate curricula andinstructional materials would be overseen by a Working Group under the DGHE,which would receive technical support from CIDIA.

57. To ensure that the pool of possible overseas training candidateswill be as large as possible, the Government has waived its requirement thatcivil servants studying abroad should have been employed for at least twoyears prior to departure. Candidates would sign a "fellowship contract" whichrequired them to teach at a university for a period equivalent to twice theperiod of time spent abroad plus an additional two years.

58. In order to ensure smooth implementation and a forum for Bank com-ment on annual plans, the project would include an annual Bank-DGHE projectreview. As preparation for this review, the Government uould furnish for eachIUC to the Bank for review and comment by January 1 of each year, beginning

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January 1, 1986: (a) an annual plan and program detailing degree and non-degree staff training, research, and materials development, production anddistribution programs; (b) an annual budget; and (c) an annual pLan formonitoring and data collection for project activities (Section 3.04 of thedraft Loan Agreement).

59. The project would require three new sites: a completely new sitefor the Open University IUC, and sites for the extension of the ITB and UGMcampuses. The Government gave assurances at negotiations that these siteswould be acquired by December 31, 1985 (Section 3.05 of the draft LoanAgreement). Appointment of qualified architectural consulting firms for thedesign and supervision of construction of the IUC facilities would be a condi-tion of loan effectiveness (Section 5.01(b) of the draft Loan Agreement).

Project Costs and Financing Plan

60. The total cost of the project is estimated at US$244.5 million equi-valent, of which US$134.8 million (55%) wouLd be in foreign exchange. Basecosts are expressed in April 1985 prices and include taxes and import duties,which would be negligible. Construction costs of US$235/square mcter werebased on the costs of recently contracted works. Equipment costs were derivedfrom master equipment lists which have been reviewed and found appropriate inscope and cost. Fellowship costs include average tuition fees and subsistencecosts, including housing and travel allowances, as well as administrativecosts and an initial three-month language training period. Overseas degreefellowships were estimated at about US$18,000 per staff-year, while overseasnon-degree training was estimated ac about US$2,000 per staff-month forinternships (generally 6-12 months) and at about US$6,000 per staff-month forconferences and seminars (up to one month). Domestic non-degree training wasestimated at an average of US$725 per staff-month for internships (3-12months), US$820 for short courses (1-3 months), and $2,500 for seminars andworkshops (up to one month). Physical contingencies (US$18.2 million)represent 10Z of base costs. Price contingencies (US$43.8 million) represent21.8% of base costs plus physical contingencies, and assume the followingannual price increases: local - 8Z for 1985-90; foreign - 8% for 1985; 9% for1986-88; 7.51 for 1989; and 6Z for subsequent yea-s.

61. The proposed Bank loan of US$147 million would cover 601 of projectcosts, including 100% of the foreign exchange costs (US$134.8 million) and 15%of local costs (US$12.2 million). The Government would finance the remainingUS$97.5 million (40% of total project costs). Annual recurrent expendituresgenerated by the project are estimated at about US$15.8 million (at 1984prices) in 1988/89, the year in which the prGject would be fully opera-tiDnal. This represents about 5% of the projected DGHE budget (developmentand routine) for that year and about 1% of the MEC budget. Considering thepriority given to higher education development, and the relative underfinanc-ing of higher education until now, this is not an unreasonable addition to thebudget of DGHE. Based on a favorable experience under earlier Bank-assistedprojects, it is hence expected that the Government would allocate sufficientfunds for the maintenance of project facilities.

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Procurement

62. Procurement arrangements for the major expenditure categories ispresented in the table on page 22. Three major contracts for civil worksranging from about US$3 million to US$6 million would be packaged by eachuniversity to attract foreign bidders, and would be awarded on the basis ofinternational competitive bidding (ICB) procedures in accordance with Bankguidelines (about US$13.1 million). The remaining two smaller civiL workspackages wouLd be awarded on the basis of local competitive bidding (LCB) pro-cedures acceptable to the Bank (about US$2.3 million). Equipment bid packagesexceeding US$500,000 equivaLent would be awarded on the basis of ICB proce-dures in accordance with Bank guidelines (about US$24.6 million). LocaLmanufacturers would be given a margin of preference in bid comparison of 15%of the c.i.f. price of competing imports or the actual customs duty, whicheveris lower. Equipment, instructional materials and consumable materials insmaller packages, and aggregating to a maximum of US$10.9 million, would beprocured through LCB procedures acceptable to the Bank. Off-the-shelf itemsof equipment, instructional materials and consumable materials not exceedingUS$50,000 equivalent for each package and aggregating to a maximum of aboutUS$8.7 million, could be purchased through prudent shopping on the basis ofthree competitive price quotations. Books and journals would be purchasedthrough prudent shopping procedures directly from publishers or localdistributors after negotiations for discounts. Employment of visitingscholars and placement of fellows would be undertaken in a combination ofinstitution-to-institution contracts and direct hire of individuals inaccordance with Bank Group guidelines.

