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Document ofThe World Bank

ReportNo: 17887

PROJECT APPRAISAL DOCUMENT

ONA

PROPOSED LOAN

IN THE AMOUNT OF US$145.45 MILLION

TO

THE REPUBLIC OF CHILE

FORA

HIGHER EDUCATION IMPROVEMENT PROJECT

October 19, 1998

Human and Social Development GroupArgentina, Chile and Uruguay Country Management UnitLatin America and the Caribbean Regional Office

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CURRENCY EQUIVALENTS(Exchange Rate Effective 5/19/98)

Currency Unit = Chilean Peso (CLP)452.55 CLP = US$1.00

FISCAL YEARJanuary 1 to December 31

ABBREVIATIONS AND ACRONYMSAFD Aporte Fiscal Directo (Direct Financial Support)AFI Aporte Fiscal Indirecto (Indirect Financial Support)CAS Country Assistance StrategyCFT Centro de Formaci6n Tecnica (Technical Training Center)CONICYT Comision Nacional de Investigacion Cientifica y Tecnol6gica (National

Commission for Scientific and Technological Research)CORFO Corporaci6n de Fomento (Economic Development Corporation)CSE Consejo Superior de Educaci6n (Higher Council for Education)DIVESUP Division de Educaci6n Superior (Higher Education Division in the Ministry

of Education)ERR Economic Rate of ReturnFDI Fondo de Desarrollo Institutional (Institutional Development Fund)FOMEC Fondo para el Mejoramiento de la Calidad (Fund for Quality Improvement)FONDECYT Fondo Nacional de Desarrollo Cientifico y Tecnol6gico (National Fund for

Scientific and Technological Development)FONDEF Fondo de Fomento al Desarrollo Cientifico y Tecnol6gico (Fund for the

Promotion of Scientific and Technological Development, for Industry-University Collaborative Research)

GDP Gross Domestic ProductGNP Gross National ProductHE Higher EducationIBRD International Bank for Reconstruction and Development (the Bank)ICR Implementation Completion ReportIDB Inter-American Development BankIIU Institutional Implementation UnitM&E Monitoring and EvaluationMECE-SUP Mejoramiento de la Calidady la Equidad en la Educaci6n Superior

(Quality and Equity Improvement in Higher Education)MINEDUC (MOE) Ministry of EducationMIS Management Information SystemNPV Net Present ValueOECD Organization for Economic Cooperation and DevelopmentOM Operational ManualPFU Publicly Funded UniversityPHRD Policy and Human Resources DevelopmentPI Professional InstitutePIP Project Implementation PlanPPF Project Preparation FacilityR&D Research and Development

Vice President Shahid Javed BurkiCountry Director Myrna AlexanderSector Director Xavier CollTask Manager Lauritz Holm-Nielsen

ChileHigher Education Improvement Project

CONTENTS

A. Project Development Objective

1. Project development objective and key performance indicators ............................ 2

B. Strategic Context1. Sector-related CAS goal supported by the project ............................................. 22. Main sector issues and Government strategy .................................................. 33. Sector issues to be addressed by the project and strategic choices .......................... 6

C. Project Description Summary

1. Project components ......................................................... 82. Key policy and institutional reforms supported by the project .......... .................... 93. Benefits and target population ......................................................... 94. Institutional and implementation arrangements ................................................ 10

D. Project Rationale

1. Project alternatives considered and reasons for rejection ..................................... 122. Major related projects financed by the Bank and/or other development agencies ........ 133. Lessons learned and reflected in proposed project design .................................... 134. Indications of borrower commitment and ownership .......................................... 145. Value added of Bank support in this project ................................................... 14

E. Summary Project Analyses

1. Economic ......................................................... 142. Financial ......................................................... 153. Technical ............................... 164. Institutional ..................... 165. Social ..................... 176. Environmental assessment ..................... 187. Participatory approach .1..................... 8

F. Sustainability and Risks

1. Sustainability ..................... 192. Critical risks ..................... 203. Possible controversial aspects ..................... 21

