Document ofThe World Bank

Report No: 18634-IND

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN OF US$54.5 MILLION EQUIVALENT

AND A PROPOSED CREDIT OF SDR 14.8 MILLION EQUIVALENT

TO THE

REPUBLIC OF INDONESIA

FORA

SUMATERA BASIC EDUCATION PROJECT

March 17, 1999

Human Development Sector UnitEast Asia and Pacific Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective 1998 - est.)

Currency Unit = Rupiah (Rp)Rp I = US$0.000125US$1.00 = Rp 8,000

SDR I = US$1.36202

FISCAL YEARApril I - March 31

ABBREVIATIONS AND ACRONYMS

ADB - Asian Development BankASEM - Asian - European MeetingBappenas - National Development Planning AgencyBappeda - Regional Development Planning Agency at Provincial (I) and

District (II) LevelsBKKBN - Family Planning AgencyBPKP - State Auditing AgencyBupati - District HeadBP3 - Parents Teachers AssociationCAS - Country Assistance StrategyCEM - Country Economic MemorandumCPCU - Central Project Coordinating UnitDaerah Percontohan - Pilot districts for local government autonomyDCC - District Coordination CommitteeDinas P&K - Local Government Office for Ministry of Education & CultureDinas I - Provincial - Level Office of Local GovernmentDinas II - District - Level Office of Local GovemmentDPIU - District Project Implementation UnitEAP - East Asia and Pacific Region, World BankFKIPs - Teacher Training Departments in UniversitiesGOI - Government of IndonesiaGTZ - German Development Agency (Gesellschaft fur

Technische Zusammenarbeit)IKIPs - Teacher Training InstitutionsJS - Junior SecondaryKabupaten - Official District DesignationKandep/Kanin - District - Level Office of Central GovernmentKanwil - Provincial Office of Central GovernmentKESRA - Coordinating Ministry of Health and Social WelfareKotamadya - Official City DesignationKPKN - State TreasurerMOEC - Ministry of Education and CultureMOHA - Ministry of Home AffairsMORA - Ministry of Religious AffairsMOSA - Ministry of Social AffairsNER - Net Enrollment RateNGO - Non-governmental OrganizationOECF - Overseas Economic Cooperation FundPimpro - Project DirectorPimbagpro - Sub-project DirectorPIP - Project Implementation PlanPODES - Potensi Desa (Village Census)PPIU - Provincial Project Implementation UnitPU - Ministry of Public WorksSA - Special AccountSekwilda - Secretary of Regional OfficeSKB - Surat Keputusan Bersama (Joint Governmental Decree)SMP Terbuka - Open Junior Secondary SchoolsSOE - Statement of ExpendituresSUSENAS - Socio-economic Household SurveyWalikota - City Mayor

Vice President: Jean-Michel SeverinoCountry Manager/Director: Dennis de Tray

Sector Manager: Alan RubyTask Team Leader: Brigitte Duces

INDONESIASumatera Basic Education Project

CONTENTS

A. Project Development Objective .................................................................. 21. Project development objective and key performance indicators ........................... 2

B. Strategic Context .................................................................. 2

1. Sector-related CAS goal supported by the project .......................................... 22. Main sector issues and Government strategy ................................................ 23. Sector issues to be addressed by the project and strategic choices ........................ 4

C. Project Description Summary .................................................................. 5

1. Project components .................................................................. 52. Key policy and institutional reforms supported by the project ............................ 73. Benefits and target population ................................................................. 74. Institutional and implementation arrangements ............................................. 8

D. Project Rationale .................................................................. 9

1. Project alternatives considered and reasons for rejection .................................. 92. Major related projects financed by the Bank and/or other development agencies..... 103. Lessons learned and reflected in proposed project design ................................ 114. Indications of Borrower commitment and ownership ..................................... 125. Value added of Bank support in this project ................................................ 13

E. Summary Project Analyses .................................................................. 13

1. Economic .................................................................. 132. Financial .................................................................. 133. Technical .................................................................. 134. Institutional .................................................................. 135. Social ............................................................... . . 146. Environmental assessment .................................................................. 147. Participatory approach .................................................................. 14

F. Sustainability and Risks .................................................................. 15

1. Sustainability .................................................................. 152. Critical risks .................................................................. 153. Possible controversial aspects .................................................................. 16

G. Main Loan Conditions ................................... 16

1. Effectiveness conditions ................................... 162. Other ................................... 16

H. Readiness for Implementation ................................... 17

I. Compliance with Bank Policies ................................... 17

Annexes

Annex 1. Project Design Summary .18Annex 2. Project Description .23Annex 3. Estimated Project Costs .27Annex 4. Economic Analysis .28Annex 5. Fiscal Impact Analysis .44Annex 6. Procurement and Disbursement Arrangements .52

Table A. Project Costs by Procurement Arrangements .52Table Al. Selection & Hiring of Consultants ................................ 55Table B. Thresholds for Procurement Methods and Prior Review .56Table C. Allocation of Loan Proceeds .57

Annex 7. Project Processing Budget and Schedule .64Annex 8. Documents in Project File .65Annex 9. Statement of Loans and Credits .67Annex 10. Country at a Glance ...................... 69

Map

IndonesiaSumatera Basic Education Project

Project Appraisal Document

East Asia and Pacific Region

Date March 17, 1999 Task Team Leader: Brigitte DucesCountry Manager/Director: Dennis de Tray Sector Manager: Alan RubyProject ID: ID-PE-40196 Sector: Education Program Objective Category: Poverty Reduction and

Human Resource Development/Institution BuildingLending Instrument: SIL Program of Targeted Intervention: [x ] Yes [ ] No

Project Financing Data [x] Loan [x] Credit [ Guarantee [ ] Other[Specify]

For Loans/Credits/Others:

Amount (US$m/SDRm): (IBRD Loan: US$54.5 million); (IDA Credit: SDR 14.8 million)Proposed terms: [ Multicurrency [x] Single currency, specify

Grace period (years): 3 (10) [] Standard Variable [x] Fixed [] LIBOR-basedYears to maturity: 15 (35)

Commitment charge: 0.75% (0.5%)Service charge: .. (0.75%)

Bank fee: 1%(..)

Financing plan (US$m):Source Local Foreign Total

Government 8.8 0.9 9.7CofinanciersIBRD 50.6 3.9 54.5IDA 18.6 1.5 20.1Other (specify)

Total 78.0 6.3 84.3

Borrower: Republic of IndonesiaGuarantor:Responsible agency(ies): Directorate General of Primary and Secondary Education, Ministry of Education and Culture;Directorate-General of Regional Development, Ministry of Home Affairs; Ministry of Religious Affairs

Estimated disbursements (Bank FYIUS$M): 1999 2000 2001 2002 2003 2004 2005

IBRD 1% Front end fee 0.545Annual 9.1 13.5 15.9 18.5 12.7 4.4 74.6

Cumulative 9.6 23.1 39.0 57.5 70.2 74.6

Project implementation period: 6 years Expected effectiveness date: 7/1/99 Expected closing date: 4/30/2006

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A: Project Development Objective1. Project development objectives and key performance indicators (see Annex 1):

In the provinces of Sumatera Utara, Riau, and Bengkulu:(i) To mitigate the effect of the economic crisis by:

* maintaining primary and junior secondary enrollment rates and transition rates from primary tojunior secondary for the poor;

* preventing quality from deteriorating further by ensuring that schools can meet essentialoperational and maintenance costs; and

* realizing efficiency gains wherever possible.

(ii) To support recovery and return to the medium-term education strategy of:* improving quality of basic education (grades 1-9); and* decentralizing educational planning, management and implementation effectively to districts

and below.

B: Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project (see Annex I):

CAS document number: 18963-IND Date of latest CAS discussion: March 9, 1999

The project supports the short-term strategy of reinforcing social safety nets:delivering basic education services to the poor by supporting poor students and schools througha successful back-to-school campaign (para. 36).

It also supports the medium-term:* emphasizing institutional strengthening in support of human resource development, greater

decentralization of education management and increased autonomy of schools (para. 49); and* improving basic education quality (para. 49).

2. Main sector issues and Government strategy:

Main sector issues

* Effect of the economic crisis on the education sector. The current economic crisis is expected tohave a significant negative impact on education participation by the poor, as well as the ability of schoolsin poor areas to operate. Higher food and transport prices coupled with increased unemployment andunder-employment are likely to threaten the living standards of many. Initiatives to ensure that access ofthe poor to basic education in the short run is not jeopardized and that quality of basic education does notsuffer even more, are necessary. Past experience in Indonesia (1986) has shown that the combined effectsof reductions in public expenditure on education, increases in school fees, and declines in private incomesresulted in a decline in school enrollment for the poor at the basic education level (Education inIndonesia: From Crisis to Recovery, 1998). Recent survey work suggests it is happening again.

* Ineffective institutional arrangements. A major constraint to achieving more and better high-quality basic education are the current institutional arrangements. The most important constraints are: (i)the splitting of responsibility for delivery of primary education among various government agencieswhich results in a lack of accountability for results; (ii) overly centralized management at the juniorsecondary level; (iii) little autonomy for principals and lower level managers and ineffective schoolmanagement; (iv) a fragmented and rigid budgetary process; (v) civil service incentive structures that donot reward good teaching practices and lead to an uneven allocation of teachers in schools; and (vi) little

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community involvement partly as a result of crowding out by the public sector. (Education in Indonesia:From Crisis to Recovery, 1998).

* Unsatisfactory quality of basic education. Graduates are leaving basic education with lownumeracy, reading and reasoning skills. In addition to the institutional factors identified above, thefollowing factors contribute to unsatisfactory student outcomes: (i) a large stock of poorly trainedteachers; (ii) inadequate time-on-task in all grades, but especially in grades 1 and 2; (iii) insufficientresources, particularly for schools in poor communities and for the large number of private juniorsecondary schools; (iv) low levels and quality of textbooks and materials; (v) ineffective curriculumimplementation and lack of student learning assessment tools; (vi) dilapidated and unsafe primary schoolbuildings; and (vii) insufficient monitoring and evaluation of quality. (Education in Indonesia: FromCrisis to Recovery, 1998).

* Low demand for junior secondary education by the poor and low primary completion rates.Even before the crisis, primary school completion rates in the project provinces were low (see Annex 4;Statistical Attachments); they are expected to decline because of the economic crisis . Factorscontributing to low completion rates are late entry and high repetition in the early years. Similarly, juniorsecondary net enrollment rates were low (Annex 4) and are particularly low for the bottom income groupsbecause of high direct costs and indirect costs of schools. Households' uncertainty about the benefits ofjunior secondary education in the labor market also reduces participation. From the public finance side,there are high resource costs for the government to expand access to junior secondary schools withoutprivate schools continuing to satisfy a large portion of the demand; in addition, there are inefficienciesrelated to teacher allocation and incentives, which make delivery of basic education more costly than itneed be. All these constraints are exacerbated by the current economic crisis.

Government Strategy

The Government of Indonesia's (GOI) objective at the basic education level is to have a system where:(i) all children successfully complete 9 years of education; (ii) management and delivery for basiceducation is in the hands of the local government (Bupati and her/his staff) but with strong monitoringand oversight by the Ministry of Education and Culture (MOEC); (iii) schools have more autonomy overtheir budgets and staff; (iv) teacher allocations and distribution would be more equitable and reflectactual needs, especially in rural areas, and would be supported by teacher incentives that reward goodteaching; (v) an ongoing in-service teacher training program of high quality is available for all teachers,including those in religious and private schools, and is strongly linked to the books and educationalmaterials that are used in the classroom; (vi) a planning process is active based on school mapping; and(vii) parents and communities actively participate in the schools in their area where they would beresponsible for the maintenance of their schools and would receive adequate rehabilitation funds.

The severity of the economic crisis has slowed down the achievement of these objectives. GOI hasresponded by formulating the following "crisis strategy" for the coming 1-3 years:

Crisis Strategy:Sustaining investments in basic education and shielding the poor from adverse consequences ofthe economic crisis. The Government has launched a five-year national "Back-to-School" program($390 million) to provide scholarships for the 17% poorest junior secondary school-age children andschool grants to 60% of primary and junior secondary schools serving poor communities starting July1998. The program is supported from funds provided by the ADB ($86 million) and the Bank ($296million). This project is expected to contribute $28 million of the World Bank share.

At the same time, GOI has revised the 1998/99 budget (June program) to include significantreallocation of public spending to basic education. The 1998/99 basic education budget has beenpreserved in real terms to 1996/97 levels.

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Medium-term Strategy:* Decentralizing delivery of basic education and enhancing interagency cooperation. GOI'sinstitutional strategy is to put the responsibility for service delivery closer to the community. This is partof an overall strategy to decentralize functions of central government, including education, to the districtlevel. In the districts piloted for the strategy starting in 1997 (through the Daerah Percontohan, DP,program), offices of line ministries were abolished and staff and resources transferred to the dinas (localgovernment office). In the case of education, kandep (MOEC office at district) was transformed into.inspection offices called Kantor Inspeksi or Kanin. The responsibility of implementing the basiceducation program was given to the Bupati (head of district) or Walikota (city mayor). At the SpecialAssembly of Parliament at the end of 1998, a Decree of MPR (RI No. XV/MPR/1998) was issueddelegating wide autonomy to the Regions and paving the way for further steps toward decentralization.The implementation of this decree is now under further, intensive discussion in Parliament.

* Improving quality. In addition to the provision of free textbooks for all primary and juniorsecondary schools and quality improvements, GOI has adopted various policies and implementedactivities for upgrading the quality of its teachers since the mid-1980s with varying degrees of success:pre-service training of primary teachers has been increased to a two-year postsecondary diploma (DII)and junior secondary teachers to a three-year postsecondary diploma (DIII). For junior secondaryteachers, an extensive in-service training program (PKG and MGMP) has been implemented with regulartraining and school visits by core teachers in each province. For primary schools, several pilots for in-service training are now in operation (primarily in the Primary Education Quality Improvement Project).GOI has also piloted some efforts to foster community participation in basic education. These efforts,while producing some gains, require further improvements and must now be rethought in terms ofresource availability in the coming few years of economic recession.

* Increasing access to junior secondary. In addition to abolishing fees and building additionalschools, GOI's pre-crisis strategy included: (i) providing scholarships to needy students; (ii) expandingalternative modes of junior secondary education (SMP terbuka and Paket B); and (iii) providingassistance to private schools in the form of matching grants, teacher secondments, and books andmaterials. The pace of the expansion will be slowed down now and resources are instead redirected tomaintain enrollments and transition rates through targeted scholarships.

3. Sector issues to be addressed by the project and strategic choices:

Of the sector issues discussed in Section 2, the project will address the following to varying degrees andat different time periods: (i) the adverse impact of the economic crisis on poor households' investment ineducation and poor schools' ability to operate; (ii) ineffective and overly-centralized institutionalarrangements; and (iii) unsatisfactory quality of basic education.

A schematic view of the structure of the project is provided in Attachment 1 of Annex 2. Initially, theproject would focus on crisis-relief activities, and gradually phase in the pre-crisis agenda as theeconomy recovers. During the first two years, the focus will be on keeping poor children in school andschools in poor communities operational. Hence, almost all project funds during the initial years wouldbe allocated to scholarships and school block grants.

At the same time, the crisis should not deflect attention from the medium-term agenda of institutionalreform. In addition to the long-term benefits of these reforms, many do not require large amounts ofresources to implement, hence can be undertaken in this resource-constrained environment. The maininstitutional issues addressed by the project are: (i) the splitting of responsibility for delivery of primaryeducation among various government agencies; (ii) the overly centralized management at the juniorsecondary level; (iii) the fragmented budgetary process; and (iv) little community involvement ineducation and ineffective school management.

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In addition, the issue of inefficient use of resources from the overabundance of primary school facilities(due to declining school-age group since the early 1 990s) will be addressed through the schoolconsolidation program required of every project district. Indeed, given the efficiency gains which suchconsolidation will achieve, this activity will be included among the priorities at the outset of the project.Beyond these reforms, additional ones are unlikely since these already constitute significant changes forthe education sector and it is important to focus on their successful implementation before introducingadditional changes.

Quality enhancing activities will be phased in as the economy recovers (expected by the second year ofthe project), and as districts show their readiness to implement these more complex and skill-intensiveactivities, Only a selection of quality issues will be addressed including: poor training of teachers(through in-service cluster-based training); poor conditions of primary schools (rehabilitation of schoolsby the community); low levels and quality of materials (additional financing and provision); ineffectiveschool management (selective training of principals and supervisors); problems with appropriatedistribution of teachers (contract teachers and incentives for rural areas, changes in teacher allocationformula, redeployment of teachers); lack of resources and teacher quality in private schools (throughmatching grants and teacher upgrading programs).

C: Project Description Summary

1. Project components (see Annex 2for a detailed description and Annex 3for a detailed costbreakdown):

Component Category Cost Incl. % of Bank- % ofContingencies Total financing Bank-

Li_(US$M) (US$M) financing1. Crisis Relief Scholarships, 28.2 33.4 27.5 97.5

Grants, Training,ProjectManagement

2. Institutional Development Goods, Training, 10.1 12.0 8.9 88.1ProjectManagement,Consultants

3. Quality Improvement Goods, 39.0 46.3 31.3 80.5Consultants,Civil works,Private SchoolGrants, Training

4. Project Management Goods, Training, 6.5 7.7 6.4 98.5Consultants,ProjectManagement

Loan Fee .5 .6 .5 100Total 84.3 100.0 74.6 88.5

The project components are based on district-prepared plans reflecting issues and priorities in thedistricts. Even though all provinces in Indonesia will receive crisis-relief interventions, the distribution ofthe scholarships and school grants are based on the incidence of poverty in each province and district.

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1. Crisis Relief

For the scholarships and grants program, about 17% (for Sumatera Utara), 12% (for Riau) and 15% (forBengkulu) of the junior secondary students will receive scholarships, against a national average of 16.1%. For the school grants, 37% of the schools in Sumatera Utara, 28% in Riau and 33% in Bengkuluwill receive grants, againts a national average of 40%. Poverty incidence in the the provinces is slightlybelow average for the country. Within Sumatera Utara, there are wide divergences in poverty, with somekabupaten (Nias, Tapanuli Tengah and Tebing Tinggi) with a poverty index 4 or 5 times as high as thekotamadya (Medan, Binjai or Tanjung Balai) or kabupaten Karo, Langkat or Labuhan Batu. Within Riau,while overall poverty is lower, there is an equally wide divergence between the kotamadya (Batam andPekanbaru) and some of the kabupaten (Indragiri Hulu and Indragiri Hilir), mainly in the swampy areas.Within Bengkulu, a smaller province, both in land area and in population, with only 4 kabupaten, there isless divergence in poverty.