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PROJECT EXPENDITURES BY PROCUREMENT CATEGORY(in US$ million)

Notappli- Total

Category of expenditure ICB LCB Other cable cost

1. Fellowships - - 80.4 - 80.4- - (80.4) - (80.4)

2. Visiting scholars - - 18.0 - 18.0_ - (18.0) - (18.0)

3. Graduate level research - - - 9.7 9.7_ _ - (4.4) (4.4)

4. Physical facilities 13.1 2.3 - - 15.4(5.9) (1.0) - - (6.9)

5. Equipment 24.6 5.3 5.3 - 35.2(20.8) (3.5) (3.5) - (27.8)

6. Furniture - 1.0 0.3 - 1.3

7. Books, journals, consum-able materials, and 0.5 5.6 3.4 13.1 22.6instructional materials (0.3) (2.3) (1.4) (5.5) (9.5)

8. Incremental staff salaries,and operations andmaintenance - - - 61.9 61.9

Total 38.2 14.2 107.4 84.7 244.5(27.0) (6.8) (103.3) (9.9) (147.0)

Note: Figures in parentheses are the respective amounts financed by the Bank.

63. Architectural schematic designs, draft bidding documents and masterequipment lists indicating proposed packaging and cost estimates would be re-viewed by the Bank. Terms of reference for visiting scholars and plans forfellowship training would also be reviewed by the Bank. Prior approval of theBank would be required for the award of civil works contracts exceedingUS$3.0 million equivalent (covering about 85Z of the value and 60% of theestimated number of contracts), for the purchase of equipment ezceedingUS$1.5 million equivalent (covering about 75% of the value and 50% of theestimated number of contracts), and for the purchase of instructional mater-ials exceeding US$0.7 million equivalent (covering about 85Z of the value and60% of the estimated number of contracts). Other contracts would be subjectto selective post-award reviews.

- 23 -

Di sbursemen' s

64. The proposed loan of US$147 million would be disbursed over a periodof about six years. Disbursements are expected to be completed by December31, 1991 and would be made against the following categories of expenditures:(a) civil works and reLated professional services - 45% of total expenditures;(b) equipment: (i) 100% of foreign expenditures; (ii) 100% of local (ex-factory) expenditures; and (iii) 701 of local expenditures for other itemsprocured locally; (c) books, journals, and consumable and instructionaL mater-ials - 100% of foreign expenditures and 40% of local expenditures; (d) fellow-ships and visiting scholars - 100% of total expenditures; and (e) researchawards - 45% of total expenditures. The disbursement forecast is slightlyaccelerated, compared with the profiles for all projects in Indonesia and forregional education projects, in view of the advar:ed project preparation, par-ticularly in software aspects, and expected early start of fellowship and vis-iting scholar programs. Retroactive financing of about US$3 million would beprovided for expenditures incurred after October 31, 1984 for instructionalmaterials development, fellowships and visiting scholars to ensure a timelystart to project activities.

65. Documentation of Expenditures. Withdrawal applications for goodsand services with a contract value of US$50,000 or more would be supported byfull documentation. Other disbursements would be made on the basis of state-ments of expenditure. To the extent practicable, withdrawal applicationswould be aggregated in amounts of US$100,000 or more, prior to submission tothe Bank.

Accounts, Audits and Reports

66. All project agencies would prepare and maintain separate projectaccounts in accordance with sound accounting practices. Accounts anddocumentation supporting statements of expenditure would be maintainedseparately and would be readily avaiLable centrally for review by visitingBank -issions. Accounts, statements of expenditure, and financial statementsfor each fiscal year would be prepared and audited by independent auditorsacceptabLe to the Bank. Certified copies of the audited accounts andfinancial statements, for each fiscal year, together with the auditor's reportwould be furnished to the Bank as soon as available, but not later than ninemonths after the end of each fiscal year. Six months after the closing datethe CPIU would submit a project completion report to the Bank. During negoti-ations, the Government provided assurances that it would comply with thesereview and reporting requiremei.ts (Section 4.01 of the draft Loan Agreement).

67. Monitoring and Evaluation. The project would support information-gathering activities, which would be managed by the Higher Education PlanningUnit in DQHE. A three-tiered system wouLd be used to monitor the IUC compo-nent. Data on all major IUC activities (civil works, procurement, technicalassistance, degree and nondegree training, development of instructionalmaterials, research support), as well as staffing, would be gathered, storedand analyzed using a common micro-computer program developed for the purposeby the Computer Center at UI. These data would be used at the LPIU level toconstruct indicators of IUC progress for each university. The Planning Unit

- 24 -

would compile information across LPIUs, for reporting to DGHE and the Dank.Quarterly Reports to the Bank would be prepared by the CPIU. The Governmenthas prepared a set of monitoring indicators and a plan for appropriatemonitoring and data collection.