G. Main Loan Conditions

1. Effectiveness conditions .................. 21

H. Readiness for Implementation ........................ 19

I. Compliance with Bank Policies ........................ 20

Annexes

Annex 1. Project Design SummaryAnnex 2. Detailed Project DescriptionAnnex 3. Estimated Project CostsAnnex 4. Economic AnalysisAnnex 5. Financial SummaryAnnex 6. Procurement and Disbursement Arrangements

Table A. Project Costs by Procurement ArrangementsTable Al. Consultant Selection ArrangementsTable B. Thresholds for Procurement Methods and Prior ReviewTable C. Allocation of Loan Proceeds

Annex 7. Project Processing Budget and ScheduleAnnex 8. Documents in Project FileAnnex 9. Statement of Loans and CreditsAnnex 10. Chile at a GlanceAnnex 11. Chile Higher Education

Map

ChileHigher Education Improvement

Project Appraisal Document

Latin America and the Caribbean Regional OfficeLCSHD

Date: October 19, 1998 Task Team Leader: Lauritz Holm-NielsenCountry Director: Myma Alexander Sector Director: Xavier Coll

Project I): 45881 Sector: Education Program Objective Category: N/ALending Instrument: Specific Investment Loan Program of Targeted Intervention: JI Yes [X] No

Project Financing Data [X] Loan [] Credit [] Guarantee [] Other,SpecifyJ

For Loans/Credits/Others:

Amount (US$m): 145.45Proposed terms: [] Multicurrency [X] Single currency, specify US$

Grace period (years): 3 [ Standard [] Fixed [X] LIBORVariable -based

Years to maturity: 15Commitment fee: 0.75%

Front End fee: 1.00%

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

Government 96.OOM 0.00M 96.OOMIBRD 78.30M 67.15M 145.45M

Total 174.30M 67.15M 241.45MBorrower: Republic of ChileGuarantor: N/AResponsible agencies: Ministry of Education, Division of Higher Education (DIVESUP)

Estimated disbursements(Bank FY/US$M): 1999 2000 2001 2002 2003 2004Annual 16.00 36.00 30.00 24.00 23.00 16.45

Cumulative 16.00 52.00 82.00 106.00 129.00 145.45

Project implementation period: January, 1999 to December, 2003 Expected effectiveness date: January 1, 1999Expected closing date: June 30, 2004

A: Project Development Objective

1. Project development objective and key performance indicators (see Annex 1):

The objective of the project is to improve the performance of the Chilean higher education system in thefollowing dimensions:

* Coherence and Efficiency: the project would enhance the legal and regulatory framework in order tointegrate higher education institutions at the three tiers (universities, professional institutes, andtechnical training centers). It would develop one coherent and flexible set of rules to: (i) allocate anincreasing share of public funding on the basis of performance; (ii) facilitate the enrollment ofstudents with academic credits from lower-tier higher education institutions; (iii) require periodicevaluation; and (iv) build strategic planning and management.

* Quality and Relevance: the project would promote study programs and levels of higher education thatare responsive to social demand and labor market needs and, thus, would have direct impact onChilean socio-economic development. This would be achieved through the establishment of: (i) aCompetitive Fund to finance such programs and levels; and (ii) an integrated quality assurance andevaluation system for all higher education institutions and study programs in order to provideconcrete guidance to students, employers, Government, and the higher education sector itself.

* Equity: the project would encourage participation of students from low-income families byidentifying inequities in the higher education system and developing policies and policy instrumentsto overcome them. It would assess the pattern of participation by gender and by socio-economicgroups in higher education. More specifically the project would revise and enhance the student aidsystem, and integrate regional development criteria in the selection of specific innovation activities tobe financed through a Competitive Fund.

Progress towards development objectives and outputs will be monitored and assessed based on keyperformance indicators shown in Annex 1. The main performance indicators are: (i) increasedpercentage of graduates employed in their fields of study within six months of graduation; (ii)improved positive views from employers on quality of graduates; (iii) increased enrollment in andgraduation from relevant technical, undergraduate and graduate programs; and (iv) increasedproportion of low income students that enter and graduate from the higher education (HE) system.