2. Institutional Development

The project supports inter-agency district-based planning, management, and implementation of basiceducation in order to address the issue of scattered responsibilities and overly centralized operations. Atthe district levels, five-year and annual plans are prepared which integrate and coordinate the activities ofMOEC, MORA, BAPPEDA and Dinas P&K. Responsibility for implementing the plans rests with theBupati who heads an inter-agency implementing unit which he appoints. The project is funded throughone source of funds only (for more details on institutional arrangements, see Section C.4 below). Belowthe districts, the sub-districts are the focal point where location maps of primary and junior secondaryschools are prepared for use in school consolidation and better distribution of teachers. At the schoollevel, increased resources are provided in the form of block grants to encourage school autonomyincluding the functioning of school committees. The latter will be particularly important in selection andadministration of student scholarships and school grants (Component 1). Furthermore, communities willbe responsible for the rehabilitation of primary schools with funds going directly to them. Finally, thiscomponent supports the carrying out of organizational, staffing and other assessments of the capabilityand capacity of the different agencies at provincial, district and kecamatan levels to plan, budget andimplement basic education programs. Results of the assessments will be used to determine reallocation ofstaff between agencies with a view of strengthening local government agencies (Dinas P&K, BAPPEDA).

3. Quality Improvements

Teacher Training Program. One of the key elements for quality improvement is the in-service teachertraining program. The teacher support system in mainland areas works with the school clusters,consisting of groups of closely located schools, where regular teacher meetings are held after schoolhours, to develop teaching materials, discuss problems, and prepare class activities. This model does notwork well in remote and scarcely populated areas, such as in the islands of Riau Province. A pilot "islandtraining model" is being supported in Riau, with teacher tutors visiting island schools, supported withmore in-depth teacher training once a year in the district capital. For private religious schools, mostschools do not have qualifications, and the project will support teacher up-grading and certification.

School Consolidation, and Rehabilitation. A primary school rehabilitation program will be supportedwhich provides funds directly to communities to utilize for that purpose.

Teacher Deployment. The project will support the provision of approximately 1500 contract teachers forjunior secondary schools in remote rural areas. In addition and on a limited basis, incentives such asteacher housing, relocation costs and other such programs will be supported to relocate teachers to remoterural areas. At the national level, a Policy Reform Working Group on Teachers will be supported whichwill evaluate current teacher workforce issues, including deployment policies and incentives, and proposealternatives to the current system.

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Private School Grants. Based on proposals from schools, matching grants will be provided to privateschools for rehabilitation of school buildings, and provision of equipment and furniture.

2. Key policy and institutional reforms supported by the project:

* A substantial increase in support to the poor in the community, to ensure enrollment of their childrenin basic education. A substantial expansion of the school grants for the poorest schools, whereparental financial support is minimal. Involvement from communities and NGO's in the delivery andmonitoring of these programs.

* A decentralized institutional framework for the management and delivery of basic education, withintegrated planning by the different agencies involved in basic education, and increasingimplementation responsibilities by local government. One implementing unit only will be created atthe district level drawing from the different relevant agencies and headed by Bupati. Only one sourceof funding is used in the project. Involvement by parents and communities is actively sought.

* A long-term plan for a more efficient and effective teaching force. For the short-term, someimportant prerequisites would be addressed in this project such as changing the teacher allocationformula from one that is school-based to a pupil-based allocation ratio, and incentives offered forteaching in rural and remote schools.

* Increase of support to private schools to ensure an increase in their quality in the form of matchinggrants.

* A school rationalization plan based on school mapping activities, to ensure that underused schools arestreamlined and consolidated if possible, and that new school buildings are optimally placed.

3. Benefits and target population:

Benefits:

(1) Crisis Relief- children remaining in school (through scholarships to 260,000 junior secondary school

children and school fee relief to 825,000 primary school children)- schools remaining operational (through grants to 5,500 primary schools and 1,300 junior

secondary schools);

(2) Institutional Reform* greater ownership of basic education by the local community;* a more integrated and better run education system;* more efficient and equitable distribution of teachers;

(3) Quality Improvement* more effective schools, with increased student achievement;* more effective and skilled education personnel.

Target population:* school-age children, especially poor children who would be able to remain in school during

the worst crisis period; and have better quality schooling subsequently;* teachers, principals, supervisors, tutors and other education personnel at the district level and

below who would gain increased skills and resources;* Communities and parents who would become more closely involved with the schools in their

areas.

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4. Institutional and implementation arrangements:

The project would be implemented in phases in the project provinces. During the crisis period, thescholarships and school grants program would be implemented in all districts in all seven provinces. Theother project components would be implemented gradually during subsequent years as economicconditions improve in Sumatera Utara, Riau and Bengkulu, and depending on the readiness of eachdistrict and the capacity at the provincial level. Most project activities would be implemented at thedistrict level, although the province would also carry responsibility for certain project activities (e.g.,design and development of the teacher in-service training program, monitoring and evaluation).

(a) For the Crisis Relief Component

For the scholarships and grants program, the financing will come from several World Bank projects(junior secondary education and other basic education projects) and from the ADB. For this component,the project would follow the organizational arrangements of the overall scholarships and grants program.This includes a Central Coordination Project Unit (CPCU) responsible for overall program coordinationand represented by the three main implementing agencies (MOEC, MORA and MOHA) and reports to theCentral Steering Committee. Province and district-level Coordination Committees (PCCs and DCCs),chaired by Bappeda, will be responsible for selection and targeting, training of educational staff in theprogram and program administration. School Committees will be responsible for selection of scholarshiprecipients. These Committees will include heads of various agencies (MOEC, MORA, MOHA, MOF,MOSA, Sekwilda, Post Office, Dinas P&K, KESRA, BKKBN, and PU) and members of civil society andNGOs.

(b) For the other Components

A joint ministerial decree (SKB) has been agreed upon and signed by MOEC, MORA, MOHA,providing the organizational structure for delivery of basic education at the district level. The SKB bringsthe various agencies together under one umbrella for planning, budgeting and implementation of basiceducation. This process begins at the district level, with each district preparing its medium-terminvestment plan (5 years) based on an analysis of its education problems and identification of priorities.In addition, the SKB calls for the rehabilitation of primary schools to be carried out by the schoolcommittees (with community representation).

For project implementation a single District Project Implementation Unit (DPIU) is established drawingupon staff from the three concerned implementing agencies (Dinas P&K, Kandep Dikbud, KandepAgama) and in adequate numbers to provide the necessary technical expertise to implement the project.The Bupati appoints the three main heads of the DPIU (project manager, treasurer, secretary), one fromeach agency, by signing and issuing their letters of appointments, thus ensuring that this unit reports to theBupati and he/she is accountable. The three main heads and the technical staff of the DPIU will bechosen from the three implementing agencies based upon recommendations from heads of thedepartments. The Minister of Education and Culture delegates to the Bupati the authority to appoint theproject staff, thus reinforcing the role of local government, while at the same time not relinquishing therole of the central government (if Bupati does not deliver, the Minister has the authority to withdraw thedelegation).

At the provincial level, a Provincial Project Implementing unit (PPIU) is established in the Kanwil withstaff appointed by the Ministry of Education. It similarly draws upon staff from the three concernedagencies in adequate numbers.

At the central level, a Central Coordinating Project Unit (CPCU) is established for overall programsupport, technical assistance, monitoring and evaluation, and financial management.

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At the provincial and district levels, Coordination Committees (PCC and DCC) and at the central level, aSteering Committee (CSC) are established for policy making, guidance, and coordination. These unitsare the same as those already established for the national scholarship and block grants program (seeabove).

Only one source of funding (DIP), which goes directly to the DPIU, PPIU, or CPCU (as needed), will beutilized in the project.

For planning and budgeting, overall project plans and annual plans will be developed at the districtlevel, under the coordination of the Bappeda II, integrating the different agencies involved in BasicEducation: kandep MOEC, kandep MORA, Dinas P&K II and Bupati's office. The plans will bereviewed and signed off by the Bupati in each district, who will be responsible for ensuring thatimplementation is carried out adequately. At the provincial level, plans will be reviewed by each of theagencies at Level 1, and the integrated plans sent through the Governor's office to the national level-

D: Project Rationale

1. Project alternatives considered and reasons for rejection:

• A crisis-relief only project. One alternative is to design a project only for crisis-relief and wait untilconditions are starting to return to normal before initiating a quality and access expansion project.The decision on one project which includes both crisis interventions and other programs will allowgreater flexibility during the project to phase in activities, as they are needed. It also maintains thestrong district and province focus.

* Different financing options to mitigate the impact of the crisis. Cross-country experienceindicates that scholarships can be an effective means of enabling the poor to attend school (DemandSide Financing, World Bank 1997), while school grants are more effective in increasing schoolparticipation and autonomy. In the project, block grants to schools have been chosen as the preferredoption to maintain enrollment at the primary level, while at the junior secondary level, a combinationof scholarships and school grants have been selected. A scholarship program for primary studentswas rejected since the scale of such a program would quickly become too unwieldy to manage,implement and monitor. Instead, schools are given guidelines that include allocating a certainproportion of the block grant to defray the costs of education for those who cannot afford it, therebypromoting the school's autonomy and flexibility to find local solutions.

* Planning, budgeting and implementation at the national instead of district level. While projectpreparation may seem more manageable if carried out at the national level, it creates a lack ofownership at the lower levels. Moreover, as project design is expected to reflect local needs, districtlevel involvement is essential. There are, however, costs to this preferred approach. There is a highlearning curve for the districts since they have no prior involvement in processes of this kind. Othercountry experience, as well as Indonesia's experience in other sectors indicate that the potentialbenefits of decentralization, however, outweigh the potential costs.

* Involvement of one sectoral agency instead of multiple agencies. A single agency project couldresult in easier implementation. However, it would strengthen the divide between the Ministries ofEducation and Culture, Home Affairs, and Religous Affairs, which has been a deterrent to achievinggood quality basic education. For the preferred alternative to work effectively, clearly allocatedresponsibilities among different agencies and levels of government is critical. Mechanisms andincentives for coordination should also be built into project design.

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Excluding private schools. There are a large number of private schools (muhammadyah, pesantrenand catholic), especially at the junior secondary. Quality in these schools is low, with more severeteacher shortages and low teacher skills, poor building construction and maintenance and a severelack of books and materials. Maintaining the viability of these schools is important because they areattended by children from low-income families and are often the only alternative available in ruraland remote areas. To raise the quality of private schools, and to serve the poor, these schools havebeen included in the project, with some targeted programs for quality improvements.

2. Major related projects financed by the Bank and/or other development agencies (completed, ongoingand planned):

Sector issue Project Latest Supervision (Form 590)Ratings

(Bank-financed projects only)Implementation Development

Progress (IP) Objective (DO)

Bank-financedPrimary education quality Primary Education S S

QualityImprovementProject (Loan 3448)

Secondary education quality Second Secondary S SEducation ( 3158)

Junior secondary education quality and East Java/NTT S Saccess; management deconcentration of Junior Secondaryjunior secondary education Education (4042)

Central Indonesia S S(4062)

Sumatra (4095) S S

Teacher training quality and teacher Primary School S Sdistribution Teacher

Development(3496)

Secondary School S STeacherDevelopment(3979)

Textbooks and reading promotion Book and Reading S SDevelopment(3887)

I1

Decentralization and deconcentration West Java Basic NA NAin management of basic education; Educationbasic education quality and expansionin access to junior secondary education South Sulawesi and

Eastern Islands NA NABasic Education

Other Development AgenciesOECF Junior secondary school Junior Secondarybuilding Education

ADB Junior secondary education Junior SecondaryEducation

ADB Private junior secondary Private Junioreducation Secondary

Education

ADB Primary and junior secondary Basic Educationeducation (MORA)

ADB Social Protection Sector Loan Social ProtectionSector DevelopmentProgram

IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (HighlyUnsatisfactory)

3. Lessons learned and reflected in the project design:

From Indonesian Education and the World Bank: An Assessment of Two Decades of Lending (OEDDoc. No. 9752, 1991):

X Decentralized institutional capacity building is basic to the long-term goal of increasing theself-sufficiency of the education system.

* Previous projects, mainly national in scope, were either overly complex or underestimatedabsorption capacity, resulting in unsatisfactory implementation.

From the Primary Education Quality Improvement Project (PEQIP, Loan 3448-IND)* The main elements for quality improvement are: a decentralized and participatory in-service

teacher training program; reliance on school clusters and mutual support of teachers;significant community participation; sufficient quantity of textbooks with increased teacheruse of books and materials; and close MOEC-MOHA cooperation.

From the Village Infrastructure Project for Java and the Second Village Infrastructure Project (VIPand VIP II, Loan Nos. 3888-IND and 4100-IND)

* Though varied, community capacities are nearly always higher than official sources initiallybelieve.

* Effective use of local organizations require giving them resources and responsibilities.* Most Indonesian communities can satisfactorily manage simple administration, procurement,

and bookkeeping, and can comply with national standards provided they are given formats.

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* There are benefits to be gained in giving higher credibility to local governments, provincialand district administrations.

* Efforts to enhance institutional capacity of local governments need to be coupled with effortsto enhance human resource capacity.

* Although there may be in principle a strong commitment to decentralize on the part of thecentral government, the actions of central government are often not in line with theprinciples underlying decentralization.

* There is a need to ensure that decision-makers at the local level have access to educationability and competence, and make decisions accordingly, rather than as a result of politicalconsiderations.

From the Secondary Education Project (Loan No. 2472-IND) and the Second Secondary Educationand Management Project (Loan No. 3158-IND)

* Changes and improvements to schools are very difficult to manage from the central level,because they tend to be global solutions and are often not appropriate to local conditions.

* Local communities contribute significantly to the development of education in their ownareas. Stakeholders and clients are also well placed to evaluate project outcomes. They knowwhen children are learning and how investments in schools are being used. Stakeholdersinvolvement is critical to fully measure project outcomes, to understand how a project isunfolding and to help develop appropriate corrective measures when necessary.

From the Community Participation In Planning and Management of Educational Resources Project(COPLANER) (UNDP)

- There are advantages to be gained from an expanded role of local government in theprovision of and support for educational services, especially in the Indonesian context,where cultural and ethnic differences are best taken into account when action is closer tohome.

- There is considerable evidence that community organizations substantially increased theextent and character of community contributions to education,

- Project activities successfully brought together local government and non-governmentcommunity leaders as member of the community organizations. This enabled thedevelopment of common goals and actions.

4. Indications of Borrower commitment and ownership:

Commitment to Crisis Relief The national "Back-to-School" Program, which was launched by thePresident on June 29, consists of a coalition of Ministers from Education and Culture, Religious Affairs,Population, Home Affairs, Bappenas, and is led by the Coordinating Minister for Social Welfare. This isa strong indication of GOI's commitment at the highest levels to mitigate the impact of the economiccrisis on the poor. In addition, GOI's agreement in the revised June budget to preserve allocations forbasic education to the 1996/97 levels in real terms is another sign of its support for crisis relief programs.

Commitment to a more decentralized and multi-sectoral system to deliver basic education isdemonstrated through the preparation and signing of the joint decree (SKB) between MOEC, MORA andMOHA on October 27, 1998 prior to project approval.

Over the medium term, GOI is committed to achieving universal enrollment for basic education as soonas conditions return to normal and to ensure a good quality basic education for all.

13

5. Value added of Bank support in this project:

* The Bank has been the driving force behind the National "back-to-school" program bringing togetherother multi-lateral and bi-laterial donors.

* This project is part of an overall program for crisis relief, and basic education quality improvementssupported by the Bank.

* The Bank can act as an effective catalyst in improving coordination between government agencies.* The Bank will bring to Indonesia's benefit its experience in decentralized, district-based education

project design, implementation, and evaluation in other large and populous Asian countries (India andChina).

* Technical experience and lessons learned gained from other education sector capacity developmentprojects, especially in planning, evaluation and improving primary school quality.

E: Summary Project Analysis (Detailed assessments are in the project file, see Annex 8)

1. Economic (see Annex 4):

[X] Cost-Benefit AnalysisThe reverse-switching method of cost-benefit analysis indicates that the benefits of the primaryquality component far exceed the cost and yields a social return of at least 10 percent in bothSumatera Utara and Bengkulu, even though less so in Riau. In the case of the junior secondaryquality component, social returns of at least 10 percent can be enjoyed when graduates switch out ofthe agricultural sector into other sectors. See Annex 4 for assumptions, methodology andestimations.

[X] Cost Effectiveness Analysis[X] Other: Economics of scholarships and school grants.

2. Financial (see Annex 5): Fiscal impact analysis

3. Technical:

* The scholarships and school grants program requires adhering to a selection and targetingmechanism for poor students and poor schools. The mechanism needs to be simple tofollow and effective in reaching the poor. District Committees and schools throughouteach province need to be trained annually. Public awareness needs to be raised in a mediacampaign. Effective monitoring needs to be in place. These issues have been discussedand agreed upon with GOI. (see Annex 4 on design of selection and targeting, andmonitoring and evaluation).

* Special programs need to be developed for schools on remote islands such as a differentteacher training model, employment of contract teachers, and incentives for teachers in theseareas. (see Annex 8 for Guidelines developed for each program).

* In order to ensure more local accountability and involvement in education, primary schoolrehabilitation is to be carried out by communities. Guidelines spelling out rehabilitationprocedures and a system of support from field engineers have been developed (see Annex 8for Guidelines for rehabilitation of SD/MI schools).

4. Institutional:

* An institutional framework for education management at the district level was developed forimplementation in the project, with agreements reached between the key agencies involved.This framework will be implemented during the project and adjusted if needed (see Annex 8).

* Existing financial systems and internal controls at the CPCU and provincial and district

14

levels will be reviewed. Results of the review will be used in the design of appropriatesystems, including development of documented procedures for project accounting andreporting at the CPIU, PPIUs, and DPIUs. There is limited experience and possiblyinadequate staff skills to carry out the financial management of the project. Appropriatetraining is provided under the project.

* Based on assessments done during project preparation (see Annex 8. Building InstitutionalCapacity Working Paper) district-level capacity for project implementation was found to bemixed. The capacity building programs in the project will be responsive to the weaknessesfound.

5. Social:

* To maintain the pre-crisis gender equality in enrollments at the basic education level,approximately 50% of the recipients of the junior secondary scholarships would be girls.

* Other social risks relate to consolidation of schools which will necessitate transferring ofteachers and principals and will likely generate resistance. Incentives will be awarded totransferring to rural/remote areas.

* While the areas covered by the project include some vulnerable isolated groups, the projectis not establishing new schools and hence no particularly negative impact from the project isexpected on these groups. Quality improvements in schools will provide positive impact.

6. Environmental assessment: Environmental Category [ ] A [ ] B [x] C

7. Participatory approach [key stakeholders, how involved, and what they have influenced; ifparticipatory approach not used, describe why not applicable]:

a. Primary beneficiaries and other affected groups:

Parents Associations, school managers and school committees (consisting of at least 50% civilsociety) are involved in implementation, primarily in the crisis relief component and in therehabilitation and maintenance programs of primary schools.

Institutions at the local government level (MOEC, MOHA, MORA, and Bappeda) whosecontribution and involvement in planning and implementation was largely executive, will take ongreater planning and management responsibilities.

Private school Yayasans (Associations) will be actively participating and implementing theproject activities intended for private schools.

b. Other key stakeholders:

Civil Society representatives including NGOs will form 50% of the district committees which willselect scholarship and block grant recipients. They will also be involved in the monitoring of thescholarship and block grant programs.

Teacher training institutions (IKIPs) will contribute staff and resources to the in-service teachertraining programs.