Benefits and Risks

68. The main benefits of the project would be: (a) further developmentof the higher education subsector; (b) improved quality of output;(c) increased output of high-level graduates to meet development needs; and(d) increased management capacity for administration and planning of highereducation in general, and graduate education in particular. In addition, theproject would lay the groundwork for further increases in university output byproviding the institutional framework for continuous staff and instructionalmaterials development and research. The improvements in management capacityunder the project would provide the basis for improvements in the managementof the university system as a whole. The increased output generated by theproposed project, by 1990, should help meet the university staff requirementsin priority areas. Specifically, the project would produce about 845 personswith advanced degrees or 35% of the projected stafE deficit of 2,420 by1989. Ite second major benefit of the proposed project, the improvement inthe quality of output, would be expected by the increase in the scholarlyproductivity of graduates from the project universities based on the financingof over 1,000 research studies. In addition, about 3,000 differing prototypeinstructional materials would be derived from the project. The third majorbenefit, institution building, should have the short-term effect of helping toincrease the level and quality of output of the university system, and thelonger term effect of improving the overall operation, planning and managementfor future development of the higher education system.

69. A major risk inherent in a university development program of thescope and complexity proposed is the difficulty in coordinating implementationof various participating entities and ensuring quaLity and impact across uni-versities. This difficulty of coordination has resulted in delays in theimplementation of the first university project. To reduce this risk, theproject would formalize the current ad hoc doctoral program management teaminto a National Graduate Education Council, with representation from all majoruniversities, key government policymakers and outstanding authorities in theirrespective fields, in order to facilitate coordination and to provide highlevel policy and technical advice. In addition, annual in-depth Bank-DGHEimplementation reviews would facilitate appropriate adjustments in projectactivities.

PART V - LEGAL INSTRUMENTS AND AUTHORITY

70. The draft Loan Agreement between the Republic of Indonesia and theBank and the report of the Committee provided for in Article III, Section 4(iii)of the Articles of Agreement are being distributed to the Executive Directorsseparately. Conditions of loan effectiveness would be (a) the establishmentof the Inter-University Centers (IUCs) and project implementation units (para-graph 55) and (b) the appointment of architectural consulting firms for thedesign and supervision of the IUC facilities (paragraph 59). Other speciaLconditions of the project are listed in Section III of Annex III.

- 25 -

71. I am satisfied that the proposed loan would comply with the Articlesof Agreement of the Bank.

PART VI - RECOMMENDATION

72. I recommend that the Executive Directors approve the proposed loan.

A. W. ClausenPresident

AttachmentsMay 1, 1985Washington, D. C.

-26- ANNEX IaPage 1 of 5 pages

IHOONESIA - SOCIAL INDICATORI DATA SISUIDONESIA ErECEZ GROUPs (WEGWED AVERAgE) a

MOST CMOSr SCENT ESTIMATE) lIkCENT MiDDLE INCOI*E MIDDLZ INCEGE

19601i! 19ToL zESTImATLb ASIA b tACIFIC LAT. AMERICA & CAR

ARA (THUUBND SQ. I)TOTAL 1919.3 1919.3 1919.3ACRICULTIJRAL 296.3 307.1 317.3

CUP PER CAPITA (CGM) 90.0 130.0 sa8.0 IW1.2 2108.6

EmmaT wmumwnu NER CAPITA(KILORAMS or OIL EqUIVALENT) 68.0 91.0 191.0 567.3 995.5

POPULATIOW AD VITAL UPTSUTICSPOPULATIUN.MID-YEAR (THOUSANDS) 946B0.0 116201.0 152398.0URbAN POPULATION (I OF TOTAL) 14.6 17.1 22.3 34.7 66.3

POPUIATION PROJCTIONSPOPULATlON IN YEAR 2000 (HILL) 212.0STArLOllARY POPULATION (HILL) 370.1POPULArlaO WDMENTIm 1.9

POPULATIJN DENSITYPER 5Q. MM. 49.3 60.5 77.9 261.9 35.7PER Sq. K04. AGRI. LAND 319.3 375.4 471.0 1735.1 92.4

POPULATION AGE STRUCTURE (2)0-14 IRS 40.7 44.0 39.5 39.0 39.9

15-64 YRS 56.2 53.4 57.3 57.6 36.065 AND AOVE 3.1 2.5 3.1 3.3 4.1

POPULATION GROWTH RATE (2)TOTAL 2.1 2.0 2.3 2.3 2.4URBAN 3.7 3.6 4.5 4.3 3.6

CRUDE BIRTH RATE (PER TIOUS) 44.Z 41.0 33.6 30.1 31.3CRUDE DEATH RATE (PER THOUS) 22.9 17.6 13.0 9.5 R.IGROSS REPRODUCTION RATE 2.7 2.7 2.2 2.0 2.0