B: Strategic Context

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

CAS document number: 14370-CH Date of latest CAS discussion: May 9, 1995

This project would contribute to the sector-related Country Assistance Strategy (CAS) goal of "upgradingChile's human capital, with a view towards improving the country competitiveness in the internationalarena" (para. 34). It is widely accepted that HE systems play a critical role in the enhancement of acountry's competitiveness, through the training of its workforce and the advancement of knowledge,which in turn leads to new products and processes. Chile's HE system is not yet as developed as those ofindustrialized economies, but compares well with that of, for example, Argentina, some of the East Asiancountries, and Hungary. Three key indicators lead to that conclusion: (i) qualification of teaching staff inmost OECD countries university professors are recruited from the Ph.D. level; Chile produces 1/20 (perpopulation unit) of the Ph.D.s produced on average by OECD countries, and less than 15% of facultyhave advanced degrees (Argentina: 15%); (ii) coverage: it is about 27% in Chile, compared to 35% inArgentina, and 17% in Hungary, but significantly lower than in Korea (48%) and OECD countries, which

are approaching higher education for all, with more than 50% higher education enrollmient on average,and more than 80% of enrollment in the most advanced countries; and (iii) incomplete diversification: thesubsector has relatively low enrollment rates at the lowest tier (17%, two year vocational and technicallevel), the graduate level, and in high cost / low private return fields such as basic sciences (2.5%).

2. Main sector issues and Government strategy:

Key Structural and Institutional Features of the Sector:

In 1981, the government launched a comprehensive series of structural andfinancial reforms. The highereducation system was diversified and stratified into three tiers: universities, professional institutes (PIs),and technical training centers (CFTs). Fees were introduced in public institutions, and the number of fee-charging private universities and colleges increased sharply. In addition, a loan scheme for students wasintroduced in public institutions. The procedures for financing public universities were changed toencourage income generation and cost-saving, and to award research funding on a competitive basis.Finally, public university personnel changed from regular to special civil service status (estatutoespecial).

These reforms, aimed at deregulating the subsector, had a profound impact on its size, organization,financing and management. They led to more than a doubling of student intake, increasing the grossenrollment rate from 10.8% in 1980 to 27% in 1994; they also resulted in a proliferation of institutions,from 8 universities to 257 institutions, including 68 universities, 70 PIs and 11 9 CFTs, many of which arein the regions.

Nearly all of the expansion has been financed by private sources. Public expenditures on highereducation declined by 40% in real terms thoughper capita spending rose. By 1990, the state financed27% of the costs, down from 100% (before the 1980's reform). Since the return of democracy in 1990,however, the resources allocated to the sub-sector have increased by 50% in real terms, driving the shareof higher education in the education budget to about 12%. In 1997, funding, in pub]lic and privateinstitutions, came from student fees (33%), income from services (26%), and public subsidies (41%).

Public funding is allocated through four mechanisms: (a) direct public support, Aporte Fiscal Directo(AFD) to the 25 "pre-reform" public and private universities (approximately 43% of public funding); (b)indirect public support, Aporte Fiscal Indirecto (AFI) linked to a "best student formula" which allocatesresources based on the number of top scorers admitted in each institution the previous yearl (8.6% ofpublic support); (c) Institutional Development Fund, Fondo de Desarrollo Institucional (FDI), dividedinto four competitive funds (8.9% of public funding), one for science and technology (with 3 windowsrespectively for general, applied and priority research), a second one for institutional development, onefor teacher education, and a pilot program launched in 1998, called convenios dle desempenio("performance contracts"); and (d) assistance to students (21.7% of public funding) in the form ofscholarships and a loan system based on an income contingent repayment scheme, which benefit about54% of students.