Other donors (OECF, GTZ, ADB) who also work in basic education have been extensivelyconsulted and their staff are participating in project preparation. For the scholarship and schoolgrants program, the Bank is leading a multi-donor effort, including the Asian Development Bank(ADB), UNICEF, UNDP and bilateral agencies (AusAID, ASEM and the British Council).

15

F: Sustainability and Risks

1. Sustainability:

The fiscal impact analysis (Annex 5) indicates that even though during project lifetime, the fiscalimpact reaches as high as 40 percent of provincial education budgets, after the project is completed itsrecurrent cost implications are not high (as a percent of the provincial education budgets of NorthSumatera, Bengkulu, and Riau, recurrent costs are 6, 5 and 5 percent, respectively). This is because: (i)crisis-relief activities are not expected to continue beyond project lifetime at such high levels of coverage(17% of junior secondary students, 40% of primary and junior secondary schools); and (ii) maintenancelevels of teacher training programs will be much reduced.

2. Critical Risks (reflecting assumptions in the fourth column ofAnnex 1):

Risk Risk Rating Risk Minimization Measure

Annex 1, cell "from Outputs to Objective"

A worsening economic situation forces large H The scholarship and block grantnumbers of children out of schools. program has been substantially

expanded, but may not be enough.

Public expenditure on basic education erodes during S The 1998/99 basic educationadjustment period. expenditures have been maintained at

1996/97 levels in real terms.

Annex 1, cell "from Outputs to Objective"

Political will and commitment to make M Overall, GOI is strongly committed todecentralization work is weak at central, provincial decentralization to the district level andand district levels. has taken some appropriate initial steps

(necessary decrees are in place). Staffin MOEC, however, will need todevelop increased commitment to thedecentralization agenda.

Bupati does not take responsibility for the delivery S Some Bupatis will take this task veryof basic education in the district and does not ensure seriously and will take on thethat interagency cooperation works. responsibility for good-quality

education in their district; there will besome Bupatis whose concern will notbe adequate. The project will introduceincentives (such as, awards scheme,increased technical assistance whereskills are weak, and publishing ofdistrict performance indicators tointroduce competition among Bupatis.

Delay in providing counterpart funds in sufficient S During crisis condition, Bank cost-amounts. sharing ratio will be high for education

projects.

SKB (decree) on planning, budgeting and M&E is M SKB was produced with the extensivenot fully accepted by all agencies as interim solution involvement of all agencies and reflectsand implemented accordingly. their interests as much as possible.

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Scholarships/grants are directed elsewhere. S The project will implement a strongmonitoring program, using NGO's, anational media-campaign, and involvecivil society and NGO's in the districtcommittees.

SD School Building Operations and Maintenance M School operations and maintenanceProgram is not implemented and adhered to. program forms part of the project;

appropriate procedures will bedeveloped, including additional trainingif necessary.

Overall Risk Rating SRisk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligible or Low Risk)

3. Possible Controversial Aspects:

Risk Type of Risk Risk Minimization MeasureI Risk Rating I

GOI implementation of decentralization strategy G S Explicit decrees will need tobe in place starting with theSKB (signed atnegotiations).

Teacher allocation and distribution programG S The project supports

incentives for teachertransfers, including toremove areas.

Type of Risk - S (Social), E (Ecological), P (Pollution), G (Governance), M (Management capacity), 0 (Other)Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligible or Low Risk)

G: Main Loan Conditions

1. Effectiveness Conditions:

The establishment of Provincial and District Project Implementation Units (PPIUs and DPIUs) in theproject provinces and the first group of districts, respectively.

2. Other [classify according to covenant types used in the Legal Agreements.]:

The Borrower shall:

1. establish and maintain at the district levels DPIUs in the first group of districts by effectiveness (seeabove), by May 1, 2000 DPIUs in the second group of districts, and by May 1, 2001 DPIUs in the thirdgroup of districts.

2. no later than December 31, 2000 for the first group of districts, June 1, 2001 for the second group ofdistricts, and June 1, 2002 for the third group of districts, carry out a review of the terms of reference ofDINAS P&K staff, revise the TORs as necessary for the decentralization of further educationresponsibilities to local government, and thereafter maintain DINAS P&K with competent staff inadequate numbers.

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3. prepare consolidation plan for primary schools no later than: June 1, 2000 for the first group ofdistricts, June 1, 2001 for the second group of districts, and June 1, 2002 for the third group of districts;and thereafter carry out such plans.

4. prepare plans for the training and deployment, as teachers or administrators, of school principalsdeclared redundant due to school consolidation no later than: August 1, 2000 for the first group ofdistricts, August 1, 2001 for the second group of districts, and August 1, 2002 for the third group ofdistricts; and thereafter carry out such plans.

5. furnish to the Bank the annual budgetary and technical plans by October of each year, startingOctober 1, 1999; and thereafter carry out the plans.

6. prepare guidelines for the deployment of primary school teachers no later than December 1, 2002;and thereafter deploy teachers accordingly.

7. prepare a proposal for the funding of operation and maintenance at primary schools by February 1,200 1; and thereafter carry out an action plan for O&M funding.

8. grants and scholarships will be provided in accordance with procedures and conditions, acceptable tothe Bank.

H. Readiness for Implementation[] The engineering design documents for the first year's activities are complete and ready for the start ofproject implementation. [X] Not applicable.[X] The procurement documents for the first year's activities are complete and ready for the start ofproject implementation.[X] The Project Implementation Plan has been appraised and found to be realistic and of satisfactoryquality.[I] The following items are lacking and are discussed under loan conditions (Section G):

I. Compliance with Bank Policies[X] This project complies with all applicable Bank policies.[ ] [The following exceptions to Bank policies are recommended for approval: The project complies

with all other applicable Bank policies.]

Task Team Leader/Task Manager: s,)4 z =_/Fr~igtte Duces

Sector Manager/Director: _ _ _ _ _ _Alan Ruby

Country Manager/Director: _ _ _ _ _ _ _ _

Dennis de Tray

18

Annex 1

Project Design Summary

Indonesia: Sumatera Basic Education Project

Narrative Summary Key Performance Indicators Monitoring and Evaluation Critical AssumptionsSector-related CAS Goal: (Goal to Bank Mission)Maintenance and eventual 1. Average gross enrollment L.&2. Independent (Not applicable)increase in the equitable mix rate (APK) over the life of the monitoring report (sample-(poverty/gender/ regional) and project equal to 96/97 rates. based surveys). Annuallyquality of students graduating SUSENAS (Socio economicfrom basic education (1-9). 2. Average transition rates national survey)

(SD-STLP) over the life of the MOEC/MORAproject equal to 1996/97 levels, administrative data.

3. 90% of targeted schools 3. Independent monitoringremain open over the life of the report. Annually.project. (Except for thoseimpacted by consolidation).

4. Extent to which schools are 4. School managementmanaged effectively. study.

5. More focused planning 5. CPCU and provincialprocesses adopted. monitoring reports (sample(Assessment criteria to be based survey).determined).

6. Teacher/student and 6. Province and districtteacher/school ratios move statistics. Annually.toward the district mean.

7. Significant improvements in 7. NEM data.NEM scores between first andfifth year of project.

8. 10% increase from base line 8. Test scores from Impactin student test scores over the Evaluation. Baseline in yearlife of the project. one, mid-term and end of

project.Project Development (Objective to Goal)Objective:I. To mitigate the effect of the I. Block grants used according I. Independent monitoring 1. A worsening economic

economic crisis on basic to guidelines. (75% in year 1; report (sample-based situation forces largeeducation enrollment and 80% in year 2; 85% in surveys). Annually. numbers of children out ofoperation of primary and junior subsequent years.) schools.secondary schools.

2. To support recovery and 2. Percentage of scholarships 2. Independent monitoring 2. Public expenditure onreturn to the medium-term reaching the poorest students. report (sample-based basic education erodeseducation strategy of quality (85% in year 1; 90% in year 2; surveys). Annually. during adjustment period.improvement. 95% in subsequent years.)

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3. Improved assessment score 3. PCC assessment of districton each annual plan submitted. plans. Annually.(Assessment criteria to bedetermined.)

4. School mappings of 4. Provincial assessment ofimproved quality (Assessment district plans.criteria to be determined.)

5. 100% of all reports 5. CPCU, provincial andproduced on time. district committee reports.

6. Improved classroom 6. School supervisors andinstruction (Assessment criteria provincial monitoring reportsto be determined.) (sample based surveys).

7. Percentage of schools 7. CPCU, provincial andrehabilitated are done so in district committee reports.accordance with technical Annually.specifications. (85% in year 1;90% in year 2; 95% insubsequent years.)

8. Targeted teacher vacancies 8. CPCU, provincial andfilled in areas with shortages. district committee reports.

9. 75% of contract teachers 9. Provincial and districtfulfill three year contracts. committee reports. End of

Project.

10. Private schools (that 10. CPCU, provincial andreceived matching grants) district committee reports.developed according to plans.

I1. Growth in the number and 11. District committeequality of community activities reports.to support schools.(Assessment criteria to bedetermined.)

12. Number of books and 12. School supervisors andteaching aids distributed that provincial monitoringare used. (Assessment criteria reports.to be determined.)

13. 75% of MI and MTs 13. CPCU, PCC and DCCteachers that undertake formal monitoring reports.upgrading complete training by Annually.the end of the project.

Outputs: (Outputs to Objective)1. Crisis Relief Activities 1.1 95% of scholarships 1.1 Independent monitoring 1.1 Political will and

delivered to students within 45 report (sample-based commitment to makedays of receiving funds (60 surveys). Twice a year. decentralization work is

20

days for remote areas). weak at central, provincialand district levels.

1.2. Bupati does not take1.2 95% of block grants 1.2. Independent monitoring responsibility for thedelivered to schools within 45 report (sample-based delivery of basic educationdays of receiving funds (60 surveys). Twice a year. in district and does notdays for remote areas). ensure that interagency

cooperation works.2.1 Number of coordination 2.1 Provincial and districtmeetings at district level. committee reports.

2. Institutional Reform of (Expressed as a percentage ofAgencies Responsible for those planned).Basic Education

2.2 Number of district and 2.2 Provincial and districtsub-district managers trained. committee reports.(Expressed as a percentage ofthose planned).

2.3 Number of district 2.3 Provincial and districtcomparative studies (studi committee reports.banding) completed.(Expressed as a percentage ofthose planned.)

3.1 95% of planned training of 3.1 CPCU, PCC and DCCteachers/school monitoring reports.principals/supervisors/library Annually.teachers/school committeestakes place as planned.

3. Quality Improvements in 3.2 80% of planned school 3.2 Provincial and districtPrimary and Junior Secondary rehabilitation completed. committee reports. CPCUSchools monitoring reports.

3.3 95% of private school 3.3 Provincial and districtgrants issued as planned. committee reports. CPCU

monitoring reports.

3.4 95% of planned number of 3.4 Provincial and districtteachers contracts issued. committee reports. CPCU

monitoring reports. Twice ayear.

3.5 95% of planned teachers 3.5 Provincial and districtreceiving incentives are committee reports. CPCUdistributed. monitoring reports.

3.6 95% of planned formal 3.6 Provincial and districtupgrading of public and private committee reports. CPCUMI and MTs teachers takes monitoring reports.place as planned. Annually.

3.7 90% of planned books and 3.7 Provincial and districtteaching aids delivered to committee reports. CPCUschools. monitoring reports

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3.8 100% of gugus grants 3.8 Provincial and districtdistributed (within 30 days of committee reports. CPCUsubmission of annual plans). monitoring reports

Project Activities (Components to Outputs)Component 11.1 Scholarships for poor US$28.2 1. Delay in providingstudents. counterpart funds and in

sufficient amounts.1.2 School Grants for poorprimary and junior secondary 2 SKB (decree) onschools planning, budgeting and

M&E is not fully acceptedComponent 2 by all agencies as interim2.1 Developing and adopting a US$10.1 solution and implementedsupporting policy framework accordingly.and legislation fordecentralization of basic 3. District medium termeducation. plan for development of

basic education is of poor2.2 Developing integrated quality and not "owned" byannual plans and budgets for all agencies involved.development of basic educationby districts, with active 4. The right staff are notcommunity involvement, and sent to the trainingbased on school maps. programs.

2.3 Assessing capacity andneeds at district and provincelevel.

2.4 Building capacity atprovincial and district levelsincluding: changes inincentives, technical assistance,and training.

2.5 Rationalization/consolidation of primaryschools.

2.6 Establishing a multi-levelmonitoring and evaluationmechanism.

Component 33.1 Community-managed US$39.0primary school rehabilitationand maintenance program.

3.2 School-cluster basedteacher training program.

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3.3 Improved teacherdistribution (selection andplacement, transfers,incentives, contract teaching)

3.4 Improved schoolmanagement (schoolautonomy, school principalselection and training).

3.5 Availability of teachingand other materials.

23

Annex 2Sumatera Basic Education Project

Project Description

Initially, the project will focus on crisis-relief activities, until the worst of the economic crisis haspassed, with a gradual return to the pre-crisis agenda, as the economy recovers. (See attachment I to thisAnnex). During the first year, the project focus will be as follows:

* support to the junior secondary school scholarship program, covering from 12% to 17% ofthe students;

* support to the school grants program for primary and junior secondary schools;* continue to support the medium-term agenda of institutional reform, to the extent possible.

These reforms may not require large amounts of resources to implement and will lead to amore efficient and cost-effective delivery of education in the long term.

Starting from the second year, issues of quality in basic education will gradually be introduced:

* community support activities;teacher training, especially of low-cost in-service training programs, and procurement oflimited teaching materials;

* primary school rehabilitation; and* programs to improve the distribution of teachers.

Project Component 1 - US$28.2 million (total cost of component including contingencies)

Crisis Relief

The project would support the national scholarship and special assistance fund program, designed to assistpoor students and schools serving poor communities during the economic crisis. The project wouldsupport the program in the three provinces. Scholarships would be provided to about 17% (for SumateraUtara), 12% (for Riau) and 15% (for Bengukulu) of the poorest students in junior secondary school, forthe three years of schooling. School grants would be provided to 37% (in SumateraUtara), 28% (in Riau)and 33% (in Bengkulu) of the primary junior secondary schools serving the poorest communities.Identification and selection of the schools would be done according to the criteria established for theoverall program and in accordance with the agreements with the World Bank and the ADB and asdescribed in Annex 4.

The program is based on a set of principles that have been agreed between the Government, the Bank andthe ADB. These principles will guide the implementation of the program.

* scholarships would be provided to poor students and families;* special assistance funds would be provided to schools serving poor communities* funds would be available by the beginning of the new school year;* the Program should be implemented with the lowest overhead possible;* the Program should be financially sustainable, bearing in mind the competition with other

poverty programs and shrinking budgets;

24

* scholarships and special assistance funds should be entirely in the form of money and no part ofit should be in kind;

* scholarships and special assistance funds should flow directly from the center to the recipient bythe most direct route possible;

* the Program should be as simple as possible, to be easily understood by everyone and be easilyexplained in a media campaign; and

* the Program must be monitored judiciously.

The program is supported by an intensive and repeated training effort of head teachers and provincial anddistrict officials, to ensure knowledge of the scheme and of the procedures; by a national media campaign,to ensure that parents are aware of the program and do not withdraw their children out of ignorance, andby a monitoring and evaluation program. The project would also partly support these costs. Itemseligible for financing under the school grants are specified in Annex 6.

Project Component 2 - US$ 10.1 million (total cost of component excluding contingencies)

Institutional Reform

Districts, subdistricts and schools should be able to manage their responsibilities for delivery of basiceducation more skillfully. This means: (i) being able to plan more effectively the education activitieswithin their district; (ii) manage the education program in an integrated way between the differentagencies; (iii) be skilled in and use appropriate techniques for planning and implementation; (iv) assignstaff according to needs and skills, transfer if required, and retrain if needed; and (v) carry out targetedactivities, involving communities, to make them more aware and participating in school affairs.

Some project activities will be implemented by all districts; they are: (i) based on school mapping,development of a multi-year plan of school rationalization and consolidation in each district, that wouldresult in a better organization of staff and functions, including needed staff transfers; and (ii) capacityassessment of staff at district level in the offices of MOEC, MOHA, MORA and Bappeda, with anevaluation of training requirements and determination of staff reallocation between agencies with a viewof strengthening local government.

Some project activities will be implemented, as needed by the districts and will be financed uponapproval of satisfactory proposals: (i) District-level training proposals, based on annual budgets. Thetraining proposals would be presented for the district as a whole, in an integrated way. (ii) District-levelsupport for project planning and implementation, if required, to strengthen the districts in those areaswhere they are weak. Technical assistance would be available, if needed, but would not automatically beassigned. (iii) Activities to support and instigate community participation, in the form of awarenessraising meetings and workshops, and seed support to start new initiatives that bring schools andcommunities together.

This component would also include support for project management and implementation of the integratedplans and would support the establishment and implementation of a monitoring and evaluation system,operating at district, province and central levels. This M & E system would be implemented for all basiceducation projects, to be adapted to the provincial situation as needed. Each of the basic educationprojects would support implementation in their own provinces and would carry a portion of the centralcost.

For the districts that are already well advanced and have shown a substantial degree of capability duringthe preparation of the project, capacity assessment can start immediately at project implementation;districts with less capabilities will be provided with technical assistance to carry out the assessment;

25

districts that have not yet started with project preparation will be provided with the necessary resources(including technical assistance) during the first and second year of the project.

Project Component 3 - US$39.0 million (total cost of component including contingencies)

Quality Improvements

Each district provides a proposal for implementation during the project reflecting district needs. Theproposals will contain quality improvement components, depending upon the needs of the district and theexisting capacity. It is expected that in districts where capacity building has to happen first, the qualitycomponents will be carried out in the later years. In addition, in all districts, quality components will besignificantly reduced or postponed until at the earliest the third year of the project, due to the economiccrisis and budget constraints.

Districts will select quality components from a positive list, in the amount and mix needed dependingupon the conditions of the district. The full list of activities for financing is: (i) primary schoolrehabilitation and maintenance, with funds given to the community to manage the school improvement,including procurement of basic school furniture; (ii) teacher-training programs for primary and juniorsecondary education teachers, principals, library teachers and supervisors including special programs forremote areas; (iii) procurement and distribution of teaching and learning materials and equipment; (iv)teacher deployment in rural, remote areas through teacher incentives to teach in remote areas and hiringof contract teachers for rural schools; (v) support to private schools through provision of matching grantsfor rehabilitation of school buildings and provision of equipment and furniture; and (vi) upgrading ofreligious school teachers.

Districts can submit for quality improvement, packages of interventions in a coherent proposal. Proposalsmust present a balance between primary and junior secondary schools, and must include school mappingand school consolidation as a prerequisite.

For primary schools the school quality improvement activities are based on the lessons of the PrimaryEducation Quality Improvement Project. For junior secondary schools, they are in keeping with theactivities as carried out in the ongoing JSE projects. It is expected that very few quality improvementactivities will be carried out during the first two years of project implementation. During this crisisperiod, the emphasis for financing will be on ensuring that children remain in school and that schools cancontinue to operate. The quality improvement component, as a result, will be minimal during these years,and be focussed on providing low-cost teacher training only.