FAMILY PLANOINGACCEPT0RS. AINUAL (T1OUS) .. 181.1 3051.0USERS (Z OF HARRIED OEN) .. .. 53.0 Ic 52.7 40.3

FOOD A- MUlMTIONINDEX OF FOOD PROD. PER CAPITA(1969-71-100) 93.D 102.0 t17.0 123.0 114.3

PEU CAPITA SUPPLY OFCALORIES (Z OF REQLIIREKENTS) 86.0 96.0 110.0 114.4 110.6PROrEINS (GRAMS PER DAY) 35.D 44.0 49.0 57.0 67.3

OF WHICH ANIMAL AND PULSE 6.0 6.0 7.0 /4 14.1 34.1

CRILD (ACES 1-4) 1EATm RATE 22.9 16.9 13.0 7.2 5.7

NALT8LIFE EXPECT. Ar BIRTH (YEARS) 41.2 47.0 53.3 60.4 64.7INFANT 1ORT. RATE (PER THOIS) 149.9 120.9 102.0 66.3 60.6

ACCESS TO SAFE WATER (%POP)TOTAL *- 3.0 23.0 37.0 65.4URBAN .. 10.0 41.0 54.8 78.1RURAL *- 1.0 18.0 26.4 46.2

ACCESS TO EXCRETA DISPOSAL(2 OF POPULATION)

TOTAL *- 15.0 23.0 41.3 52.9URUAN *- 19.0 20.0 47.4 67.0RURAL 14.0 24.0 33.3 24.5

POPULATION PER PRYSICIAN 4b780.0 26510.0 11530.0 /e 7749.4 1917.7POP. PER NURSING PERSON 4510.0 If 7680.0 2300.0 77 2460.4 815.8POP. PER HOSPITAL RED

TOTAL 1360.0 1650.0 1720.0 /e 1044.2 367.2URBAN 250.0 . . 70.o 7 651.2 411.5RURAL 3160.00 j7 2594.6 2636.3

ADMISSIONS PER HOSPITAL BED .. .. 22.4 lh 27.0 27.3

IIDUSIN1CAVERAGE SIZE OF HOUSEHOLD

TOTAL 4.4 4.8URBAN 4.9 5.3RURAL 4.3 4.7

AVERAGE NO. OF PERSONS/ROUITOTAL. I. 1.5 . -

URBN1 1.6RURAL 1.5

ACCESS To ELECT. (Z OF DWELLINGS)TOUAL .. ..URIAN .. ..RURAL .. ..

- 27 - ANNEX IPage 2 of 5 pages

INEDNEIIA - 8ocI. INICATO DTA BUNTzmXmUsZA RZPIABG GRUPS (URIGHT AVERAGES)

MO! (NO"T S N ESIAu E) ARUSIII MIDDLt INCO KIIDDU INCM

1igGeLb xm z7imETIH bTE A SIAEZA PACIFIC LAT. AERIC A CAR

EDUCATICEADIUSTD ENROLIIMT RATIOS

PIMA4Ti TOTAL 71.0 77.0 100.0 102.0 103.4IALZ 66.0 63.0 106.0 103.9 106.3FEMALE 38.0 71.0 94.0 96.2 104.5

SECONDARY: TOTAL 6.0 15.0 30.0 46.0 43.2MALE 10.0 20.0 36.0 45.7 42.3

FEKALZ 3.0 10.0 24.0 43.1 44.5

VOCATIONAL (2 OF SECONDARY) 20.4 22.1 13.4 17.3 33.6

PUPIL-TEACHE RATIOPRIMARY 39.0 29.o 32.0 31.6 30.1SECONDARY 14.0 13.0 16.0 23.5 16.8

ADULT LITERACY RATE (2) 39.0 36.6 62.0 72.9 79.3

PASSENGER CAKS/THOUSAND POP 1.1 2.1 4.4 10.1 46.0RADIO RECEIVERS/TMOUSAND POP 7.2 21.9 42.4 113.6 225.6TV RPCEXVERS/hlOUSAND POP 0.1 0.8 9.6 50.1 107.2NEUSPAPRN C *DILY GENEtAL

INTEREST-) CIRCULATIOSPER THOUSANwD POPULlATION 11.0 .. 17.7 /R53-9 63.5

CINEIIA ANIAL ATTEMMME/CAPITA 2.61 0.8 l i 3.4 2.o

IAMBFORMlRTOTAL LABOR FORCE (THOUS) 34791.0 41090.0 54689.0F33411 (PERCENT) 27.8 30.9 29.1 33.5 23.2AA2ICULTURE (PERCENT) 75.0 66.0 58.0 ,. 2 31.5INDUSTRY (PERCENT) 8.0 10.0 12.0 17.9 23.9

PARTICIPATION RATE (PERCENT) 3TOTEAL 36.7 35.4 35.8 38.7 3.2MALE 54.2 49.5 51.1 50.9 49.3.PEKALE 20.0 21.6 20.7 26.6 15.2