Recent developments and present status: A new legal framework providing greater autonomy and moreparticipatory governance for the public universities is under congressional review. However, studentunrest spread to the entire sub-sector during May/June of 1997. Although grievances focused onfinancing and governance issues, they revealed broader concerns having to do with the concept, identityand mission of higher education in Chile, its role in national development and the role of the State in

'Students are classified in 5 categories, with a 12:1 subsidy range.

supporting it. The Ministry of Education recognized that in recent years the basic and secondaryeducation reform had mobilized attention at the expense of the higher education sector, where a long termvision had been missing. The government was both receptive and firm, agreeing to the most pressingfinancial demands, including a revision of the policy covering contractual funding. At the same time, theMinistry opened a process of broad dialogue which will address, as a matter of urgency, issues of equity,management and participation, regulation, and financing, and, in a more strategic perspective, concerns ofquality in the context of global competition, regional development, and international cooperation.

Main Sector Issues:

Fragmentation: The system has the following characteristics: (i) inconsistencies between the currentregulatory framework and policy instruments; (ii) incomplete diversification, with low enrollment at thetechnical level, and science and technology undergraduate and graduate programs, due to failure of themarket to engage private institutions in more expensive programs (which occurs in most countries);2 (iii)segmentation, since student transfer between the different institutional tiers is extremely limited, whichhampers the aspirations of learners, adversely affecting equity; and (iv) insufficient linkages with thepublic and private sectors, and regional development.

Governance: The Ministry of Education has limited possibilities of action to develop an efficient nationalpolicy. This problem is due to two factors: (i) higher education institutions have real autonomy; and (ii)the system is very fragmented and heterogeneous. The higher education institutions have highly unevencapacity for self governance. Some have developed capacity for strategic planning and self evaluation,and are moving towards establishing real internal and external accountability, while others are either tooautocratic and resistant to change, or are still struggling with fundamental issues. Over the last year, theHigher Education Division (DIVESUP) has increased its capacity in terms of human and materialresources to effectively perform its role as coordinator and regulator of the system.

Efficiency: At the sub-sector level, the proliferation of small private institutions points to the need forconsolidation. At the institutional level, the existing one-year financial framework is inadequate, not onlyas a time horizon for academic improvement, but also as a tool to raise efficiency. In 1992, it was foundthat the average time for completion of a first degree had increased from 7 to 10 years in the 25traditional universities, twice the stipulated length. There are also high dropout rates.

Financing: Most public financing is linked neither to performance nor to social promotion. There areconcerns about the adequacy of the different financing mechanisms: (i) institutional funds (AFD andAFI); (ii) FDI; (iii) student support (scholarships and loans); and (iv) research and development (R&D)funding. AFD accounts for about half of all government expenditures on higher education, and 95% of itis distributed among 25 "traditional" universities on a historical basis. The remaining 5% is distributedaccording to 5 performance indicators, but given its structure and size it has a very limited impact on thesystem. The system of resource allocation bears little relationship with any obvious indicator of need.Another point of concern is the level of autonomy of public and private universities among the traditionaluniversities. Given that both types of universities receive public resources they should have the samelevel of autonomy and should operate on a level playing field. Additionally, the system of student aid iscomplex. There are three main student loan and scholarship schemes and two new scholarship programs,but there is limited coordination among them. Moreover, the amount allocated to student aid is relativelysmall in the context of a system where fees are high. These programs offer resources to cover part or allof the fees, but they do not provide resources for living expenses (though some institutions providescholarships that cover partial living expenses). Many private institutions (professional institutes and

2 Basic sciences represent 12% of careers offered in traditional universities, while only 0.5% in the private sector. On theother hand, social sciences represent 7% of courses offered by traditional universities, but 27% in the private sector.

technical training centers) have little or no access to these resources and they are the ones that need itmost since the majority of their students come from lower income families.