The project would also support and further improve private junior secondary schools. While these schoolsare numerous especially in the rural areas, they are often of poor quality and, serving the poorest, many ofthem are underfunded. The project would provide matching grants to these schools, which they woulduse for needed quality improvements, which could range from construction and rehabilitation, to hiring ofextra teachers, school materials, or participation in teacher training programs.

At the national level, the project would support the establishment of a national-level Policy ReformWorking Group on Teachers to evaluate current teacher workforce issues and propose alternatives.

Project Components/Activities by YearYear I (FYOO) Year 2 (FY0i) Year 3 (FY02) Year 4 (FY03) Year 5 (FY04)

COMPONENT ____.

CRISIS RELIEF JS Scholarships (17%) > -- -- > JS Scholarships (11%) JS Scholarships (5°%)Primary SAFs (40%) - ----- > --------- > -------- > . >

JS SAFs (40%/6) .. > - > ------ > >

Training of principals, district , -. > --- --- > --- .> >

officials, others on use ofSch/SAFs

Monitoring ---- - > ------- > __ - --- > _

INSTITUTIONAL School mapping __-:----> - ----- -> _ _----> . _ >

REFORMMulti-year planning and -- ------ - ___._ __ ---. - --- -_--- >budgeting

Institutional/ capacity .--- > _- ------> ------ >assessments

Technical assistance - --- - ---------- >

Project Implementation --- - -- -_ ---- > -----. > -_ >

Monitoring & Evaluation(small surveys, support - - - -------- -- .> --------- >

SUSENAS, etc.)District-level training - -- > _-----> ---- >

Community-support activities __- ------ ----> - - --- >

QUALITY Primary school consolidation - - > - -------------. > ------- _ -- - -- . . -->

ENHANCEMENTRedeployment of teachers/ _-__-----> _ _ _.---^>principals

Contract teachers - - ------_-----> _ _- _---.>>

Primary school rehabilitation/ ___---.> __-_--->fumiture

Teacher Training

Principal & supervisortraining - __>

Provision of teaching/learning -- ___ ___>materials & equipment

Private School Grants > _>

27

Annex 3Sumatera Basic Education Project

Estimated Project Costs

Summary by Project Component Local Foreign TotalUS $ million----

1. Crisis Relief 26.9 0.7 27.6

2. Institutional Reform 8.6 1.2 9.8

3. Quality Improvement 34.5 3.5 38.0

4. Project Management 5.6 .8 6.4

Total Baseline Cost 75.6 6.2 81.8Physical Contingencies 1.75 .2 1.95

Fee .55 - .55

Total Project Cost 77.9 6.4 84.3

Summary by Category of Expenditure

Local Foreign Total------ USS million-

1. Investment CostsA. Civil Works 7.7 0.8 8.5Subtotal Civil Works 7.7 0.8 8.5B. Goods

1. Education Materials 6.6 1.2 7.82. Equipment and Fumiture 0.4 0.7 1.1

Subtotal Goods 7.0 1.9 8.9C. Services

1. Training 18.1 2.0 20.12. Fellowships 0.5 0.1 0.63. Contract Teachers 2.2 - 2.24. Consultant Services 4.8 0.5 5.3

Subtotal Services 25.6 2.6 28.2D. Miscellaneous

1. Secondary School Scholarships 14.0 - 14.02. Primary School Grants 7.3 - 7.33. Secondary School Grants 3.8 - 3.84. Private School Grants 2.9 - 2.95. Project Management 7.3 0.9 8.2

Subtotal Miscellaneous 35.3 0.9 36.2

Total Baseline Costs 75.6 6.2 81.8Contingencies 1.75 0.2 1.95Fee (1% of loan amount) .55 - .55Total Project Costs 77.9 6.4 84.3

28

Annex 4Sumatera Basic Education project

Economic Analysis

In the last year, the economic situation in Indonesia has changed rapidly. After a long period of strongeconomic growth, the economy is on the brink of collapse with a declining GDP of about 8.5% in the firstquarter of 1998 and an expected reduction of about 7.5% in the second quarter (World Bank, 1998). Theprojected growth rates are -12, 0 and 3 percent for FY98/99, FY99/00 and FYOO/01 respectively andinflation is projected at 80, 20 and 7 percent for the same years (Table 1).

Table 1: Macroeconomic Framework

Fiscal Year 96/97 97/98 98/99 99/00 00/01

Growth Rate 7.8 1.0 -12 0.0 3.0

Inflation 25 80 20 7.0GovernmentExpenditure/GDP (%) 13.9 16.7 24.2 18.0 17.0

Source: World Bank, 1998

The impact of the economic crisis on educational outcomes is twofold. The first is the reduced ability ofschools, especially those in poor areas to function as a result of reduced government budgets and parentalcontributions. The second is declining enrollments as household incomes decline and many householdswill no longer be able to afford school expenditures.

In an effort to prevent the erosion of human resource gains which Indonesia has enjoyed over the pastfew years, GOI and the donor community have initiated a national scholarship and school grants program.This project, as part of the larger initiative, will support both these interventions. In addition, longer-termgoals have to be sustained but interventions to address them need to be judiciously phased in. With theseissues in mind, the economic analysis focuses the following:

I. Economics of scholarships and school grants;II. Cost-Benefit of quality;III. Cost-effectiveness;IV. Fiscal analysis (Annex 5)

I. ECONOMICS OF SCHOLARSHIPS AND SCHOOL GRANTS

Introduction. Indonesia's economic crisis is expected to severely impact the poor as a result ofreduced incomes, increasing prices, and higher unemployment and underemployment. The poors' abilityto invest in human capital will be impaired as parents face higher prices of schooling and lower incomesto pay for schooling. In addition, schools serving poor communities will no longer be able to provideeven a basic quality of education as public funding is reduced and income from parents and thecommunities dwindles. As has happened during the past economic downturn in Indonesia a decade ago,the combined effect of reduced public funding for education, higher prices of schooling, and lower familyincomes, is expected to be a decline in primary and junior secondary school enrollments among the poor.Experience from Latin American countries during the 1980s and 1990s shows that not immediatelymaintaining support for core education services risks irreversible losses in human capital in the long run.

In order not to jeopardize its long-term investment in human capital, the Government has rapidlylaunched a five-year national program to provide scholarships for poor children in basic education and

29

block grants to schools serving poor communities starting this school year (July 20). A coalition ofMinisters, consisting of the Ministers for Education and Culture, Religious Affairs, Population, HomeAffairs and The National Development Planning Agency (Bappenas), and led by the CoordinatingMinister for Social Welfare, has been formned to support the program. GOI requested the Bank to lead amulti-donor effort, including the Asian Development Bank (ADB), UNICEF and bilateral agencies --AusAID, and Asia Europe Meeting (ASEM) -- to support the Program. Total cost of the five-yearprogram is approximately US$ 382 million, with an ADB contribution of US$ 86 million, and theremaining from the Bank. Bank financing is provided partly from restructuring of current educationprojects (US$ 177.2 million) and partly from Basic Education projects under preparation for FY99(US$119.1 million) including this project.

Impact of the Crisis. Estimating the impact of the economic crisis on enrollment is a complex matter asthe crisis is unprecedented in terms of magnitude and depth. Different methodologies have been used toestimate the likely changes in school enrollments as a result of a fall in income. Results varyconsiderably. Econometric techniques have yielded relatively low impact effects ranging from anadditional 115,000-260,000 7-12 year olds, and 173,000-270,000 13-15 year old children dropping outover time as a result of a 10 percent fall in per capita income.1 Estimates from GOI (Table 2) point tomuch larger effects of an additional 890,000 and 640,000 children dropping out of primary and juniorsecondary schools, respectively in just one year.

Table 2: Estimated Impact of the Crisis on School Enrollment (without intervention)Change 97/98 to 98/99

1996/97 1997/98 1998/99 Absolute

Primary

Enrollment (millions) 29.24 29.27 28.99 -0.28

Drop outs (millions) 0.88 0.76 1.65 0.89

Drop out rate 3.0% 2.6% 5.7% 3.1

Junior SecondaryEnrollment (millions) 9.28 9.69 8.33 -1.36

Drop outs (millions) 0.30 0.47 1.11 0.64

Drop out rate 3.6% 5.1% 11.5% 6.4

Source: DIKMENUM, MOEC, 1998

While it may not be possible to reach closure on precise figures, there is agreement among policy-makers,donors, teachers, principals, parents, NGOs and other stakeholders that the impact of the crisis on poorchildren will be severe. The strongest evidence available comes from the well documented experience ofthe impact of a much smaller economic shock in 1986/87 than today where education expenditures werenot maintained and special efforts were not made to keep children in school. During that period, grossenrollment rates fell precipitously from 62% to 52% at the junior secondary level (Figure 1), and it tookalmost a decade for enrollment to regain its previous levels. Income data from SUSENAS confirms thatall the decline was due to the drop out of children from poor households (Figure 2).

I The models estimate the elasticity of enrollment with respect to per capita income (or its proxy, per capitaconsumption) using 1996 SUSENAS (Filmer, Pradhan, 1998)

30

Figure 1

Primary and Junior Secondary Gross Enrollment Rates, 1971-1995/96120.0

100.0

_ 80.0

o -*-- ~~~~~~~~~~~~~~~~~~~~~~Primary°60.0 _--A, Junior Secondary

40.0200

20.0

N N 0 N N E N f w E0 ( 0 N O 0

0) 0) 0) 0) ~ w w co 9Ž 9Ž0)0)

Source: Indonesia Suggested Priorities for Education, World Bank, August 1997

Figure 2

Changes in Net Junior Secondary Enrollment Rates by Income Decilebetweeen 1987 and 1989

1 0

6

4

2

U 6 7 8 9 10

Income Decile

Source: Staff calculations from SUSENAS 1987 and 1989

Focus group discussions and school visits conducted in April 1998 (when the crisis was in its sixthmonths approximately) indicate that already poor schools and children were feeling the impact of thecrisis (see: Frame-work for an Assessment of the Impact of the Economic Crisis on Demand for BasicEducation, D. Filmer). Most principals reported more parents having difficulties paying the parentassociation fees (BP3) on time or at all; student absences were higher this year than last; some studentsappeared to be eating less in the morning; students were reported having more problems purchasingrequired books; and some reported lateness of teachers as they switched to cheaper but slower and lessreliable forms of transport.

31

Financing options. Various options were considered to maintain access to basic education forthose children expected to be adversely affected by the economic crisis. These include vouchersstipends/scholarships, or targeted grants (which can be per capita, matching, etc.). Vouchers andscholarships, given directly to students, are intended to offset the costs of schooling (books, tuition,transport, fees, uniforms, etc.). In some countries, they have also been used to compensate families forthe loss of the child's labor (opportunity cost). This mechanism has been effective in other countries inenabling disadvantaged groups such as the poor, girls and rural children to attend school (Demand SideFinancing, World Bank 1997). Cross-country experience indicates that scholarships can be an effectivemeans of enabling the poor to attend school while school grants are more effective for increasing schoolparticipation and autonomy.

For this program, block grants to schools have been chosen as the preferred option to maintain enrollmentat the primary level, while at the junior secondary level, a combination of scholarships and school grantshave been selected. A scholarship program for primary students was rejected since the scale of such aprogram would quickly become too unwieldy to manage, implement and monitor. Instead, schools aregiven guidelines that include allocating a certain proportion of the block grant to defray the costs ofeducation for those who cannot afford it, thereby promoting the school's autonomy and flexibility to findlocal solutions.

Complementing the scholarship and block grants program is a nationwide TV, radio, and print mediacampaign to ensure that parents and communities are aware of the program and to facilitate transparencyin the use of funds and selection of recipients.

Estimated Costs. Table in Attachment 1 provides the cost of the full five-year US $382 millionprogram. Annually, the cost of the program is equivalent to approximately 24% of the 1998/99 basiceducation development budget.

Given the difficulty in estimating needs accurately, projections in increases in poverty rates were used asthe basis for estimating the number of students needing scholarships. Recent estimates of povertyincreases indicate that if real GDP declined in 1998 by 12%, the incidence of poverty could increase toabout 14% with that in rural areas reaching 17% (Indonesia in Crisis: A Macroeconomic Update, WorldBank, 1998). Hence, approximately 17% (nationally) of junior secondary students will be awardedscholarships in the first three years, and 11 % and 5% in the fourth and fifth years of the program,respectively. Scholarships will be distributed according to the poverty incidence of each district (seeSelection and Targeting). Each student will receive a scholarship of Rp 240,000 (US$ 30 equivalent) invoucher form at the beginning of the school year. This is intended to cover school costs such asnotebooks, uniforms, transportation costs, and school fees. Nationally, 2.6 million junior secondarystudents will receive scholarships.

For primary block grants, Rp 2 million (US$ 250 equivalent) will be provided per school per year to 41%of all primary schools serving the poorest communities. Forjunior secondary schools, Rp 4 million (US$500 equivalent) will be provided per school per year to 40% of all junior secondary schools serving thepoorest communities. In total, 82,000 primary and junior secondary schools will benefit from blockgrants per year.

Unit costs of the scholarships are derived from cost of schooling for households in the poorest quintilefrom SUSENAS 95 (Rp 93,000) inflated to current prices.

32

Cost of junior secondary education by category and quintileQuintile school fees (incl equipment and transportation others total

BP3) supplies and tutorsI (poor) 38,166 28,913 12,284 12,779 92,1422 44,339 35,417 16,442 18,180 114,3783 51,931 39,870 32,597 24,307 148,7064 65,505 48,534 46,493 28,272 188,8045 (rich) 114,849 61,352 98,130 39,251 313,582Susenas 95

Unit costs for block grants to schools are roughly based on estimates of BP3 payments per student thatschool received before the crisis.

Project Beneficiaries. Table 3 provides the total number of scholarship and grant beneficiaries in thethree project provinces. Due to its higher poverty rate, Sumatra Utara receives a higher proportion ofscholarships and grants.

Table 3: Numbers of Recipients and % of total (JS Students or Schools)_1999/00 2000/01 2001/02 2&02/02 1999/00 1 2000/01 2001/02 2002/02

Sumatra UtaraJS scholarships 116952 116952 77966 38989 16.6% 16.6% 11.1% 5.5%JS grants 873 873 873 873 34.9%/o 34.9% 34.9% 34.9%PS grants 3919 3919 3919 3919 37.4% 37.4% 37.4% 37.4%RiauJS scholarships 26081 26081 17387 8695 12.3% 12.3% 8.2% 4.1%JS grants 262 262 262 262 30.8% 30.8% 30.8% 30.8%PS grants 1103 1103 1103 1103 29.5% 29.5% 29.5% 29.5%BengkuluJS scholarships 12526 12526 8350 4176 15.4% 15.4% 10.2% 5.1%JS grants 84 84 84 84 37.3% 37.3% 37.3% 37.3%PS grants 521 521 521 521 36.3% 36.3% 36.3% 36.3%TotalJS scholarships 155559 155559 103703 51860PS/JS grants 6762 6762 6762 6762

Selection and Targeting. Two main sources of data are available in Indonesia for poverty targeting bothof which are useful for targeting of the scholarship and school grants program but which cannot be reliedon solely. The SUSENAS (socioeconomic household-level survey) which collects a large number ofwelfare indicators including education variables (enrollments, household expenditure, etc.) is notrepresentative at the sub-district level, and therefore can be used to provide a ranking of districts only bypoverty incidence. The PODES (village census) collects a range of data on physical, environmental,social and economic infrastructure of every village in Indonesia. The selection of poor villages (IDTvillages) from the PODES is based on a score of variables which are biased towards infrastructureavailability. IDT villages are selected from the poorest third villages in each district with no harmonizingacross districts. Hence, the lowest third in a rich district may be better off than the top third in a very poordistrict.

Given these considerations, the approach underlying the targeting mechanism selected for the scholarshipand school grants is one which uses quantitative information coupled with local knowledge and theparticipation of NGOs and other members of civil society in the selection at the local level. Morespecifically:

33

Nationally, the poorest 17% of JS students will be awarded scholarships and the poorest 40% primary andjunior secondary schools will receive block grants. District (and city) allocation of available scholarshipsand grants have been determined on the basis of poverty incidences from the 1996 SUSENAS. Withineach district, a District Project Committee (DPCs) with equal representation from civil society andgovernment, will (i) allocate a scholarship quota to each junior secondary school; (ii) determine whichschools will receive a grant; and (iii) allocate a proportion of the district's primary school grants to eachsub-district. A similarly composed sub-district committee will identify those primary schools that willreceive grants. Forjunior secondary scholarships, at each school, a school committee, chaired by thehead teacher and consisting of teachers, community members and students will identify those studentswhich will receive scholarships.

Scholarships: DPCs will rank all JS schools in the district based on four indicators; (i) the poverty of thecommunity served by the school (as measured by PODES/SUSENAS data), (ii) the percentage of poorhouseholds in the community served by the school; (iii) the average per child parent-teacher contributionreceived during the 1996/97 year, and (iv) the physical condition of the school. Based in this ranking, thepoorest 50% of the schools will share 75% of the available scholarships and the remaining 50% ofschools will share the remaining 25% of the scholarships. This is to account for the issue that even richschools have some poor students attending. In each case, the scholarships will be proportionallydistributed among schools on the basis of their 1996/97 enrollment (pre-crisis). School committees willsubsequently distribute scholarships to those students that have already, or are most likely to drop out ofschool for economic reasons, and to those primary school leavers who would otherwise continue theirschooling but will not do so for financial reasons. At least half of the recipients will be girls.

JS Grants: Using the same four indicators above, the DPCs will rank all JS schools in the district,excluding only those schools that are considered unviable (based on enrollment, location, and registrationcriteria). Based on the DPC's ranking of all JS schools, the poorest schools in each district will beawarded the available grants.

Primary School Grants: In each district, the DPC will proportionally distribute all available grants to thesub-districts based on the percentage of IDT villages in each sub-district. Subsequently, the poorest 50%of the sub-districts will share 65% of available grants and the remaining 50% will share 35% of thegrants. The grants will be proportionally distributed among sub-districts based on the number of schoolsin each sub-district. Each sub-district committee will subsequently rank all primary schools in the sub-district according to the indicators listed above. Based on the sub-district committees' rankings of allprimary schools, the poorest schools in each sub-district will be awarded the available grants.

Monitoring and Evaluation. A comprehensive monitoring, evaluation and supervision program is beingdeveloped for management of scholarships and school grants. While the Government will monitor theday-to-day operation of the program, a third-party agency will carry out quarterly monitoring of theselection and targeting process, and the use of funds. Representatives from civil society and NGOs willbe utilized in the monitoring of the program. In addition, a database will be maintained by Bank RakyatIndonesia to track all aspects of flow of funds. Throughout the program, the Government, the Bank, andthe ADB will evaluate the impact of the program on school enrollments and transition through focusedsurveys and the use of SUSENAS.

Returns to a Junior Secondary Scholarship

Providing a scholarship of Rp240,000 per year for a junior secondary student yields a high return as theestimation below demonstrates:

34

We assume that an additional year of junior secondary education yields a productivity gain of 10 percent.2

At an annual total income/product of $700 per capita in Indonesia, a 10 percent gain produces $70/year.The present value of this amount, over a 30 year time period of lifetime production, is $602 (discount rateof 10%). When compared to the cost today of a scholarship per child of Rp3 00,000 (Rp240,000 plus 25%administration/training cost), or US$38 (exchange rate of Rp8,000), it is clear that the investment isworthwhile.