ECONOMIC DEPENDENCY RATIO 1.2 1.3 1.2 1.1 1.4

IN DI SAIO!OPERCENT OF PRIVATE INCOMERECEIVED BYHICHEST 52 OF HOUSEHOLDS .. .. 23.5 22.2HIGHR? 2ZO OF HOUSEHOLDS *- *- 49.4 48.0LOEST 20Z OF HOUSEHOLDS .. .. 6.6 6.4iLOEST 401 OF HOUSEHOLDS *- *- 14.4 7 15.5

wzm TAGT -ESTIMATED ABSOLUTE POVERrY INCO1LEVEL CUSS PER CAPITA)URI"N .. 124.0 ji 124.0 /I 188.6 28.2RURAL .. 106.0 71 106.0 71 152.0 184.0

ESTIMATED RELATIVE POVERTY INCOMELEVEL (USS PER CAPITA)

URBAN .. .. 119.0 /1 177.9 522.8RURAL .. .. 98.0 7- 164.6 372.4

ESTIMATED POP- BELOW ABSOLUTEPOVERTY INCOI£ LEVEL (Z)URBAN . 51.0 /I 26.0 /A 23.4RURAL * 59.0 7 44.0 71 37.7

NOT AVAILABLENOT APPLICABLE

11 0 T t S

/a The group avrarma for each indicator are population-aLsbtad arltth.tic smn. Coverqn of countriea e ong theendicators depends on ava*labLity of data and lo not uilform.

lb UnIoas otberwla noted. 'Dta for 1960' refer to any year between 1959 and 19611 "Data for 1970' between 19e9 and1971; and data for Not RaceAt eatlmt. betwean 1980 and 1982.

/c 1983; /d 1977; /a 1979; /f 1962; j/ 1976; Ib 1975; /1 1980 prIces.

JUNE. 1984

ANNEX I-28- Page3'of 5pages

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ANNEX IPopulation 1 155.8 million (mid-1983) - 29 - Pa.e 4 of 5 PagesCNP per Capitst US$560 (1983 estimata)

INDONESIA - ECON0KIC INDICATORS

Amount(mlilion USS at Annual growth rate (2) /bcurrent prices) Actual Projected

Indieator 1982 iS8U 0M n 19V YiL 1953 1-jaa MM Iv.) 19B6 1981 Lo5 IVYH 1YYU

NATtONAL ACCOUNTSGross domeEtic product /c 78,344 9.9 7.9 -0.2 4.7 5.5 2.6 5.0 5.1 4.7 4.1 4.3Agciculture 20,651 5.2 4.9 2.1 4.8 5.0 3.7 3.7 3.7 3.7 3.7 3.7Industry 29,896 12.5 8.5 -6.4 5.0 7.3 0.2 5.4 5.6 4.5 3.0 3.5Services 27,797 11.8 9.8 5.5 4.3 4.0 4.5 5.5 5.5 5.5 5.5 5.5

Consumption 62,731 12.4 15.8 3.0 2.0 5.6 1.3 3.4 4.3 4.3 4.3 4.1Cros. investment /d 18,908 18.9 11.1 8.5 -5.0 -2.0 5.1 5.1 5.3 5.5 5.7 5.5

a Exports of CNFS 19,S08 -5.6 -2.4 -12.6 14.8 1.5 2.9 6.3 5.2 3.9 1.4 3.2Imports of GNFS 22,803 15.1 Z7.1 3.2 -8.1 -5.0 0.5 1.3 2.5 2.6 3.0 3.4

Cross national savings 12,273 33.2 -20.0 -15.9 22.2 16.7 -1.6 12.2 8.2 7.1 5.4 5.5

PRICES-DlTFdeflator (1981 - 100) 91 100 113 131 142 154 166 179 194 209 226Exchange rate (Rp per US$) 627 632 661 909 1,026

Share of GDP at market prices (Z)(at current prices) Average annual increase (Z) /b

____ 1970 19iz 1 190 l5O 1990 1960-70 V1-'-)u 197 I-8 B lY8V-85 i9UT--

Gross domestic product 100 100 100 100 100 100 3.9 8.4 7.4 4.1 4.6Agriculture 54 47 32 25 26 25 2.7 4.1 3.3 4.1 3.7Industry 14 18 34 43 38 37 5.2 12.0 9.8 2.8 4.4Services 32 35 35 32 36 35 4.8 9.7 9.5 5.6 5.5

Consumption 91 89 79 71 76 74 4.1 8.4 9.2 5.6 4.0Gross investment Id 8 14 20 21 20 22 4.8 18.3 12.2 4.5 5.4Exports of GNFS 13 13 23 31 Z5 25 3.6 9.2 2.9 -1.2 4.0Imports of GNFS -13 -16 -22 -22 -22 -20 3.2 22.1 14.0 2.6 2.6

Gross natLonal savings 8 9 17 26 20 22 6.1 23.1 14.2 0.5 7.7

As 2 of CDP1960 1970 19/5 19S0 1984

PUBLIC FINANCE lecurrent revenue 11.7 10.1 17.4 22.5 20.1Current expenditure. 14.0 8.4 9.9 12.8 11.8Surplus (+) or deficit (-) -2.3 +1.6 +7.5 +9.7 +8.3Capital expenditure n.a. 5.0 11.3 13.0 7.4Foreign financing 0.2 3.5 3.7 3.3 -0.9