Equity: In the late '80s, the top 20% income group obtained around 53% of public expenditures on thesub-sector, while the bottom 20% only captured 6%. Although the gross enrollment rate for the 18 to 24years-old group was 15.8% in 1990, only 8% of the population belonged to the lowest quintile while54.2% belonged to the upper income quintile. Moreover, this gap has been widening in the past years; in1992 the enrollment rates were 7.8% and 41.1% respectively. This situation is aggravated by the lack ofefficient mechanisms to support academically qualified but financially needy students. Also, thediversification of higher education is incomplete, and there is no real choice for the students. The lack ofdirect public funding for professional institutes and technical training centers seems to be perceived as ifthe education that these institutions provide has lower priority. The market orientation of the system hasled to an emphasis on the most profitable levels and programs (for the institutions), a decline in qualityinvestment, and an uneven stratification, with weaker institutions offering lower quality services to poorerstudents at an unsubsidized cost. Most regional institutions have not received enough resources to play arole in promoting decentralized development. Although in the last decade the share regional universitieshave received from different funds (FDI, student aid, FONDEF, and most recently performancecontracts) has been increasing, inequalities remain.

Quality: Quality is generally considered high in public higher education, and more heterogeneous inprivate institutions. The level of knowledge acquired by graduates and their associated opportunitiesdiffer widely according to the type of institution attended. The mechanisms for quality assurance havebeen improving but are still not as strong as desired3 . In particular: (i) the regulatory frarnework remainsfragmented and does not cover the entire subsector; (ii) the system does not use the full range ofmanagerial mechanisms available to guarantee quality; (iii) the expansion of the system has not been wellregulated, and the proliferation of institutions as well as programs has affected both quality and externalefficiency; (iv) the quality of teaching staff is a concern; and (v) the quality of research is at risk andprograms are barely sufficient to support the ambitions of Chile in the international scene.

Relevance: There has been strong growth in enrollment in Chilean universities since 1980. The growthhas been driven by student demand, and in some fields of study, by the new private universities' push toraise funds through offering low cost, high volume courses in careers such as law, journalism andbusiness administration. For undergraduate study programs, the result to date is a pattern of enrollmentthat is not well matched with the labor market. At the graduate level, there has been a proliferation of softstudy programs for the M.A. degree and slow or no growth in science and Ph.D. programs. Again, thereis a mismatch with the labor market in the distribution of enrollment between the various careers. Whileenrollment in the private universities represents only 31% of total enrollments, the enrolliments in socialsciences and law (22,554 and 10,077 respectively) exceed those in the publicly funded universities,(PFU) (20,235 and 7,699 respectively). In contrast, the private universities are very minor players in basicsciences and mathematics (183 vs. 7,976 in PFU), technology (9,057 vs. 52,107 in PFU) and health (567vs. 16,760 in PFU). Furthermore, there has been a decline in enrollment at the lower tiers (i.e., technicaltraining centers), from 83,000 in 1993 to 60,000 in 1997. This is the opposite of what would be expectedin an expansive higher education system reaching towards OECD country levels. This is strong evidencethat the present system is failing to respond to the needs of the country. More students would enroll at the

3In March 1990, the Higher Council for Education was created as a public, semi-autonomous organization, formallychaired by the Minister of Education. This Council was charged with developing and establishing a new evaluationsystem using the few guidelines that the 1990 law provided. The Ministry of Education is in charge of accreditationof CFTs. This is a partial accreditation system since it only covers the new private institutions (i.e., universities,professional institutes and CFTs).

lower tiers if study programs provided value for the money they cost, e.g., relevance and direct access tothe labor market.

Government Strategy:

Policy objectives:The Government presented a new bill on public universities to Congress in 1997 (see section D.4). InJuly 1997, the Minister of Education formulated the Government's commitment towards HE, its policyobjectives, and next steps. DIVESUP prepared a document on a vision, policy criteria and objectives forHE (see "Proyecto MECE - Educaci6n Superior: Visi6n global, principios y objetivos de politica, " in theproject files). This document states that quality, equity, and efficiency are priority objectives for HEpolicies: (i) quality is defined as an excellence level that allows graduates at all levels of HE to compareand compete in the international market. The current accreditation and evaluation system would beenhanced and expanded to cover the whole sub-sector of higher education. An acceptable quality levelwould be a pre-requisite for an institution to be granted government funds; (ii) equity measures areintended to alleviate limited access due to socioeconomic or geographic reasons. The Government isintegrating regional development criteria in its funding mechanisms4 , and expanding the student aidsystem; (iii) regarding efficiency, where the aim is at equilibrating teaching, research, and extensionfunctions within institutions and to diversify and integrate HE tiers, fields of study, and careers. There is adefinite strategy to link funding to performance. The Government intends to use a contracting system forthe transfer of funds to the institutions. This system would apply to the matching grants awarded by theCompetitive Fund. Later, accountability criteria would be extended to AFD transfers.