In the table below we present the above PV calculation (Column 1) and repeat it varying some of theassumptions. In Column 2, we assume the exchange rate improves to Rp2000. In Column 3, we assumethe economy takes another nose-dive and annual income falls to $400 and the exchange rate weakens toRplO,000. In all cases, the return from today's investment in a junior secondary scholarship is remainsprofitable.

Annual per capita income ($) 700 700 400

Income equivalent increase in annualproductivity ($) 70 70 40

Present value of income increase ($) 602 602 344

Annual cost of scholarship/student (Rp) 2/2 300,000 300,000 300,000Annual cost of scholarship/student ($) 38 150 30

PV/cost of scholarship 16 4 12

Assumptions:Discount rate (/o) 10 10 10Exchange rate (IUS$/Rp) 8000 2000 10,000time horizon (years) 30 30 30

1/ The PV formula is corrected for the fact that the impact will be one year later (i.e. after the additional year ofschooling).2/ includes 25% administration and training cost.

I. COST-BENEFIT OF QUALITY

Introduction. Low quality basic education has been identified as one of the main problems faced by theeducation system in Indonesia (Education in Indonesia: From Crisis to Recovery, 1998). This isreflected in unsatisfactory schooling outcomes (high drop-out and repetition), low levels of skills andinadequate preparation for post-basic education and a lifetime of learning and employment that manygraduates possess. Evidence3 indicates that the main (non-institutional) factors precipitating this problemare poorly trained teachers, the lack of adequate levels of resources, curriculum overload, shortage ofteaching staff, and an inadequate supply of text-books and materials, among others. As part of the overallquality enhancement program of basic education, this project, as well as the West Java and Sulawesi andEastern Islands Basic Education projects, includes large quality components that aim to address some ofthese issues. In North Sumatra, Bengkulu and Riau the quality component is the single largest componentmaking up about 48 and 59 percent of province project costs, respectively. The specific interventions

2 Rates of return studies for Indonesia have shown returns to junior secondary even higher than 10%. Further wecan assume there are other non-wage benefits such as better health, productivity gains in home production, etc.).3 Studies by Moegiadi, Suryadi, Somerset, Malo et al, World Bank 1989, and others.

35

include school rehabilitation, provision of contract teachers, provision of educational materials, clusterin-service teacher training, matching grants to private schools, and incentives to teachers in remote areas.

The Reverse Cost-Benefit Method--Estimating Switching Values. To calculate the returns to thequality component we employ the use of the reverse switching method. This method determines thefeasibility of an intervention based on a comparison of the cost of the intervention with the minimalproductivity differential required to make the intervention profitable to society. It asks: Given the cost ofproducing a higher quality graduate, what productivity differential is required to make the investment inquality profitable to society? The required differential is estimated according to the following equation4:

D./,-, =F (t (Cs +Ws)

whereD ,- = the required productivity differential between a graduate of school

level S and a graduate of school level S-1F = discount ratet, = number of year required to complete levelC, = per student direct resource cost (government cost and household

expenditure)Ws = earning forgone during each year of investment.

A discount rate of 10 percent is assumed. The methodology uses both the direct costs to the governmentand households, and the costs to the individual in the form of opportunity cost of schooling (i.e. foregonewages).

Data. The analysis utilizes data from Labor Force Surveys (1994 and 1996 SAKERNAS), householdsocio-economic survey (1995 SUSENAS) and budget data. The SAKERNAS details informationpertaining to sector and occupation of employment, wages and number of hours worked in addition togeneral demographic information. The labor force data is used to impute the average weekly wages forindividuals who have not completed primary school, primary school graduates and junior secondarygraduates in various employment sectors. The surveys sort employment into 10 main sectors (Table 4).

A descriptive analysis of employment by sector and level of education indicates that primary schoolgraduates are mainly employed in the agriculture sector (Table 4). At the junior secondary level, there issome movement out of agriculture into other sectors such as trade and manufacturing. More than 60percent of primary graduates and 50 percent of junior secondary graduates are employed in agricultureand 37 percent of junior secondary graduates are employed in trade, services and manufacturing. It isonly at the senior secondary level that employment beyond agriculture begins to increase significantly.

4Adopted from Vietnam, Education Financing, 1997.

36

Table 4: Sector of EmpTloyment by Level of Education

Sector Primary Junior SeniorSecondary Secondary

Agriculture 62 50 28Mining and quarry 1 1 IManufacturing 11 13 12Electric , Gas and Water < 1 <1 <1Construction 5 5 4Trade 13 15 14Transportation, Storage and 4 6 4CommunicationFinance, and other services <1 <1 1Services 4 9 36Others <1 <1 <1

Total 100 100 100Source: Sakernas 1996

The data necessary to estimate D s,s- is wage data for graduates at three levels: incomplete primary,primary graduates and junior secondary graduates. Wage data was obtained through the estimation of abasic OLS using the 1994 Sakemas. The sample included individuals between the ages of 14 and 65.Wages for three groups of agricultural workers and junior secondary graduates employed in the non-agriculture sector was imputed for each province (Table 5).

Table 5: Imputed Weekly Wages for Agriculture and Non-Agricultural Workers(1994 Wage data inflated to February 1998 using Farmer Price Index)

Provinces Agricultural Wage Non(Rp'OOO) Agricultural

Incomplete Primary Junior JuniorPrimary Secondary Secondary Level

North Sumatra 22,442 28,438 33,481 45,828Bengkulu 14,189 19,209 19,672 38,212Riau 26,160 28519 33770 60,987

Source: Sakernas 1994, Central Bureau of Statistics, August 1998* Sample size less than 30All data was calculated from the Sakernas 1994

Estimation of Returns for Primary Quality Component. We assume that benefits from the qualitycomponent lead to higher student achievemenf which reduces repetition and increases school completionrates. Hence, the benefits can be measured as the differences in wages for a primary school completer toa less-than-primary school completer.

Costs per student per year are derived from the total costs of quality interventions (school rehabilitation,teacher cluster training, and provision of educational materials) averaged across the total population ofprimary school students in each province.

5 Evidence of this relationship is available from the impact evaluation of the Indonesia PEQIP project, wheresimilar quality interventions in 6 provinces led to a positive effect on student achievement (DHV, 1997).

37

Table 6: Reverse Switching Methodology Applied to Primary Quality Component

North SumatraCost per Average Assumed Required Observed Observed asstudent per Earnings treatment period Differential Real percentageyear (Rp) (years) (Rp) Differential of required(Rp) (Rp)

33,021 1,077,216 ____

1,365,0244 6 years of 127534 287808 226treatment

1 year ofOpportunity cost

BengkuluCost per Average Assumed Required Observed Observedstudent per Earnings treatment period Differential Real asyear (years) Differential percentage(Rp) of required

61,287 681072922032 6 years of 104880 240960 230

treatment

1 year ofOpportunity cost

RiauCost per Average Assumed Required Observed Observed asstudent per Earnings treatment period Differential Real percentageyear (Rp) (years) Differential of required

49,292 1,255,6801,368,912 6 years of 144,582 113,232 78

treatment

I year ofOpportunity cost

Note: Household expenditure only includes cost of uniforms, books, transportation and allowance

The analysis suggests that the investment in primary quality in North Sumatra and Bengkulu satisfies theminimum 10 percent rate of return. However, this is not the case in Riau where the minimum return of 10percent is not met. The highest return among the three provinces is in Bengkulu where the observed wagedifferential is more than twice as large as the required wage differential. In North Sumatra, the return isjust as high, where the observed differential is also twice as large as the required wage differential.

Hence if the primary quality interventions if implemented well and results in higher student completionthe benefits exceed the opportunity cost of schooling and the direct cost of the intervention in North

38

Sumatra and Bengkulu. This is unfortunately not the case in Riau. It is worthwhile to keep in mind thatthese estimates of benefits reflect a minimum given the other expected benefits to school rehabilitation,for example (see Section below).

Estimation of Returns for Junior Secondary Quality Component. The junior secondary qualityinterventions differ from the primary component in that it includes contract teachers and excludes schoolrehabilitation. The unit costs used in the analysis again reflects the aggregated costs of all the aboveinterventions averaged across the population ofjunior secondary students in each province. Thehousehold cost added to the analysis includes transportation, allowance, expenditure on uniforms andequipment and books.

Two scenarios are modeled to examine the benefits of the junior secondary quality component, namely:(i) an inter-sectoral effect (where the wages of junior secondary graduates who enter a non-agriculturalsector upon graduation are compared against the wages of primary school graduates who enter theagricultural sector); and (ii) an intra-sectoral effect (where the wages of junior secondary graduates whoenter the agricultural sector are compared against the wages of primary school graduates who enter theagricultural sector). This analysis takes into account the benefits of increased employment opportunitiesin non-agricultural sectors for junior secondary graduates.

Inter-Sectoral Effect

When junior secondary graduates are able to switch out of the agricultural sector, the benefits to a qualitycomponent is rather large. As illustrated in Table 7, in all three provinces, the observed wage differentialis larger than the required differential to satisfies the minimum criteria to achieve a 10 percent return onthe investment. In Riau and Bengkulu, the observed wage differential is three times larger than therequired wage differential while in North Sumatra, the difference is smaller but still satisfies the minimum10 percent return. Hence, in all three provinces, the quality component does accrue a good return to theinvestment.

Table 7: Reverse-Switching Methodology Applied to Junior Secondary Quality ComponentNorth Sumatra

Cost per Average Assumed Required Observed Observed asstudent per Earnings treatment period Differential Real percentage ofyear (Rp) (Rp) (years) Differential required

98,166 1,365,024 _

2,199,763 3years treatment 445,100 834,739 188

Bengkulu

Cost per Average Assumed Required Observed Observed asstudent per Earnings treatment period Differential Real percentage ofyear (Rp) (Rp) (years) Differential required

142,563 922,032 _

1,834,199 3 years treatment 332,670 912,167 274

39

Riau

Cost per Average Assumed Required Observed Observed asstudent per Earnings treatment period Differential Real percentage ofyear (Rp) (Rp) (years) Differential required

112,789 1,368,912 __ _ _ _2,827,409 3 years treatment 432,064 1,558,497 361

Intra-Sectoral Effect

Remaining in the agricultural sector, however, is not as beneficial for junior secondary graduates. Thewage differential between primary and junior secondary school graduates who enter agriculture is sosmall that it is nearly completely offset by the opportunity cost of staying in school for the additional 3years. This result is the same for both all three provinces where the observed wage differential is onlyabout a fourth of the required wage differential and therefore does not meet the minimum 10 percentreturn on the investment (Table 8).

Table 8: Reverse-Switching Methodology Applied to Junior Secondary Quality ComponentNorth Sumatra

Cost per Average Assumed Required Observed Observed asstudent per Earnings treatment period Differential Real percentage ofyear (Rp) (years) Differential required(R p)__ _ _ _ _ _ __ _ _ _ _ __ _ _ _ _ _

98,166 1,365,024___________ 1,607,088 3years treatment 445,100 242,064 54

Bengkulu

Cost per Average Assumed Required Observed Observed asstudent per Earnings treatment period Differential Real percentage ofyear (Rp) (years) Differential required(Rp)_ _ _ _ _

142,563 922,0321,027,200 3 years treatment 332,670 105,168 32

Riau

Cost per Average Assumed Required Observed Observed asstudent per Earnings treatment period Differential Real percentage ofyear (Rp) (years) Differential required(Rp )

112,789 1,368,9121,620,960 3 years treatment 432,064 252,048 58

40

Comparing the inter-sectoral and intra-sectoral results indicate that unless junior secondary graduates are able tomove out of agriculture, the returns to the investment in junior secondary quality will not be socially profitable.While the probability of this move is low during the economic downturn in Indonesia, as the economy resumes

its pre-crisis growth patterns, opportunities for junior secondary graduates in non-agricultural sectors will beginto expand again.

Conclusion. The reverse-switching method indicates that the benefits of the primary qualitycomponent far exceed the combined effect of the fiscal costs and opportunity cost yielding a social returnof at least 10 percent in both North Sumatra and Bengkulu. However in Riau this was not found to thecase. In the case of the junior secondary quality component, social returns of at least 10 percent can onlybe enjoyed if the graduate is able to switch out of the agricultural sector into other sectors.

M. COST EFFECTIVENESS

Facing extreme budgetary constraints, GOI has to employ cost-effective strategies in its delivery ofeducation services. This analysis proposes several cost-effective strategies that could be adopted underthe project. The first focuses on the school consolidation process and associated savings. The secondlooks at the need for adequate maintenance budgets for schools.

School Consolidation. There are currently (140,000) primary schools in Indonesia. Many of theseschools were built to support large cohorts of children in the late 1970's and throughout the 1980's. Asthe fertility rate has stabilized at a lower level, the cohort of school aged children has fallen resulting inthe under utilization or abandonment of many primary school buildings. In an effort to conserveresources, the project supports a school consolidation program where primary school buildings locatedwithin close proximity to each other (less than 1 km) are consolidated. In some cases, it is feasible toconvert one of the primary school buildings into a junior secondary school. Using the unit constructioncosts as present in Table 9 the analysis focuses on the economic benefits or costs that are derived from aschool consolidation program.

Table 9: Cost Of Construction And Rehabilitation In The Project Provinces.(in thousands of Rp)

Province Average Cost of Cost of Cost ofconstruction per constructing a rehabilitating am 2 Primary School primary school

for conversion

Bengkulu 388 159,152 95,491Riau 392 157,528 94,517North Sumatra 432 175,392 105,235

(Source: Unit cost from BAPPENAS, 1997/98)

The comparison is the cost of consolidation against non-consolidation where:

* there are two primary schools within a I km radius of each other that are consolidated. Thus,since one building is now vacant, the cost of rehabilitation and maintenance has been halved.

* the two primary schools are not consolidated. Since both buildings are occupied GOI willhave to rehabilitate and maintain both these primary school buildings.

41

The underlying assumptions of the model are: school buildings last for 15 years after which totalreconstruction has to take place, maintenance is about 2 percent of base construction cost and inflationover the period is normalized to 7 percent.

TablelO: Savings per school over period of 15 years(in thousands of Rp)

Province Savings

Bengkulu 143,209Riau 142,019North Sumatra 157,418

The analysis shows that consolidation is extremely cost effective and will accrue to GOI substantialsavings. They are the result of a possible reduction in the total budget required for school rehabilitation(if schools are consolidated one of the consequences could be a reduction in the number of buildings thatneed to be rehabilitated for use) and a reduction in the maintenance budget. On average, GOI can save upto an estimated Rp160 million per school. In North Sumatra, savings are as high as Rpl 57 per school overa period of 15 years (See Table 10). Similarly in the Bengkulu and Riau, the government can save up toRpl43 and Rpl42 million on each school.

Preventive Maintenance/Rehabilitation.6 If school buildings are to maintain their value and providetheir pupils and teachers with a satisfactory learning and teaching environment, regular schoolmaintenance is essential. Frequently maintenance budgets are limited.

The construction budgets used by the government for estimating the cost of construction of new orrenovation of existing schools are more than adequate for the construction of good quality facilities if theyare properly built. Unfortunately, because of the generally low standard of construction, the full potentialof the building is never realized. Thus, combined with the fact that very little money is spent onmaintenance, the useful life of most school buildings is very short.

The full cost of maintaining a building against not maintaining a building over a period of 21 years isexamined in the Table below. If this building is well constructed and maintained, it should have a usefullife of at least 20 years and probably much longer. However, if the building is badly constructed andpoorly maintained, its life could be shortened to 10 years and possibly much less. To illustrate this point,we use the case of North Sumatra. The initial cost of constructing the building at current rates will beRpl 75.4 million in North Sumatra (See table above). If we assume that annual maintenance costs are afixed rate of 2 percent of the initial construction cost in the first case, this will result in a maintenance costof Rp3.5 million for the first year after construction. In the second case we use a maintenance rate ofabout 0.5 percent per annum which allows for approximately Rp867,000 per year per school. This iscomparable to the current allocation that schools currently receive. Both the cost of maintenance andconstruction increases at an annual inflation rate of 7 percent

6Adapted from Nigel Wakeham, "Implementation Specialist's Report" (June 1998).

42

Table 12: The Case Of North Sumatra - Cost-Effectiveness Of Maintenance(in thousands of Rp)

Year School 1: With Maintenance School 2: Without Maintenance1 175,392 Construction 175,392 Construction2 3,507 Maintenance 8773 3,753 l 9384 4,016 1,0045 4,297 1,0746 4,598 1,1507 4,920 1,2298 5,264 l 1,3169 5,633 l 1,40810 6,027 1,50711 6,449 369174 Reconstruction12 6,900 1 1,84613 7,383 l 1,97514 7,900 l 2,11315 8,453 2,26116 9,045 2,41917 9,678 l 2,58918 10,356 l 2,77019 11,081 2,96420 12,686 t 3,17121 726,221 Reconstruction 726221 ReconstructionTotal 1,045,419 _ _ _ 1,305,014

The above data indicate that spending higher amounts of money on school maintenance today saves GOIover Rp200 million per school over the long-term (See Table 12). This implies that on average about 21percent of funds that would have been spent on construction and maintenance can be saved if GOIincreases the per school maintenance allocation. This is because the cost of construction is high andbuildings that are not well maintained deteriorate rapidly eroding the value of initial construction. Anillustrative example using current construction prices from North Sumatra is present in Table 12. Thetotal cost of constructing a 4-classroom building primary school, maintaining it regularly andreconstructing it after 20 years is Rpl.05 billion. The total cost of constructing the same building, but, notmaintaining it resulting in two necessary reconstruction activities after 10 years is Rpl .31 billion,resulting in savings of Rp259 million per building over a period of 21 years.