1960-70 1970-75 1975-80 1980-85 1985-90

OTHER INDICATORSAnnual GNP groath rate (Z) 4.5 7.6 7.1 3.8 4.8Annual GSP per capita growth rate (Z) 2.4 5.1 4.7 1.7 2.8Annual energy consumption grcuth rate (1) 2.2 11.2 11.0 1.3 4.7

ICOR 2.2 2.2 3.3 5.2 4.4Marginal savings rate 0.30 0.48 0.28 0.03 0.35Import elasticity 1.2 2.8 0.84 0.63 0.57

/a Estimates.7W At constant 1973 prices for 1980-81. and 1981 prices for 1982-90.7F At market prices.7Tf Fixed investment; stock chinges are included in consumption.7e Central Government only, on an April-to-March fiscal year basis. East Asia ond PAcific Region

March 29, 1985

Population : 155.8 mulLion (mid-1983) - 30 ANNEX IGNP per Capitai US$560 (1983 estimate) Page - of 5 paes.

INDONESIA - BALANCE OF PAYMENTS AND EXTERNAL CAPITAL AND DIET(Ill.lonS US5 at current priced)

Actual Pro ectedlYoU 19dl 19SZ ISS3 Iva 7W M i"a IY5 19D IDU19

BALANCE OF PAYMENTS/b1. EIxorto 22,885 22,994 19,672 19.816 19,993 21,115 23,043 26,331 36,460

(a l and LNG (groom) 17,297 18,824 14,744 14.449 14,082 14,481 15,483 17,784 23.801(b) NonoLl 5,589 4.170 3,929 5,367 5,901 6,634 7,560 8,547 12.659

2. Imports (including net NFS) -17,589 -22,570 -22,339 -19,583 -1B,181 -19.070 -20.752 -23,015 -31.705(a) Oil sector -4,050 -5,407 -4.802 -3,939 -3,552 -3,823 -4,216 -4,776 -6.893(b) Nonoil imports -11,837 -14,561 -15.824 -14,174 -13,225 -13,807 -14,990 -16,535 -22.499(c) NYS (net) -1,702 -2,602 -1.713 -1,570 -1,441 -1,440 -1,546 -1,704 -2.313

1. Resource balance 5,296 424 -3,667 233 -1,795 2,045 2,291 3,316 4,755 *4. Factor services -3,165 -3,210 -3,573 -4,669 -4,620 -5,003 -5,395 -6,049 -7,487

(a) Interest public debt -823 -994 -1,145 -1,256 -1,499 -1,734 -1,958 -2,211 -2,747(b) Other (net) -2,342 -2,216 -2,428 -3,413 -3,121 -3,269 -3,437 -3,839 -4,740

5. Capital grants 76 67 105 95 100 110 120 125 1506. Balance on current account 2,207 -2,719 -7,135 -4,341 -2.725 -2,848 -2,984 -2,608 -2,5827. Direct foreign investment 140 142 311 193 250 250 275 300 3758. Public N & LT loans

(a) Disbursement 2,551 2,673 4,192 4,965 4,189 5,238 5,521 5,649 7,001(b) Amortization -936 -1,053 -1,102 -1,295 -2,036 -2,461 -2,534 -3,176 -5,050(c) Net disbursements 1,615 1,620 3,090 3,670 2,153 2,777 2,987 2,473 1,951

9. Other capital (net) -1.488 -31 455 2,547 611 -29 175 56 50210. Change in reserves (- increase) -2,736 988 3,279 -2,069 -289 -150 -453 -221 -24611. Net official reserves -7,342 6,354 3,074 5,144 5,433 5,583 6,036 6,257 6,902

Reserves in months of nonoil imports+ NFS 6.5 4.4 2.1 3.9 4.5 4.4 4.4 4.1 3.3

Memorandum ItemNet toreign assets of the banking

Byst.e/c 10,787 10,622 6,392 8.916 9.205 9,355 9.809 10,029 10.674Total reserves in months of nonoil

imports + NFS 9.6 7.4 4.4 6.8 7.5 7.4 7.1 6.6 5.2

EXTERNAL CAPITAL AND DEBT/dGross Disbursements 2 551 2 673 4 192 4 965concessional Loaans aT51 -7J3 '9W ED

Bilateral 7RnT 7m yT ZIDA 42 69 78 60Otler

Nonconcessional Loans 1892 1890 3503 4357Silaterai -:l* 7U T IIBRD 331 314 505 489Other multilateral 52 85 126 160Private-source 1,421 1.310 2,356 3.219