Consensus building:The Government intends to generate wide support from society via consultation with beneficiaries(including students). The documentation for the proposed project, "Proyecto MECE-SUP 1998-2003 ",has been shared with the following stakeholders: (i) MECE-SUP Advisory Group to the Minister ofEducation and DIVESUP (see project oversight in section C.4, and Advisory Group's membership andestablishing memorandum in project files); (ii) associations of higher education institutions: Council ofRectors (25 traditional universities), Consejo de la Educaci6n Superior Privada (new privateuniversities), and CONIFOS (professional institutes and technical training centers); (iii) ExecutiveBranch: Secretaria General de la Presidencia and Ministerio de Hacienda; (iv) Legislative Branch:presidents of Senate and House of Representatives, committees on education; and (v) other governmentalagencies: Higher Council for Education and the National Commission for Scientific and TechnologicalResearch (CONICYT). The next step is consultations specific to each of the components. Consultationon the quality assurance component is currently underway.

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

The issues to be addressed are: (a) quality and relevance of graduates; (b) efficiency in institutional andstudent support financial mechanisms; (c) equity in access and opportunities for further education; and(d) the system fragmentation, including HE tiers and program differentiation, and linkages with regionaldevelopment mechanisms. The project supports the necessary capacity building to undergo and sustainlegal changes in governance structures. The project would not address directly R&D fundingmechanisms. At present, R&D activities are funded by: (i) CONICYT through FONDECYT(fundamental research fund) and FONDEF (fund for technology transfer projects and services toindustry); and (ii) CORFO, through FONTEC (fund for technological innovation and development in

4 In the current pilot phase of the Competitive Fund regional universities were awarded 70% of the funds.

private firms). IDB supported these R&D activities until 1996, and the Government has continued R&Dfinancing. In addition, Fundaci6n Chile supports product innovation and commercialization.

Description of Sector Issues to be Addressed:

a. system fragmentation, including level and program differentiation, and linkages with regionaldevelopment mechanisms: The present expectations and readiness for change among sub-sectoralstakeholders offer a window of opportunity, which should be used to define an overall policyframework that balances diverse interests while addressing as a priority the issue of incompletediversification. Sub-sectoral policies have been formulated in response to emerging situations and donot add up to a coherent and comprehensive framework. There is a lack of clarity of the specificmission of the institutions comprising each of the three tiers of higher education. Thle consequenceshave been duplication and overlap of programs on one hand, and gaps on the other. For instance,universities compete with CFTs in the offering of technical careers. Due to the lack of a clear policyon research, backed up by appropriate funding policies, research is, de facto, cross-subsidized byteaching. There is a need to clarify roles at the system level and within institutions in undergraduateand graduate education, and research.

b. efficiency in institutional and student support financial mechanisms: As part of an effective sub-sectoral framework and strategy formulation, each policy should be reviewed in light of the centralobjectives for the subsector, and should be promoted by matching instruments. At the moment not allpolicy instruments support the sub-sector's stated goals. For example the AFI is allocated in a ratio of12 to 1 per student to institutions based on students' merits. The aim is to have an incentive forinstitutions to recruit the best students, an objective they would pursue in any case. The AFIresources could be used to promote equity by providing incentives for admission of talented studentsfrom less favored (municipal) secondary schools. Other instances of disconnects include the differentlevels of control applicable respectively to publicly-funded public and private universities, and thelack of decentralized decision-making power to support regional development.