Table 13: Savings per primary school over period of 21 years(in thousands of Rp)

Province Savings

Bengkulu 271,788Riau 273,007North Sumatra 259,594

43

Attachment 1Scholarship and School Grants Program

1908199 1999/00 2000/01 2001V02 2002103 TotalsScholarshipsEstimated Junior Sec. Enroilment 9,700,000 9,700,000 9,700,000 9,700,000 9.700,000Number of scholarships 1,560,000 1,560,000 1,560,000 1,040,000 520,000%ofstudentscovered 16.1% 16.1% 16.1% 10.7% 5.4%Unit cost (S equivalent) 30 30 30 30 30Total Scholarship cost (S million) 46.8 46.8 46.8 31.2 15.S 187.2

Special Assistance Funds (SAF)for Primary Schools:Total Number of schools 173,000 173,000 173,000 173,000 173,000Schools receiving SAF 71,207 71,207 71,207 71,207 71,207%ofschoolscovered 41% 41% 41% 41% 41%Unit Cost ($ equivalent) 250 250 250 250 250Total SAF Prima,y School (S mfillion)

17.8 17.8 17.8 17.8 17.8 89

Special Assistance Funds (SAF)for Junior Secondary Schools:Number of schools 31,000 31,000 31,000 31,000 31,000Schools receiving SAF 12,546 12,546 12,546 12,546 12,546% of schools covered 40% 40% 40% 40% 40°bUnit Cost (Sequivalent) 500 500 500 500 500Total SAF Junior Secondary School(S million) 6.3 6.3 6.3 6.3 6.3 31.4

Full Program (S millIon)Scholarships and SAFs 70.9 70.9 70.9 55.3 39.7 307.6Administration, training, and monitoring(25% of program) 17.7 17.7 17.7 13.8 9.9 76.9

Total Program Coast rs mliIn) 88.8 88.6t 88.6 69.1 49.6 3U4.5As percent of 1998/09 BaskEducation Development Budget 27.2% 27.2% 27.2% 21.1% 15.1%

Percent of TotalFunding Sources (S million)World Bank 44.0 45.0 88.6 69.1 49.6 77.1%

From restructuring of existing projects 44.0 29.4 44.6 29.6 29.6 46.1%From new proposed projects in FY99 0.0 15.6 44.0 39.5 20.0 31.0%

Asian Development Bank 43.3 43.3 22.5%UNICEF 0.2 0.3 0.1%Bilateral Agences 1.1 0.3%

Totals (S million) 88.6 88.6 88.6 69.1 49.6 100.0%

NOTES:US $1 = Rp 8,000Junior secondary student Scholarships: 3 equal cohorts of scholarships at Rp240,000Junior secondary school SAFs: Five years of coverage for 40% of schools at Rp 4 millionPrimary school SAFs: Five years of coverage for 40% ot schools at Rp 2 milion

44

Annex 5Sumatera Basic Education Project

Fiscal Analysis

The objective of the fiscal analysis is to examine the budgetary implications of the project on theprovincial budget. The fiscal analysis begins at the macro-level, looking at the implications of acontractionary economy on the budgetary outlook for the education sector with linkages established to therespective provincial budgets. Drawing on historical data, we begin with the projection of the overalleducation budget envelope. We assume that despite falling government revenues, developmentexpenditure budget for basic education will be maintained in real termns, relative to 1996/97 levels for thenext 2 years at least, after which it would increase. The assumption for maintaining the budget is basedon what was achieved this year in the July program and GOI's commitment to protecting basic educationduring the crisis. The assumption for increasing the education budget after the economy recovers is basedon the pre-crisis strategy to increase allocations for education.

Historical Situation

During the last structural adjustment period, the education sector was not protected and experienced arapid decline in the education budget by about 12 percent in real terms between 1985/86 and 1989/90.Similarly, real expenditure for basic (primary and junior secondary) education also declined by 71between fiscal 1985/86 and 1989/90 with the single largest drop occurring in the second year of theadjustment when the budget fell as much as 56, from Rp583 billion to Rp258 billion. Educationexpenditures as a percentage of GDP fell from 4.13 to 2.74, while the share of Government expendituresfor education fell from 17.6 to 13.

Basic education (primary and junior secondary) expenditures, 1984/85-1996/97

900

800

Soo \7 00

400 -

400-

300-

200

100

084185 85186 86187 87188 88t89 89190 90191 91/92 92193 93194 94195 95/96 96/97

Years

Source: Education in Indonesia: From Crisis to Recovery, 1998 Chapter 6.

Current Situation

The most recent revised budget (July program) shows an allocation of Rp8,800 billion for the educationsector (11 percent of the total development budget). The allocation for basic education amounts toRp.4,663 billion which is equivalent to Rp2,000 billion in real FY96/97 terms and represents anequivalent level of budgetary allocation as in FY96/97.

45

The Model

To estimate the level of provincial budgets for the necessary fiscal years, we use FY95/96 and FY96/97 asthe base. We project two growth paths for the provincial education budget.

In the base case, growth is assumed at 0 percent for the first two years of implications, 2 percent for thesubsequent two years and 4 percent for the last 2 years of the project. For the second model (high casescenario), growth is projected on a higher path where in the first year the basic education budget willgrow at a rate of 1 percent, followed by 2,4,5 and 6 percent in the subsequent five years. (See Table 1)

Table 1: Real Growth Rate Of Basic Education Budget (%)FY99/00 FYOO/Ol FYO1/02 FY02/03 FY03/04 FY04/05

BaseCase 0 0 2 2 4 4HighCase 1 2 4 5 6 6

The issues of institutional capacity, the provision of counterpart funds and program sustainability areexamined using the following indicators: fiscal burden of project cost on the basic education budget, andfiscal burden of recurrent cost (of project) on the basic education budget after the project is completed.We analyze the three provincial budgets for North Sumatra, Bengkulu and Riau.

Fiscal Implications for North Sumatra

North Sumatra is the largest province on the island of Sumatra. The North Sumatra basic educationbudget for FY96197 and FY97/98 was RplO7.9 billion and Rp129.5 billion respectively. In FY96/97,approximately 67 percent of the total provincial education budget was allocated to junior secondaryschools (SLTPs). Primary schools obtained the remaining 32 percent. The following year, the situationremain the same with a large budgetary allocation for junior secondary schools (63 percent) and a smallerallocation for primary schools (34 percent).In the following analysis, we examine the impact of the project on the province.

46

Base Case

Table 2: Fiscal impact of the project in North Sumatra (Rp billion)

98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06Before ----------------- Project implementation period -------- After Afterproject ---- project project

GDP Growth rate -12 0 3 3 3 4 5Inflation rate 80 20 7 7 7 7 7

Growth rate ofprovincial basic 0.0 1.0 2.0 3.0 4.0 5.0 6.0education budget (%)

Total basic education 203.0 266.1 266.1 271.4 276.8 287.9 299.4 311.4budget l/

Project costs 2/ 56.0 69.3 77.8 92.3 59.5 24.7

Project recurrent costs 3/ 5.6 6.9 7.8 9.2 6.0 2.5 17.3

Project costs / Total 21 26 29 33 21 8education budget (%)

Project recurrent cost 2 3 3 3 2 1 6/Total education budget(%)1 /Aggregated from provincial budgets of MOEC (education), MORA (religious affairs), MOHA (home affairs). Thesame figures are used in the other two scenarios.2/ Aggregate of all categories of expenditure including price and taxes.3/Recurrent costs during implementation represents GOI's counterpart funding for project. Recurrent cost afterimplementation includes 20 percent of training, scholarships and school grants, and 100 percent of contract teachers.

The analysis shows that the burden of the project on the total education budget for North Sumatra, as it isin the other 2 provinces is high. It increases from a high of 21 percent to as high as 33 percent over theperiod (Table 2). The implication of this finding is that the institutional capacity aspect of the project inNorth Sumatra is also of great importance. Technical assistance has to be provided to key governmentagencies for implementation purposes.

The second issue is that of recurrent cost implications of the project. During the project period this isrepresented by the amount of counterpart funds GOI has to provide. After the project the recurrentimplications are assumed at: 20 percent of selected expenditure including training, scholarships andschool grants, and 1 00 percent of contract teachers after implementation.

The ratio of recurrent costs over total project costs is relatively low and constant over the period (Table2). It rises to as high as 3.0 percent during the project but not more. Hence, because it is so low,financing the required counterpart funds should not be a problem.

Upon completion of the project, the recurrent cost to the government represents 6 percent of the totalprovincial budget. In both cases, recurrent expenditure is sufficiently low and should be easily financedduring implementation in the form of counterpart funding and absorbed after the completion of theproject.

47

High Case

Table 3: Fiscal impact of the project in North Sumatra (Rp billion)98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06

Before ----------------- Project implementation period -------- After Afterproject ---- project project

GDP Growth rate -12 0 3 3 3 4 5Inflation rate 80 20 7 7 7 7 7

Growth rate of 1.0 2.0 3.0 4.0 5.0 6.0 7.0provincial basiceducation budget (%/6)

Total basic education 203.0 266.1 271.4 280.0 290.7 305.3 323.6 343.0budget 1/

Project costs 2/ 56.0 69.3 77.8 92.3 59.5 24.7

Project recurrent costs 5.6 6.9 7.8 9.2 6.0 2.5 17.3

Project costs / Total 21 26 28 32 20 8education budget (%)

Project recurrent cost 2 3 3 3 2 1 5/Total education budget(%0)1/ 2/ and 3/ please see above

Under the high scenario, where assumptions of real increases in the basic education budget are introducedas early as FY99/00, the total project cost as a percentage of the basic education budget remains high. Itincreases from between 21 and 32 percent in the fourth year of the project (Table 3). In the case ofrecurrent costs, since the basic education budget is projected to increase by 5 percent in the period afterthe project, absorbing these additional costs will not be difficult.

Fiscal Implicationsfor Bengkulu

The Bengkulu basic education budget for FY96/97 and FY97/98 was Rp24.4 billion and Rp27.7 billionrespectively. Similar to the province of North Sumatra, junior secondary schools received a largeproportion of the budget (59 and 61 percent in FY96/97 and FY97/98 respectively).The majority of funding was from the APBN budget (70 percent) followed by INPRES (15 percent) andloan financing (14 percent). The provincial and district budgets financed a very small proportion of thetotal education budget. In the following analysis, we examine the impact of the project on the province.

48

Base Case

Table 4: Fiscal impact of the project in Bengkulu (Rp billion)

98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06Before ----------------- Project implementation period ----- After Afterproject ------- project project

GDP Growth rate -12 0 3 3 3 4 5Inflation rate 80 20 7 7 7 7 7

Growth rate ofprovincial basic 0.0 1.0 2.0 3.0 4.0 5.0 6.0education budget (%)

Total basic education 34.7 51.9 51.9 52.9 54.0 56.1 58.9 62.5budget "

Project costs 2/ 9.9 13.5 20.4 18.8 11.5

Project recurrent costs 1.0 1.4 2.0 1.9 1.2 3.0 3.0

Project costs / Total 19 26 39 35 21education budget (%)

Project recurrent cost 2 3 4 3 2 5 5/Total education budget(%)

1/ 2/ and 3/ please see above

The analysis shows that the burden of the project on the total education budget for Bengkulu is high. Itincreases from 19 percent to as high as 39 percent over the period (Table 4). Thus, the institutionalcapacity aspect of the project in Bengkulu is also of great importance. Technical assistance has to beprovided to key government agencies for implementation purposes.

The ratio of recurrent costs over total project costs, however, remains relatively low and constant over theperiod. It rises to as high as 4.0 percent during the period but not more. Upon completion of the project,the recurrent cost to the government represents 5 percent of the total provincial budget. In both cases,recurrent expenditure is sufficiently low and should be easily financed during implementation in the formof counterpart funding and absorbed after the completion of the project.

49

High Case

Table 5: Fiscal impact of the project in Bengkulu (Rp billion)

98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06Before ----------------- Project implementation period ----- After Afterproject ------- project project

GDPGrowthrate -12 0 3 3 3 4 5Inflation rate 80 20 7 7 7 7 7

Growth rate of 1.0 2.0 3.0 4.0 5.0 6.0 7.0provincial basiceducation budget (%)

Total basic education 34.7 51.9 52.9 54.5 56.7 59.5 63.1 67.5budget "

Projectcosts2/ 9.9 13.5 20.4 18.8 11.5

Project recurrent costs 31 1.0 1.4 2.0 1.9 1.2 3.0 3.0

Project costs / Total 19 26 37 33 19education budget (%)

Project recurrent cost 2 3 4 3 2 5 4/Total education budget(%)

1/ 2/ and 3/ please see above

Under the high scenario, where assumptions of real increases in the basic education budget are introducedas early as FY99/00, the total project cost as a percentage of the basic education budget remains high. Itincreases to as much as 37 percent in the third year of the project (Table 5). In the case of recurrent costs,since the basic education budget is projected to increase by 6 percent in the period after the project,absorbing these additional costs will not be difficult.

Fiscal Implicationsfor Riau

The Riau basic education budget for FY96/97 and FY97198 was Rp24.4 billion and Rp27.7 billionrespectively. Unlike the other two provinces, in Riau, primary and junior secondary schools receivealmost equal amounts of the provincial education budget. In FY96/97, 41 percent of the provincialbudget was used to finance primary-school education and 54 percent was allocated for junior secondaryeducation. In FY97/98, primary education received a larger proportion of the budget (44 percent) whilejunior secondary school received 52 percent of the provincial budget. In the following analysis, weexamine the impact of the project on the province.

50

Base Case

Table 6: Fiscal impact of the project in RIAU (Rp billion)

98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06Before ----------------- Project implementation period ------------ After Afterproject project project.

GDPGrowthrate -12 0 3 3 3 4 5Inflation rate 80 20 7 7 7 7 7

Growth rate ofprovincial basic 0.0 1.0 2.0 3.0 4.0 5.0 6.0education budget (%)

Total basic education 88.1 121.8 121.8 124.2 126.7 131.8 137.1 143.9budget "

Project costs 2/ 17.2 26.2 34.3 44.4 32.5 8.4

Project recurrent costs 1.7 2.6 3.4 4.4 3.3 0.8 7.5

Project costs / Total 14 22 28 35 25 6education budget (%/6)

Project recurrent cost 1 2 3 4 2 1 5/Total education budget(%)

1/ 2/ and 3/ please see above

The analysis shows that the burden of the project on the total education budget for Riau is high. Itincreases from 14 percent to as high as 35 percent over the period (Table 6). Thus, the institutionalcapacity aspect of the project in Riau is also of great importance. Technical assistance has to be providedto key government agencies for implementation purposes.

The ratio of recurrent costs over total project costs, however, remains relatively low and constant over theperiod. It rises to as high as 4.0 percent during the period but not more. Upon completion of the project,the recurrent cost to the government represents 5 percent of the total provincial budget. In both cases,recurrent expenditure is sufficiently low and should be easily financed during implementation in the formof counterpart funding and absorbed after the completion of the project.

51

High Case

Table 7: Fiscal impact of the project in RIAU (Rp billion)

98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06Before ----------------- Project implementation period ------------ After Afterproject project project

GDP Growth rate -12 0 3 3 3 4 5Inflation rate 80 20 7 7 7 7 7

Growth rate of 1.0 2.0 3.0 4.0 5.0 6.0 7.0provincial basiceducation budget (%)

Total basic education 88.1 121.8 124.2 128.0 133.1 139.7 148.1 157.0budget "

Project costs 2/ 17.2 26.2 34.3 44.4 32.5 8.4

Project recurrent costs 3/ 1.7 2.6 3.4 4.4 3.3 0.8 7.5

Project costs / Total 14 21 27 33 23 6education budget (%)

Project recurrent cost 1 2 3 3 2 1 5/Total education budget(%)1/ 2/ and 3/ please see above

Under the high scenario, where assumptions of real increases in the basic education budget are introducedas early as FY99/00, the total project cost as a percentage of the basic education budget remains high. Itincreases to as much as 33 percent in the fourth year of the project (Table 7). In the case of recurrentcosts, since the basic education budget is projected to increase by 6 percent in the period after the project,absorbing these additional costs will not be difficult.

Conclusion

The analysis indicates that the issues of program sustainability and the provision of counterpart funds inall the 3 provinces is not expected to be a significant problem. However, due to the relatively heavyburden of the project on the provincial budgets, adequate technical assistance to key government agencieswill be of prime importance.

52

Annex 6

Sumatera Basic Education ProjectProcurement, Disbursement and Financial Management

Procurement

All procurement of goods and works will be carried out in accordance with the Bank's Guidelinesfor Procurement under IBRD Loans and IDA Credits dated January 1995, revised in January and August1996 and September 1997. The procurement of consulting services will follow procedures prescribed inthe Guidelines on Selection and Employment of Consultants by World BankBorrowers dated January1997, revised September 1997. Table A summarizes the procurement arrangements under the project,showing the items, their respective cost estimates and proposed method of procurement while Table Bpresents the prior review thresholds.

Table A: Project costs by Procurement Arrangements(in US$ million equivalent)

Procurement Method Total CostExpenditure Category NCB Other * (incl. contingencies)

1. WorksRehabilitation 8.7 8.7

(7.0) (7.0)2. Goods

Equipment and Fumiture 0.9 0.2 1.1(0.8) (0.1) (0.9)

Educational Materials 8.0 8.0(6.3) (6.3)

3. ServicesTraining and Fellowships 21.2 21.2

(17.3) (17.3)Services of Contract Teachers 2.3 2.3

(2.3 (2.3)Consultants' Services 5.4 5.4

(5.4) (5.4)4. Miscellaneous

Secondary School Scholarships 14.3 14.3(14.3) (14.3)

Primary School Grants** 7.4 7.4(7.4) (7.4)

Secondary School Grants** 3.9 3.9(3.9) (3.9)

Private School Grants** 3.0 3.0(2.2) (2.2)

Project Management 8.4 8.4(6.7) (6.7)

Total 0.9 83.4 84.3(0.8) (73.8) (74.6)

* Includes Community participation, procurement of small works, national shopping, direct contracting, Govemment administrative proceduresacceptable to the Bank, consultant selection procedures acceptable to the Bank, and service delivery contracting.** Includes procurement of goods, works and services.

53

Organization and management of Procurement. The procurement plan reflects thedecentralized nature of the project's activities and will be carried by the 28 project districts and by

Sumatera Utara, Riau and Bengkulu provinces throughout the project implementation period. Theinstitutional arrangements for the project are charted in Attachment 1. Most of the procurement for theproject will be in small contracts. The District Project Implementation Units (DPIUs) in each district willbe in charge of procurement for the activities in the respective districts. Since districts have little or noexperience with procurement under Bank-assisted projects, guidance will be provided by the provincialProject Implementation Units (PPIUs) in respective provinces, which will be provided with appropriatetechnical assistance. The PPIUs will be in charge of procurement for the project-related activities at theprovincial level. Assistance of a specialized nature, such as for selecting and appointing internationalconsultants, will be provided by CPCU in Jakarta, which is the agency currently implementing all Bank-financed basic education projects. The staff of the CPCU will be augmented to address the requirementsof this project, in addition to its already existing workload.

In the event of any conflict between the Bank guidelines and Keppres 16/1994 or any other GOIregulations, the requirement of the Bank guidelines will govern. The Government has waived suchunacceptable procedures in a supplemental letter to the Loan Agreement.

Civil Works (US$ 8.8 million equivalent for school rehabilitation, including contingencies).The work will be small in size and scattered over the 28 districts in the three project provinces.Rehabilitation works for primary schools including provision of water supply and toilets and repair ofschool furniture, will be procured under lumpsum, fixed-price contracts awarded on the basis ofquotations obtained from three qualified domestic contractors in response to a written invitation. Theinvitation shall include a detailed description of the works, including basic specifications, the requiredcompletion date, a basic form of agreement acceptable to the Bank, and relevant drawings, whereapplicable. The award shall be made to the contractor who offers the lowest price quotation for therequired work, and who has the experience and resources to complete the contract successfully. Thecontracts will be managed by the school committees, established under the project.

Equipment and Furniture (US$ 1.1 million equivalent including contingencies). Procurementof furniture and office equipment will be carried out by the 28 DPIUs and three PPIUs for their respectiveactivities. Each package of goods is not expected to exceed US$200,000, but packages valued atUS$50,000 equivalent or more would be procured through NCB procedures acceptable to the Bank.Furniture and equipment costing less than US$50,000 per contract would be purchased on the basis ofnational shopping procedures acceptable to the Bank. Quotations must be obtained from at least threequalified suppliers on the basis of a detailed description and quantity of goods, as well as the desireddelivery time and place.