External DebtDebt outstanding and disbursed /e 14 971 15 870 18 515 21 686

Official-source iK5 lW3 TffPrivate-source 5,465 5,912 7,403 9,649

Undisbursed debt 9,481 11,387 12,870 12,975

Debt ServiceTotal service payments 1,759 2,047 2,247 2,551

Interest 823 994 1,145 1,256Payments as 2 of exports/f 7.7 9.9 12.0 12.9

Avera!e Interest Rate on New Loans (2) 8.1 8.7 9.2 8.8tcl a-source 5.4 7.8 8.8 8.7

Private-source 12.4 9.4 9.5 8.8 -

Average _aturity of New Loans (Years) 18.8 15.5 15.2 15.1Ott clal-source 24.4 20.5 20.6 22.3Private-source 9.8 11.1 11.1 10.3

As 2 of debt outstanding at end of 1983Maturity structure of debt outstanding

Maturities due vithin 5 years 40Maturities due within ID years 70

Interest structure of debt outstandingInterest due within first year 7.0

/a Estimates.7I On an April-to-March fiscal year basis.Tc Includes foreign assets of deposit money banks in addition to official reserves.7r Excludes private nonguaranteed loans.7e At end of period. East Asia and Pacific Region71r Oil exports treated on gross basis. March 29, 1985

ANNEX II- 31 - Page 1 of 4 pages

THE STATUS OF BANK GROUP OPERATIONS IN INDONESIA

A. STATEMENT OF BANK LOANS AND IDA CREDITS (as of March 31, 1985) /a

Loan/ Amount (US$ nmillion)Credit FiscaL (less cancelLations)

* number vear Purpose Bank rDA Undisbursed

Thirty-five Loans and forty-one Credits fuLlydisbursed 1,584.59 642.71 -

1578 1978 Tenth Irrigation 140.00 - 68.021604 1978 Nucleus Estate and Smallholders II 65.00 - 29.75869 1979 Polytechnic - 49.00 11.291645 1979 Twelfth Irrigation 77.00 - 23.471653 1979 Third Urban Development 54.00 - 11.261692 1979 Second Agricultural Training 42.00 - 8.291696 1979 Fifth Highway 123.20 - 19.59919 1979 Transmigration II - 67.00 0.01707 1979 Transmigration II 90.00 - 86.271708 1979 Eighth Power 175.00 - 41.641709 1979 Second Water Supply 35.50 - 9.85946 1980 Yogyakarta Rural Development - 12.00 7.401751 1980 Nucleus Estate and Smallholders III 99.00 - 34.79984 1980 Smallholder Rubber Development - 45.00 27.57995 1980 Fifteenth Irrigation - 37.6 15.72996 1980 National Agriculture Extension II - 42.00 24.951811 1980 Fourteer.th Irrigation 116.00 - 53.391835 1980 Nucleus Estate and Smallholders IV 42.00 - 29.721840 1980 National Agricultural Research 35.00 - 35.001014 1980 National Agricultural Research - 30.00 5.941872 1980 Ninth Power 253.00 - 86.711898 1981 Smallholder Coconut Development 46.00 - 33.061904 1981 University Development 45.00 - 37.301950 1981 Tenth Power 250.00 - 21.681958 1981 Swamp Reclamation 22.00 - 13.451972 1981 Fourth Urban Development 43.00 - 24.13

4

/a The status of the projects listed in Part A is described in a separate report onall Bank/IDA financial projects in execution, which is updated twice yearly andcirculated to the Executive Directors on April 30 and October 31.

- 32 - ANNEX IIPage 2 of 4 pages

Loan/ Amount (US$ milLion)Credit Fiscal (less cancellations)number year Purpose Bank IDA Undisbursed

2007 1981 Nucleus Estate and Smallholders V 161.00 - 114.442011 1981 Second Small Enterprise Development 106.00 - 8.952049 1982 Jakarta-Cikampek Highway 85.00 - 75.702056 1982 Eleventh Power 170.00 - 84.112066 1982 Second Seeds L5.00 - 10.802079 1982 Bukit Asam Coal Mining Development and

Transport 185.00 - 85.872083 1982 Rural Roads Development 85.00 - 63.112101 1982 Second Teacher Training 80.00 - 76.262102 1982 Second Textbon'c 25.00 - 24.892118 1982 Sixteenth Irrigation 37.00 - 21.242119 1982 Seventeenth Irrigation (East Java 70.00 - 48.11