c. equity in access and opportunities forfurther education: The new policy framework should include astrategy for student support addressing the issues of equitable access, participation, and careerprogression. The students are the most important element in any educational system. Insofar as they,especially the most advanced students, are the source of new blood and energy for the system, itwould be beneficial to channel their enthusiasm into constructive participation. Presently, Chile ismaking efforts to strengthen the student support system. Access is not fully equitable in geographicor socio-economic terms. The current student loan scheme is administered by the individualinstitutions and would benefit from stronger national supervision. Students from the lower incomegroups often attend the lower tier, CFTs, at relatively high costs, since these institutions do notreceive public funding. This situation is aggravated by the lack of opportunities for late re-entry andcareer progression. It is necessary to articulate the various tiers of the system, to offer credit transferoptions, and eventually to set up remedial courses.

d. quality and skills relevance of graduates: National priorities should be carefully studied and placed inthe new policy framework. A refocused policy framework would for instance: (i) ensure that Chile'shuman capital formation, accumulation and deployment compare with its competitors, including apolicy for graduate education; (ii) promote enrollment in the disciplines required for the developmentof a technology-based economy; and (iii) clarify the basis for establishing research priorities and linkthese with doctoral programs.

Strategic Choices:The main strategic choice for this project is about the role that the state should play to improve the HEsystem. The alternatives are to expand state involvement in the provision of HE services directly or tostrengthen its role in policy making and system regulation. For instance, the Government could play amajor role in the provision of technical training, given the critical importance of this level of education ineconomic development and the possible failure of the private sector to provide quality and relevanteducation. On the other hand, the private sector could continue to provide the technical training, and theGovermment could adjust the existing framework to allow the CFTs access to performance-based publicfunding and their students access to student aid. The strategic choice, consistent with Chile's market-based economy and limited role for the state, is to support a state with a more active role in policy-making and regulation. Thus, the main role of the state would be to set a framework that levels theplaying field for HE institutions.

C: Project Description Summary1. Project components (see Annex 1):(Please note: all numbers have been rounded to the nearest decimalplace)

P l lFrm eWok and wte l POR nd % of Bank- 33o

1.Plcy FrameokadCpc oiyad4.8 i 2.0 4.83.Bui_ldin'f g Institution Buildin __=_ _

a) Enhancement of the Legal and 0.9 0.4 0.9 0.6Regulatory Framework

b) Policy and Institutional Capacity 0.8 0.3 0.8 0.6Building

c) Establishment of a Management 1.6 0.7 1.6 1.1Information System

d) Promotion of Technical Training 1.5 0.6 1.5 1.02.QuaiA A ssurince. P fiid - 5.3 2.2. 5.3 3.6

Wnttton Buildin3. Finan1cin . ___ . .... iv. 227.4 9. 13.4 9.a) Institutional Funding _______ _ _.

(i) Establish a policy for public funding, Policy and 0.4 0.2 0.4 0.3and (ii) Increase accountability and develop Institution Buildinga funding methodology

(iii) Competitive Fund to Promote Physical and 226.8 93.9 130.8 89.9Quality and Relevance5 Institution Building* Technical training programs 18.6 7.7 10.7 7.4* Undergraduate programs in science, 168.5 69.8 96.5 66.3

technology, and other priorityfields* Domestic graduate programs 38.0 15.7 21.8 15.0* Fund administration, monitoring and 1.8 0.7 1.8 1.2

evaluationb) Student Aid Studies 0.2 0.1 0.2 0.1Projec VCoordina Xtion it 1.2 0 1.2 0.8

Poect Prparation Faclt P)03 01 -- 0.3 0.2Pysical and Price ContigenisL . . . .

'Eligible institutions would be grouped according their level and size to assure fair competition.

2. Key policy and institutional reforms to be sought:

The reforrns of the '80s have stimulated expansion and diversification of the subsector. However, thesereforms were introduced over a number of years, in response to market pressures, and do not form awholly coherent or comprehensive framework. Both the Chilean situation after 16 years of unregulateddevelopment and, al contrario, the experience of more industrialized (OECD and East Asian) economiespoint to the need for a well-defined role for the state in higher education. Therefore, the miain changessupported by the project are related to the improvement, strengthening and perfection of the political,legal, financial, and regulatory framework of the higher education system.