Educational Materials (US$ 8.0 million equivalent including contingencies). This wouldconsist of books for school libraries, teachers reference books, training materials, charts, maps, and otherteaching aids, including kits for purposes of demonstration. The procurement will be based on item listsagreed with the Bank and through direct contracting of proprietary items with prior Bank agreement orthrough national shopping procedures acceptable to the Bank. Quotations must be obtained from at leastthree qualified suppliers on the basis of a detailed description and quantity of goods, as well as the desireddelivery time and place.

Training (US$20.5 million equivalent including contingencies) for education managers andstaff, project managers and staff, school principals, supervisors, and teachers will be carried out bytrainers who will receive their own training from consultants who will be hired following procedures setforth in the Consultant Guidelines (above). The trainers would conduct training activities in accordancewith Government administrative procedures (including those governing staff travel and subsistence

54

allowances, honoraria, provision of consumable materials, and other training-related activities) acceptableto the Bank and based on the agreed annual work program. Similarly, the training of management andstaff of the district and provincial agencies will be carried out by consultants who will be hired in

accordance with the above Consultant Guidelines and who will conduct training under plans agreed with,and Government procedures acceptable to the Bank.

Consultants' Services (US$ 5.4 million equivalent including contingencies). These contractswould cover technical assistance for capacity building, training programs, monitoring and evaluation,project implementation, and impact evaluation studies. Recruitment would follow procedures prescribedin the above Consultant Guidelines. Letters of invitation and terms of reference for all consultancies andsingle source contracts will be subject to prior review by the Bank for contracts valued at US$ 100,000equivalent or more awarded to firms or US$50,000 equivalent or more awarded to individuals. Theconsultants would be chosen based on QCBS (Quality- and Cost-Based Selection) procedures. Consultingassignments valued at more than US$200,000 equivalent will be advertised in Development Business. TheStandard Request for Proposals, including standard contracts, dated July 1997 and revised in April 1998will be used for all consultant assignments. The short list of consultants for services for field engineer,estimated to cost less than US$200,000 per contract, may consist entirely of national consultants. TableAI provides the breakdown of consultant contracts.

Contract Teachers (US$ 2.3 million equivalent including contingencies) would be selected inaccordance with criteria agreed with the Bank, following Government procedures and under contractsacceptable to the Bank and appointed by the head of district (Bupati/Walikotamadya).

Scholarships (US$ 14.3 million equivalent including contingencies) for secondary schoolstudents will be awarded in accordance with criteria agreed with the Bank, following Govemmentadministrative procedures acceptable to the Bank.

Primary and Secondary School Grants (US$ 11.3 million equivalent including contingencies)for selected primary and junior secondary schools will be awarded based on the agreed criteria with theBank, following Government administrative procedures acceptable to the Bank. Grants are Rp 2 millionper school per year for primary schools and Rp 4 million per school per year for junior secondary schools.The Grants will cover expenditures for instructional materials (including supplemental reading books,teachers' guides, library books, reference books, atlases, charts and posters), consumable materials(including students' notebooks, chalk, pencils, and supplies for practical subjects), minor repairs andmaintenance at schools (including painting and repair of windows, doors, classroom desks and chairs,roofs, toilets, water drainage and footpaths), provision of public transportation to teachers attending KKGtraining, and formal and informal school charges (including new students entry fees and examinationfees). Procurement of goods under the grants would be through national shopping.

Private School Grants (US$ 3.0 million equivalent including contingencies) for selected privateschools for rehabilitation of school buildings, equipment and furniture will be awarded upon submissionof acceptable proposals from private schools, based on agreed criteria with the Bank, followingGovernment administrative procedures acceptable to the Bank. Grants will be a maximum of Rp 30million equivalent and the works will be carried out following community participation procedures,agreed with the Bank. Proposals should be matched with at least 25% of the total cost of the works to beprovided by the community.

Fellowships (US$ 0.5 million equivalent including contingencies) for teachers would be awardedin accordance with annual plans agreed with the Bank and following Government administrativeprocedures acceptable to the Bank.

55

Project Management (US$ 8.3 million equivalent including contingencies). Support for projectmanagement activities including travel and subsistence allowances, honoraria, office support, meetingsupport and provision of consumable materials would be provided in accordance with Governmentadministrative procedures acceptable to the Bank.

Table Al: Selection and Hiring of Consultants

Type of Consultant Hiring Approximate cost AssumptionsMethod per Assignment

(US$)LocalProvincial LevelInstitutional Development QCBS 14,000 2 year contractProject./Education Management QCBS 14,000 2 year contractMonitoring and Evaluation QCBS 14,000 2 year contractConstruction Consultants QCBS 14,000 2 year contractField Engineers QCBS 600 4 month contractQuality - SD/MI Training QCBS 14,000 2 year contractQuality - SLTP/MT Training QCBS 14,000 2 year contract

Central LevelManagement QCBS 28,000 2 year contractMonitoring and Evaluation QCBS 28,000 2 year contractQuality - SD/MI Training QCBS 28,000 2 year contractQuality - SLTP/MT Training QCBS 28,000 2 year contractConstruction QCBS 28,000 2 year contract

InternationalManagement and Training QCBS 240,000 1 year contractMonitoring and Evaluation QCBS 240,000 1 year contractImpact Evaluation QCBS 60,000 3 month contract

Prior Review Thresholds

Table B summarizes the threshold for procurement methods and Bank review.

The first contract for civil works and goods in each district in each fiscal year would be subject toprior review by the Bank whereas all other contracts would be subject to random ex-post review. TheBank would do random ex-post review of a sample of approximately 10 percent of these contracts. Allterms of reference of consulting firms and consultants, all single-source selection of consultants andconsulting firms, and all consultant contracts costing at or more than US$100,000 for firms and at or morethan US$50,000 for individuals would be subject to prior review by the Bank. All other consultantcontracts would be subject to random ex-post review. Contracts for fellowships, training, and services ofcontract teachers will be subject to random ex-post review.

About 30 percent of all contract awards would be subject to prior review.

56

Table B: Thresholds for Procurement Methods and Prior Review

Expenditure Contract Value Procurement Contracts Subject toCategory Threshold Method Prior Review

1. WorksSchool rehabilitation All Small Works First contract from each district

each year regardless of value

2. GoodsEquipment and furniture Equal to or more than NCB First contract from each district

US$50,000 each yearLess than US$50,000 National Shopping

Educational materials All National Shopping and/orDirect contracting Prior Bank agreement of item

list3. ServicesTraining/fellowships All Proposal to include subject, Prior review of proposal and

types of participants, period of annual plantraining, cost

Contract teachers All Service delivery contracting Criteria agreed by the Bank

Consultant contracts for Equal to or more than QCBS * Prior reviewimplementation and studies US$100,000Consulting services by Equal to or more than QCBS* Prior revisedindividual US$50,000

4. MiscellaneousScholarships All National shopping for goods Criteria agreed by the BankPrimary and Secondary School All National shopping for goods Criteria agreed by the Bankgrants Community participation for Criteria agreed by the Bank

repairs and maintenance

Private School Grants All National shopping for goods Criteria agreed by the BankCommunity participation Criteria agreed by the Bank

Project management Regular government procedures Criteria agreed by the Bank

* Quality- and Cost-Based Selection method.

Total value of contracts subject to prior review: US$6 million.

57

Table C: Allocation of Loan Proceeds

Expenditure Category Total Loan Credit CreditAmount in Amount in Amount in Amount in Financing Percentage

US$ US$ Million SDR US$ millionmillion

(1) Civil works 6,800,000 5,300,000 1,100,000 1,500,000 80%

(2) Goods 7,100,000 6,500,000 400,000 600,000 100% of foreignexpenditures, 100% oflocal expenditures (ex-factory) and 80% oflocal expendituresprocured locally

(3) Training and Fellowships 16,800,000 12,100,000 3,500,000 4,700,000 80%

(4) Scholarships 14,000,000 8,000,000 4,500,000 6,000,000 100%

(5) Grants:(a) Primary schools 7,300,000 5,200,000 1,600,000 2,200,000 100%(b) Junior secondary schools 3,800,000 2,600,000 800,000 1,100,000 100%

(6) Private School Grants 2,200,000 1,700,000 400,000 500,000 100%

(7) Services of Contract Teachers 2,200,000 1,900,000 200,000 300,000 100%

(8) Project Management * 6,600,000 4,500,000 1,500,000 2,100,000 80%

(9) Consultants' services 5,300,000 4,200,000 800,000 1,100,000 100%

(10) Fee 545,000 545,000 Fee equal to 1% of theamount of the Loan

(11) Unallocated 1,955,000 1,955,000

Total 74,600,000 54,500,000 14,800,000 20,100,000

* Includes travel, per diem, honoraria, office equipment and materials, and office support.

Disbursements

Use of Statements of Expenditures (SOEs). Disbursements for contracts at or aboveUS$200,000 for civil works and goods, US$100,000 for consulting firms, and US$50,000 forindividual consultants would be fully documented. Disbursements for all other expenditures,would be against statements of expenditure, whereby supporting documentation is to be retainedby the implementing agencies and made available to the Bank for review during supervision.

Special Account. To facilitate project implementation and disbursement, a SpecialAccount (SA) in US currency in the amount of US$4.3 million will be established by theDirectorate General (DG) of the Budget at Bank Indonesia on terms and conditions acceptable tothe Bank. The DG Budget will submit applications for replenishment of the Special Account on a

58

monthly basis, or when the account is drawn down to within 20% of the initial deposit, whicheveroccurs first. In addition to the supporting documents being kept at the DPIUs/PPIUs, the DGBudget will also retain copies of the relevant supporting documents against which applicationsfor disbursements are prepared.

Flow of Funds. The Pimpro/Pimbagpro at the PPIUs/DPIUs will be responsible forauthorizing the project expenditures in accordance with the agreed budgets under the existinggovernment procedures. They will submit their payment requests to their respective MOFTreasurer (KPKN) who will issue payment remittance orders (SPM) to Bank Indonesia to creditpayees' accounts at the latter's respective banks and to debit the project Special Account. Forexpenditures in small amounts and for activities managed by PPIUs/DPIUs themselves(swakelola), sufficient cash advance funds will be provided by KPKN to the Treasurer of thePPIUs/DPIUs. Each month or when required earlier, the PPIUs/DPIUs account, based on thePPIUs/DPIUs reports; the KPKN will request reimbursement from the project Special Account.

Financial Management System

Internal Control System. Existing systems and internal controls at the CPCU andprovincial and district levels will be reviewed to: a) detertnine the extent to which existingsystems and procedures can be used and relied upon, b) determine the extent to whichsupplementary systems and procedures will be required, and c) identify the address any shortfallsin existing systems which may be appropriately addressed within the scope of the project.Additionally, the result of this review will be used in the design of appropriate systems, includingdevelopment of documented procedures for project accounting and reporting at the CPCU,PIPUs, and DPIUs. The review and the design of financial management systems will be carriedout in accordance with the Guide for Review and Design of Accounting and Reporting Systemsfor World Bank Financed Projects, issued by EAP, and will be completed prior to theeffectiveness of the loan.

The adequacy of staff to carry out the project and adoption of internal controls by theagencies involved under the project have been reviewed. The limited experience and possiblyinadequate levels of staff skills for carrying out project activities, which has been observed insome districts agencies, will be addressed before project implementation through: (i) assignmentof skilled staff, operational and financial, to the district agencies concerned from other,cooperating agencies; (ii) issuance of technical implementation guidelines (Juknis); (iii) provisionof training on project administration and financial management; and (iv) deployment ofconsultants who will provide guidance during project implementation.

Each DPIU will have a Pimbagro, Treasurer, Procurement Officer, Financial Officer, and asmall team of technical staff. The provincial PPIUs and the CPCU in Jakarta will includepositions of assistants in finance, implementation, programming, and monitoring and evaluation.The qualification requirements for Pimpro/Pimbagro and Treasurer are as follows:

Pimpro/Pimbagro Treasurer (Bendaharawan)* Competent staff of the agency * Competent staff of the agency* University degree (SI) * Diploma (D3)* Minimum staff level III/c for Province and * Minimum staff level II/c

Ill/b for District* Attainment of project management course * Attainment of treasury course certificate or

certificate or equivalent equivalent* Two years working experience in * One year working experience in

government projects government projects

59

Pimpro/Pimbagpro and treasurer requirements will be fulfilled and submitted for Bankapproval before loan effectiveness. A dated covenant will be included in the Loan Agreement.

Financial Statements. The project financial statements showing the financial position ofthe project during the fiscal year ending on March 31 will consist of the following:

(a) Financial Statement of Project Account: Each PIU will maintain separate sub-project accounting records, on a cash basis, for each source of funds. The provincial PPIUs andthe CPCU will maintain similar accounting records for activities executed at provincial andcentral levels, respectively. All relevant supporting documents will be kept for annual audit andrandom inspection by the Bank. The Pimbagpro will submit the financial report to the PPIU on aquarterly basis. The PPIU will consolidate all districts reports. The overall consolidated financialproject accounts will be prepared by the CPCU, i.e., Statement of Project Expenditures andFinancing (SPEF).

(b) Financial Statement of Special Account and SOE: The DG Budget, as custodian ofthe project Special Account and responsible for disbursing funds from the Bank, will prepare thefinancial statements of the Special Account and the SOE (Statement of Expenditures). Thefinancial statements in standard formats (developed from June 1992) will include the following:

- Deposits and replenishments to the Special Account received from the Bank- Withdrawals from the Special Account, including all SOEs (both from SA and other

accounts) used as the basis for submission of withdrawal applications* Remaining balance at the end of fiscal year* Reconciliation between amount received by SA and amount disbursed by the Bank

Financial Management Reporting Requirements. As part of the monitoring system, progress offinancial status will be reported on a quarterly basis. All PIUs will submit progress reports twoweeks after the end of the quarter. The PPIUs will compile and consolidate the provincial report forsubmission to consolidated reports for submission to project management and the Bank one monthafter the end of the quarter.

All financial reports will follow the agreed formats provided in the PIP, which include thefollowing:

(1) Statement of Plan and Actual Project Expenditures and Financing (SPEF)(2) Cumulative Statement of Project Expenditures and Financing (CSPEF)(3) Contract Expenditures Report (CONREP)(4) List of SPM through Special Account (SA)(5) List of SPM - Direct Payment (DP)(6) Cost Variance Report (CVR)(7) Unit Variance Report (UVR)(8) Variance Analysis Report (VAR)(9) Project Expenditures and Financing by District (LOCPEF) - consolidated report

only(10) Status of Loan Disbursements (STATLN) - consolidated report only

Report 1-5 would follow BPKP Circular letter No. 02.00.07.4166/D.IV/1998 datedFebruary 27, 1998. All report formats will be provided in the PIP.

60

Auditing Requirement. The quarterly progress reports would be used for the basis ofpreparing the financial statement of project account (namely (SPEF) to be submitted to the BPKPregional offices at North Sumatera, Bengkulu and Riau, based on the provincial consolidatedaccount prepared by the PPIUs. The CPCU will prepare the overall consolidated accountscombining the provincial account and the central level account for audit by BPKP head office whichwill provide the audit opinion to the overall accounts on the basis of audit findings by the BPKPregional offices and its own audit activities. Likewise the BPKP head office will also audit thefinancial statement of Special Account and Statement of Expenditure (SOE) prepared by DGBudget. The audits by BPKP would be in accordance with the terms of reference for the audit ofproject accounts, Special Account, and SOEs acceptable to the Bank. The audit will be conducted inaccordance with the Audit Manual for World Bank Financed Projects issued by the bank (seeCentral Operational Services Unit, EAP, July 1998). Pimpro/Pimbagpro have to certify and submitManagement Representation Letter to the auditor as part of project management control. The annualaudit reports shall be furnished to the Bank not later than six months after the end of the Governmentfiscal year, i.e., not later than September 30 each year.

Sumatera Basic Education Project

Organizational StructureProvincial Level

Governorl

r--------------------------------------- .

Head of Kanwil MOEC | . . | PCC..~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~I

Provincial Project Director ------------------

Project Secretariat

lmprovmgInstitutional Improvement Quality Improvement Teacher Certification Education

Development Quality MImpr n QSLTP & MYs MI & MTs Management

Monitoring and Evaluation Procurement

Information: Direct Control

--------------------- Coordination

Oversight

PCC: Project Coordination Committee, provincial level

Suinatera Basic Education Project

Organizational StructureDistrict Level

r- - - - - - -- - -- - - - - - - -- - -- - - - - - - - - -___;

I Iead Kandep MOEC DoCCI-lead Dinas EducationI-lead Kandep MORA

L------------- District Sub-Plrojcct Director

Plroject Secreaia

r | I eachcr T raining | | Teacher 1 rainh |anagcmcnt SD & Ml Selhool | Book & EquipmentContract I eaclers SD&Ml SL'I'P & M'i's nraining; Rabilitaio; Irocurcment,

Community School Committee SD & MT'Participation T raining

Book & Equipmeint Teacher Monitoring I'eacher Incentives School Mappi1gProcurement, SLTI' & Certification and for Remote Areas;MTs Ml & MTs Evaluation Study Tours

AutllorityInformation:

Coordination

DCC: District Project Coordination Commitiitee

Sumatera Basic Education Project

Funds Flowchart

Ministiy of Finance

lo KPKN Project Director Center

LO

Provincial OfficeDirectorate of Budget KPKN Project Director Province

KPKN 1-0 Sub-project Director District

Information: Direction of flow of funds, except for scholarships and school grants

KPKN: State TreasurerProject Director, Treasurer, Secretary and Project Staff from Kandep/Kanin, MOEC, Kandep, MORA, and Dinas Education, appointed byBupati/Walikotamadia, at the recommendation of the three agencies.

64

Annex 7Indonesia: Sumatera Basic Education Project

Project Processing Budget and SchedulePlanned Actual

A. Project Budget (US$000) (At final PCD stage)At final PCD stage (3/98) 187.0 185.2At decision meeting (8/98)As of 3/16/99 337.9

B. Project Schedule Planned Actual(At final PCD stage)

Time taken to prepare the project (months) 26First Bank mission (identification) 10/17/96Appraisal mission departure 06/28/98 09/25/98Negotiations 07/22/98 10/26/98Renegotiations for IBRD/IDA blend 03/16/99Planned Date of Effectiveness 07/01/99

Prepared by: Provincial Project Preparation Committees in each of the provinces

Preparation assistance: PHRD Grant No. 029284

Bank staff who worked on the project included:Name Specialty

Brigitte Duces Sr. Operations Officer (Task Team Leader)Sue Berryman Sr. Education Specialist (Peer Reviewer)Elizabeth King Principal Economist (Peer Reviewer)Maris O'Rourke Manager (Peer Reviewer)Adriaan Verspoor Sr. Education Specialist (Peer Reviewer)Aya Aoki Operations AssistantJacqueline Baptist Economist (Consultant)Ulf Bartholomae Education Specialist (Consultant)Basilius Bengoteku Operations OfficerJohn de Bresser Institutional Development Spec. (Consultant)Bridie Champion Disbursement OfficerStephen Dice Regional Development SpecialistDeon Filmer EconomistVincent Greaney Sr. Education SpecialistDorothy Judkins Team AssistantSamuel Lieberman Lead Specialist, Human ResourcesMieko Masuda Project Analyst (Consultant)Karin Nordlander Sr. CounselNancy Mattson Project Costing Specialist (Consultant)Menno Pradhan Monitoring & Evaluation Spec. (Consultant)Rosfita Roesli Education SpecialistHaneen Sayed EconomistMarsoedi Soedjak Operations OfficerH. Anthony Somerset Teacher Education Specialist (Consultant)John Strawhom Institutional Develop. Specialist (Consultant)Jerry Strudwick Education Specialist (Consultant)Unggul Suprayitno Disbursement OfficerNigel Wakeham Architect

65

Annex 8Sumatera Basic Education Project

Documents in the Project File*

A. Project Implementation Plan

Sumatera Utara. Project Implementation Plan - October, 1998Riau Project Implementation Plan - October, 1998Bengkulu Project Implementation Plan - October, 1998

Cost Tables for the Project.