Province)2120 1982 National Fertilizer Discribution 66.00 - 41.712126 L982 Nucleus Estate and SmaLLholders VI 68.10 - 59.492153 L982 Coal Exploration Engineering 25.00 - 19.692199 L982 Central Java Pulp and Paper Engineering 5.50 - 4.2122L4 1983 Twelfth Power 300.00 - 256.202232 1983 Nucleus Estate and Smallholders VII 154.60 - 152.322235 1983 Provincial Health 27.00 - 25.972236 1983 Jakarta Sewerage and Sanitation 22.40 - 21.382248 1983 Transmigration III 101.00 - 66.002258 1983 Public Works Manpower Development 30.00 - 28.722275 1983 East Java Water Supply 30.60 - 27.492277 1983 Fifth BAPINDO 208.90 - 158.712288 1983 Transmigration IV 63.50 - 61.752290 1983 Second Polytechnic 107.40 - 107.132300 1983 Thirteenth Power 279.00 - 241.152341 1984 Third Agricultural Training 63.30 - 62.842344 1984 Nucleus Estate and Smallholder Sugar 79.20 - 53.912355 1984 Second Non-Formal Education 43.00 - 41.382375 1984 Second Provincial Irrigation Dev. 89.00 - 85.342404 1984 Highway Betterment 240.00 - 235.372408 1984 Fifth Urban Development 39.65 - 39.152430 1984 Third Small Enterprise Development 204.70 - 204.142431 1984 Second Swamp Reclamation 65.00 - 64.842443 1984 Fourteenth Power 210.00 - 209.481950-1 1985 Supplemental Loan for Tenth Power

(1950-IND) /a 50.00 - 50.002472 1985 Secondary Education and Management

Training 78.00 - 77.81

/a Not yet effective.

ANNEX IIPage 3 of 4 pages

Loan/ Amount (US$ million)Credit FiscaL (less cancellations)number year Purpose Bank IDA Undisbursed

* 2474 1985 Upland Agriculture and Conservation /a 11.30 - 11.302494 1985 Smallholder Rubber Development II /a 131.00 - 131.00

TotaL Bank loans and IDA credits 7,020.93 938.48

Of which has been repaid -395.81 -17.69

Total now outstanding 6,625.12 920.79

Amount sold to third party 28.24Amount repaid by third party -28.24 -

Total now held by Bank and IDA /b 6,625.12 920.79

Total undisbursed 3,693.82 98.65 3,792.47

/a Not yet effective.

/b Prior to exchange adjustnent.

ANNEX II- 34 Page 4 of 4 pages

B. STATEMENT OF IFC INVESTMENTS (as of March 31, 1985)

Fiscal Type of Loan Equity Totalyear Obligor business (US$ million) --

1971 P.T. Semen Cibinong Cement 10.6 2.5 13.11971 P.T. Unitex Textiles 2.5 0.8 3.31971 P.T. Primacexco Indonesia Textiles 2.0 0.5 2.51971 P.T. Kabel Indonesia Cable 2.8 0.4 3.2L972 P.T. Daralon Textile

Manuf. Corp. Textiles 4.5 1.5 6.0L973 P.T. Jakarta Int. Hotel Tourism 9.8 1.6 11.4l973 P.T. Semen Cibinong Cement 5.4 0.7 6.11974 P.T. Primatexco Indonesia Textiles 2.0 0.3 2.31974 P.T. Monsanto Pan Electronics 0.9 - 0.91974 P.T. PDFCI Devel. Fin. Co. - 0.5 0.51974 P.T. Kamaltex Textiles 2.4 0.6 3.01976 P.T. Semen Cibinong Cement 5.0 1.5 6.51976 P.T. Semen Cibinong Cement - 1.1 1.11977 P.T. Daralon Textile

Manuf. Corp. Textiles 0.4 - 0.41977 P.T. Kamaltex Textiles 1.3 0.2 1.51979 P.T. Daralon Textiles 0.9 - 0.91980 P.T. Papan Sejahtera Capital Market 4.0 1.2 5.21980 P.T. Indo American

Industries Glass Dinnerware 11.1 0.9 12.01980 P.T. Semen Andalas Cement and

Indonesia ConstructionMateriaL 48.0 5.0 53.0

1982/5 P.T. Saseka Gelora Leasing Capital Harket 5.0 0.3 5.31984 P.T. Semen Cibinong Cement 25.0 - 25.0

Total gross commitments 143.6 19.6 163.2

Less: sold or repaid and cancelled 107.6 7.4 115.0

Total held by IFC 36.0 12.2 48.2

Undisbursed (including participant's portion) 9.5 9.5

-35 - ANNEX III

INDONESIA

SECOND UNIVERSITY DEVELOPMENT PROJECT

Supplementary Project Data Sheet

lb Section I: Timetable of Key Events

(a) Time taken to prepare project: 12 months

(b) Agency which prepared project: Ministry of Education andCulture

(c) First presentation to Bank: November 1983

(d) First mission to consider project: February 1984

(e) Departure of appraisal mission: June 1984

(f) Completion of Negotiations: April 1985

(g) Planned date of Effectiveness: September 1985

Section II: Special Bank Implementation Actions

None.

Section III: Special Conditions

The Covernment would:

(a) formally establish and fully staff all project institutions bySeptember 30, 1986 (paragraph 55); and

(b) ensure that by January 1 of each year each IUC would furnish to theBank for review and comment (a) an annual plan and program detailingdegree and nondegree staff training, research, and materialsdevelopment, production and distribution programs; (b) an annualbudget; and (c) an annual plan for monitoring and data collection

* (paragraph 58).

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