Project Action Plans for each of the Project Provinces

Project Guidelines:1. Teacher Training Guidelines for SD/MI2. Teacher Training Guidelines for SLTP and MTs3. Cluster Grants for Teacher Training4. Libraries for SD/MI5. Libraries for STLP/MTs6. Procurement of Books and Materials7. Guidelines on School Mapping8. Guidelines for the Renovation of SD & MI Schools9. Management Training Guidelines10. Local Government Strengthening11. Community Participation12. Certification of MTs/MI Teachers13. Incentives for Teachers14. Private School Grants15. Contract Teachers16. School Committees17. Monitoring

Joint Decree between Director General Primary and Secondary Education, Ministry of Education,Ministry of Religious Affairs and Ministry of Home Affairs regarding Project Implementation forBasic Education in Sumatera Utara, Riau, Bengkulu, Sulawesi Selatan and Maluku, 271' October,1998.

B. Bank Staff Assessments

Building Institutional Capacity, 1998. Draft working paper for project preparation.

Consolidation and Renovation of Primary Schools Construction of New Junior High Schools,1998. Implementation Specialist's Report.

Framework for an Assessment of the Impact of the Economic Crisis on the Demand for BasicEducation, 1998. Draft working paper for project preparation.

Institutional Arrangements and Decentralization in Basic Education, 1997. Draft working paperfor project preparation.

66

Issues in Teacher Training, 1998. Draft working paper for project preparation.

Monitoring and Evaluation, 1998. Draft working paper for project preparation.

Scholarships and School Grants, 1998. Draft working paper for project preparation.

Suprayitno, Unggul "Financial Management System" October, 1998. Table and SampleFinancial Reporting Forms.

C. Other

World Bank Demand-side Financing, 1997.

World Bank. Education in Indonesia: From Crisis to Recovery, 1998.

*Including electronic files.

Annex 9Sumatera Basic Education Project

Status of Bank Group Operations in IndonesiaOperations Portfolio

As of 1 5-Mar-99

Difference Between

expected

Original Amount in US$ Millions and actual

Fiscal disbursements a/

Project ID Year Borrower PurposeIBRD IDA Cancellations Undisbursed Orig Frm Rev'd

Number of Closed Projects: 212

Active ProjectsID-PE-36049 1999 GOI EARLY CHILD DEVELOPM 21.50 0.00 0.00 20.40 -1.10 0.00

ID-PE-3967 1999 GOI FIFTH HEALTH PROJECT 44.70 0.00 0.00 43.70 -.10 0.00

ID-PE-56074 1999 REPUBLIC OF INDONESIA MUNICIPAL INNOVATION 5.00 0.00 0.00 5.00 0.00 0,00

ID-PE-36048 1998 GOI CORAL REEF MGM REHAB 6.90 0.00 0.00 6.40 .24 .07

ID-PE-36956 1998 GOI SAFE MOTHERHOOD 42.50 0.00 6.00 34.67 6.00 0.00

ID-PE-37095 1998 GOI MALUKU REG. DEV 16.30 0.00 0.00 15.65 .65 0.00

ID-PE-39644 1998 GOI W.JAVA BASIC EDUC. 103.50 0.00 0.00 100.50 -1.66 0.00

ID-PE-3993 1998 GOI N.SUMATRA REG. ROADS 234.00 0.00 50.00 184.00 5.34 0.00

ID-PE-40061 1998 GOI BENGKULU REG DEV 20.50 0.00 0.00 19.90 1.37 0.00

ID-PE-45337 1998 GOI KECAMATAN DEV FUND 225.00 0.00 0.00 212.13 -2.45 0.00

ID-PE-48715 1998 IIDP 34.50 0.00 8.50 24.64 7.00 7.89

ID-PE-55755 1998 REPUBLIC OF INDONESIA BANKING REFORM ASST. 20.00 0.00 0.00 13.73 13.73 0.00

ID-PE-35544 1997 GOI SOLAR HOME SYSTEMS 20.00 0.00 2.50 17.50 5.00 0.00

ID-PE-36047 1997 GOI BALI URBAN INFRAST. 110.00 0.00 15.00 89.52 2.82 -1.85

ID-PE-36053 1997 GOI SULAWESI UDP II 155.00 0.00 42.05 97.05 65.75 5.73

ID-PE-3987 1997 C.INDONESIA SEC.EDU. 104.00 0.00 0.00 96.50 27.13 0.00

ID-PE-40195 1997 GOI QUAL OF UNDERGRAD ED 71.20 0.00 9.89 55.25 6.61 0.00

ID-PE-4026 1997 GOI/PERUMKA RLWY EFFICIENCY 105.00 0.00 0.00 103.60 29.94 0.00

ID-PE-40521 1997 GOI VILLAGE INFRA II 140.10 0.00 0.00 80.87 49.12 16.48

ID-PE-41894 1997 GOI SUMATRA SEC EDUC 98.00 0.00 0.00 83.29 5.95 0.00

ID-PE-42540 1997 IODINE DEF. CONTROL 28.50 0.00 2.50 23.32 2.99 0.00

ID-PE-49051 1997 BEPEKA AUDIT MODER P 16.40 0.00 .90 13.05 2.47 0.00

ID-PE-37097 1996 GOI E.JAVA SEC.EDUC. 99.00 0.00 0.00 81.38 9.88 0.00

ID-PE-39312 1996 GOI SECOND E. JAVA UDP 142.70 0.00 25.70 94.65 104.55 0.00

ID-PE-39643 1996 GOI STD/AIDS 24.80 0.00 19.80 1.69 19.64 0.00

ID-PE-3978 1996 GOI IND'L TECHNOLOGY DEV 47.00 0.00 6.00 24.41 22.48 6.03

ID-PE-4003 1996 GOI SECONDARY SCHOOL TEA 60.40 0.00 30.00 19.77 30.68 0.00

ID-PE-4004 1996 GOI HIGHER EDUC SUP.(III 65.00 0.00 6.85 35.19 -1.64 0.00

ID-PE-4008 1996 GOI NUSA TENGGAPA DEV. 27.00 0.00 4.90 16.33 5.38 -.36

ID-PE-4011 1996 GOT SULAWESI AGRI AREA 26.80 0.00 3.70 17.37 2.52 0.00

ID-PE-4014 1996 GOI KERINCI SEBLAT ICDP 19.10 0.00 0.00 18.32 6.80 0.00

ID-PE-4016 1996 REPUBLIC OF INDONESIA STRATEGIC URB. RDS I 86.90 0.00 10.00 64.44 34.29 0.00

ID-PE-4021 1996 GOI POW. TRANS & DIST II 373.00 0.00 80.00 189.22 210.41 -9.73

ID-PE-41896 1996 GOI HR CAPACITY BUILDING 20.00 0.00 3.60 14.90 10.50 0.00

ID-PE-3951 1995 GOI KALIMANTAN UDP 136.00 0.00 0.00 59.22 51.55 0.00

ID-PE-3965 1995 GOI HEALTH IV:IMPR HEALT 88.00 0.00 20.00 49.59 25.92 4.58

ID-PE-3968 1995 BOOK & READING DEV 132.50 0.00 31.50 80.08 30.58 0.00

ID-PE-3972 1995 GOI AG. RESEARCH II 63.00 0.00 14.10 37.25 33.68 -.32

ID-PE-39754 1995 TA FOR INFRA. II 28.00 0.00 0.00 23.31 20.51 3.19

ID-PE-3979 1995 GOI RURAL ELECT II 398.00 0.00 39.90 125.35 161.51 96.59

ID-PE-3984 1995 GOI LAND ADMINISTRATION 80.00 0.00 16.50 28.70 25.91 0.00

JD-PE-3988 1995 GOI PHRD II 69.00 0.00 0.00 29.99 10.97 0.00

ID-PE-4001 1995 GO TELECOM SECTOR MODER 325.00 0.00 50.00 192.74 141.08 0.00

ID-PE-4019 1995 GOI ACCOUNTANCY DEV II 25.00 0.00 3.30 10.53 12.45 0.00

Difference Betweenexpected

Original Amount in US$ Millions and actual

Fiscal disbursements a/

Project ID Year Borrower PurposeIBRD IDA Cancellations Undisbursed Orig Frm Rev'd

ID-PE-3890 1994 GOI SEMARANG-SURAKARTA U 174.00 0.00 18.67 69.04 60.80 17.92

ID-PE-3910 1994 GOI SUMATERA & KALIMAN P 260.50 0.00 20.00 168.65 154.99 8.06

ID-PE-3937 1994 GOI INTEGRATED SWAMPS 65.00 0.00 0.00 30.27 18.41 0.00

ID-PE-3945 1994 GOI HIGHWAY SECTOR II 350.00 0.00 40.00 124.19 146.51 -185.83

ID-PE-3954 1994 GOI JAVA IRR IMP & W R M 165.70 0.00 22.00 67.81 56.08 0.00

ID-PE-3985 1994 GOI WTRSHED CONSERVATION 56.50 0.00 0.00 42.06 27.12 0.00

ID-PE-3998 1994 GOI SURABAYA URBAN 175.00 0.00 30.00 68.96 76.01 15.61

ID-PE-4010 1994 GOI DAM SAFETY 55.00 0.00 8.00 24.76 24.14 0.00

ID-PE-4017 1994 GOI UNIV.RESEARCH FOR GR 58.90 0.00 11.23 18.11 19.46 0.00

ID-PE-4020 1994 GOI KABUPATEN ROADS V 101.50 0.00 0.00 15.55 14.20 0.00

ID-PE-3914 1993 GOI THIRD COMM HEALTH & 93.50 0.00 16.00 6.54 16.02 0.00

ID-PE-3990 1993 GOI WTR & SANI FOR LOW I 80.00 0.00 11.00 26.45 37.47 27.61

ID-PE-3999 1993 GOI GROUNDWATER DEVT. 54.00 0.00 24.94 1.95 18.89 1.48

ID-PE-4006 1993 GOI E.INDONESIA KABUPATE 155.00 0.00 0.00 15.16 15.13 0.00

ID-PE-4007 1993 GOI POWER (CIRATA II) 104.00 0.00 26.00 16.08 40.79 -7.32

ID-PE-4009 1993 GOI INTEGRATED PEST MGMT 32.00 0.00 5.50 4.51 10.01 .58

ID-PE-3860 1992 GOI TREECROPS SMALLHOLDE 87.60 0.00 0.00 21.34 20.30 0.00

ID-PE-3916 1992 SURALAYA THERMAL POW 423.60 0.00 132.20 23.61 149.87 5.05

ID-PE-3940 1992 GOI PRIMARY EDUC QUALITY IMPROVE 37.00 0.00 6.00 3.90 9.90 0.00

ID-PE-3966 1992 GOI NON-FORMAL EDUC III 69.50 0.00 3.10 .49 3.57 1.97

ID-PE-3969 1992 GOI PRIMARY SCHOOL TEACH 36.60 0.00 3.20 2.75 5.95 0.00

ID-PE-3997 1992 GOI TELECOM IV 375.00 0.00 50.08 47.56 97.62 1.81

ID-PE-3922 1991 GOI SULAWESI/IRIAN JAYA 100.00 0.00 0.00 1.78 1.76 0.00

ID-PE-3977 1991 GOI THIRD JABOTABEK URB 61.00 0.00 6.24 5.45 11.70 .88

Total 7,129.70 0.00 937.35 3,362.07 2,233.15 16.12 cn

Active Projects Closed Projects Total

Total Disbursed (IBRD and IDA): 2,830.30 17,405.34 20,235.64

of which has been repaid: 51.31 8,302.84 8,354.15

Total now held by IBRD and IDA: 6,140.99 9,116.50 15,257.49

Amount sold 0.00 88.08 88.08

Of which repaid : 0.00 88.08 88.08

Total Undisbursed : 3,362.07 14.05 3,376.12

a. Intended disbursements to date minus actual disbursements to date as projected at appraisal.

Note:Disbursement data is updated at the end of the first week of the month and is currently as of 28-Feb-99.

69

Anmex 10

Indonesia at a glanceEast Lower- ________

POVERTY and SOCIAL Asia & middle-Indonesia Paciflc Income Development diamond'

1997Population, mid-year (millions) 200.1 1,753 2,285 Life expectancyGNP per capita (Atlas method, US$) 1,110 970 1,230 1GNP (Atlas meftooa US$ billions) 222.1 1,707 2,818 TAverage annuaf growth, 1991-97

Population (% 1.6 1.3 1.2Labor force (%J 2.5 1.4 1.3 j GNP Gross

per primaryMost recent estimate (latest year available, 1991-97) capita enrollment

Poverty (% of poplation below national poverty line) V/ 15Urban population (% oftotal population) 37 32 42Life expectancy at birth (years) e5 69 69Infant mortalty (per 1,000 live brths) 47 38 36Child malnutrition (% of children under5) 40 16 .. Access to safe waterAccess to safe water (Y. of population) 62 84 84Illiteracy (% ofpopulatio age 15+) 16 t7 19Gross primary enrollment (% ofschool-age population) 114 115 111 Indonesia

Male 117 118 116 Lower-middle-income groupFemale 112 116 113 _ ,

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1976 1986 1996 1997Economic ratios

GDP (USS billions) 39.3 79.9 227.4 214.6Gross domestic investmenetGDP 24.1 26.7 30,8 32.1Exports of goods and services/GDP 24.5 20.2 25.8 28.1 TradeGross domestic savingslGDP 27.1 26.3 30.2 30.9Gross nationai savings/GDP .. .. 25.5 .. TCurrent account balance/GDP .. .. -3.5 -1.2 Domestnc ,nvstenlnterestpaymentrJGDP 1.2 3.0 2.2 27 InvestmentTotal debtVGDP 35.6 53.7 56.7 64.3 SavigTotal debt service/exports .. .. 35.5Present value of debt/GDP .. .. 55,0Present value of debt/exports .. .. 206.8

Indebtedness1976486 1987-97 1996 1997 1998-02

(average annual growth)GDP 6.7 7.8 8.0 4.6 -IndonesiaGNP per capita 4.1 6.1 6.8 3.5 .. Lower-middle-income groupExports of goods and services -1.7 8.7 6.3 6.3 ..

STRUCTURE of the ECONOMY1976 1986 1996 1997 Growth rates of output and Investment (1/%)

(% of GDP)Agriculture 29.7 24.3 16.5 16.1 15

TIndustry 34.1 33.8 43.2 43.9 s

Manufacturing 10.4 16.8 25.5 25.6 sServices 36.3 41.9 40.3 40.1

Prvate consumption 63.5 62.6 62.3 62.2 92 93 94 95 98 97General govemment consumption 9.4 11.1 7.6 6.9 IG0I GDPImports of goods and services 21.5 20.5 26.4 29.2 |

1976-86 1987-97 1996 1997 Growth rates of exports and Imports (%)(average annual growth)Agriculture 4.1 3.2 3.2 0.6 25-Industry 6.5 10.0 10.5 5.6 20

Manufacturing 14.5 11.0 11.7 6.2 s?Services 8.7 7.9 7.2 5.3 ot

Private consumption 10.0 7.9 7.4 7.5 sTGeneral govemment consumption 9.2 3.9 3.8 0.1 0-Gross domestic investment 10.8 10.6 11.8 4.2 92 93 94 95 96 97Imports of goods and services 7.3 11.2 9.6 18.2 Exports - mportsGross national product 6.2 7.9 7.5 5.1

Note: 1997 data are preliminary estimates. 1/ Poverty estimate is from 1990.

* The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond willbe incomplete.

70

Indonesia

PRICES and GOVERNMENT FINANCE ___

1976 1986 1996 1997 Inflation (%)Domestic pricesI(% change) 1TConsumer prces 5.7 8.0 6.6 101 Implicit GDP deflator 15.4 -0.2 9.0 12.0 -

Govemment finance T(% of GDP, includes current grants) ICurrent revenue - 16.6 16.0 17 92 93 94 95 96 97Current budget balance -4 .9 7.6 8.5 j GDP deflator 0 CPIOverall surplus/deficit 1.0 3.4 4

TRADE

1976 1986 1996 1997 Export and import levels (US$ mIllions)(US$ millions)I

Total exports (fob) 13,673 49,815 53,547 r0o ooFuel 6,964 11,722 11,603 50 amRubber 752 1,894 1,505 40oo0IManufactures 2,747 21,210 18,568 _ l

Total imports (cif .. 12,760 42,929 41,660 30Food 711 4,357 3,796 2000 I_hIEFuel and energy 2,375 3,607 3,924 10W0SCapital goods 5,005 19,973 19,558 6 _I

91 92 93 94 95 96 97Export prce index (1995=100) . 60Import price index (1995=100) .. 72 a Exports C ImportsTerms of trade (1995=100) .. 83 i

BALANCE of PAYMENTS -

(US$ millions.) 1976 1986 1996 1997 Current account balance to GDP ratio (1°)

Exports of goods and services 58,317 61,716 0 _Imports of goods and services . .. 52,822 47,467Resource balance 5,495 14,248 1

Net income -6,094Net current transfers -7,470 -2 I " E lCurrent account balance -8,069 -2,492 3

Financing items (net) 11,967 -7,529Changes in net reserves -3,898 10,021

Memo:Reserves including gold (US$ millions) 1,508 4,051 18,251Conversion rate (DEC, localUSS) 415.0 1,282.6 2,342.3

EXTERNAL DEBT and RESOURCE FLOWS¶1976 1986 1994 t997

(US$ millions)

Total debt outstanding and disbursed 14,010 42,916 129,03 i 7,896IBRD 213 5,058 11,138 9,991 A 9,991IDA 418 857 736 715 G 1

Composition olfaIl debt, 10iifjSs millIons)Total debt service 1340 5,984 21,459 22,768 C: 2,970

IBRD 4 636 2,249 1,848 D: 5,149IDA 2 12 26 26

Composition of net resource flowsOfficial grants 59 136 190 .E:26,748

Official creditors 839 1,016 -803 615 |7 Private creditors 1,314 528 6,971Foreign direct investment 344 258 7,960 F: 76,023Portfolio equity 0 0 3,099

Worid Bank programCommitments 564 982 1,194 810 A - iBRD E - BilateralDisbursements 257 828 905 899 B - IDA D - Other multilateral F - PrivatePrincipal repayments 1 236 1,429 1,165 C - IMF G - Short-termINet flows 256 592 -523 -266 __I

Interest payments 6 411 846 709Net transfers 250 180 -1,370 -975

Development Economics

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