This framework would evolve in a way that promotes a substantial increase in the equity, quality, andefficiency dimensions of the HE system. In order to establish legitimacy and ownership, MINEDUC hasestablished a consultation network, including a high level body (MECE-SUP Advisory Group) to help theprocess of elaborating and deepening this new overall policy framework. As a consequence, this processwill involve wide stakeholder participation and would lead to the formal codification andinstitutionalization of the reforms being tried out and implemented under the project. This particularsituation would reinforce the project viability and sustainability, as long as the reform has a broadconsensus base.

The new HE framework would have improved policy tools to reinforce the concept of increased equity,quality, and efficiency. The new financial system for institutional support will be performance orientedas opposed to the current "historic" or "traditional" orientation. A very important element in financinginstitutions will be the implementation of contracts between the Government and the institutions. Thiswould also allow for extending public funding from the competitive funding mechanism to non-traditional private universities, professional institutes, and technical training centers which areautonomous and/or accredited under the new accreditation system. A more comprehensive qualityassurance system would help the cohesion of the HE system. Regarding student aid, it will seek to extendcoverage, target the poorest, and increase scholarship benefits to cover tuition costs and part of livingexpenses. The ultimate goal of the project will be to integrate all the reforms in a coherent regulatoryframework for HE in Chile.

3. Benefits and target population:

Benefits:

In general, the expected benefits are increased coherence, efficiency, quality, relevance, and equity in theChilean higher education system. This would in turn bring about broad economic and social benefits.More and better qualified graduates in general, and more graduates from relevant fields in particular,would increase and improve the human resources pool, enhancing production, productivity andcompetitiveness. The project would increase the number of students in pertinent fields ancl levels of studyand/or their economic value by increasing the quality and relevance of education. Better quality studentswill be more valuable in the market and therefore earn higher wages. If institutions become moreefficient and create the right incentives, students will graduate earlier and thus enter the labor force at anearlier age which will increase the present value of their stream of income (see E. 1 and Annex 4 for anestimation of these benefits).

The project would also contribute to increased efficiency at the institutional level. The idea is to changethe incentives that institutions have at present. By tying core funding to certain output and performanceindicators, institutions would try to improve those indicators in order to obtain more public funding, thus

becoming more efficient. The economic analysis for the project (see Annex 4) also estimates thesebenefits.

In terms of institutional improvements, the project specifically targets the following institutions:

a. for coherence and efficiency related initiatives the project would aim to strengthen capacity both atthe system and institutional level: DIVESUP, Higher Council for Education, CONICYT and highereducation institutions; andb. for quality and relevance related initiatives:

* Traditional universities and new private universities that have or plan to have undergraduateprograms in priority fields, and / or graduate programs;

* Professional institutes that have or plan to have professional programs in priority fields;* Technical training centers in fields of higher demand from the productive sectors.

Target students:

Most students in the system will benefit from the project since public funding would be directed towardsimprovement of quality and responsiveness, and efficiency gains would be converted into fuller accessand opportunities in fields of high demand. In the medium to long term it is expected that students fromlower income families will have the most to gain from the project in terms of increased opportunity tostudy at higher quality institutions and to receive increased financial support.

4. Institutional and implementation arrangements:

Implementation period: The project would be implemented over a period of five years.

Implementing agencies: Implementation of the project in general will be carried out at the system level.Implementation of the Competitive Fund sub-component will be carried out both at the system level andinstitutional level.

(i) At the system level, the project will be implemented using the existing structures of the HigherEducation Division (DIVESUP), the Higher Council for Education (CSE) and CONICYT. Theseinstitutions will be strengthened (see section E.4) to cover new functions. The MECE-SUP project unitwas incorporated as a new temporary department within DIVESUP (see organizational chart in the PIP)and will share personnel with the other departments. The Executive Secretariat for the Competitive Fundwill be a part of the MECE-SUP department. By the end of the project, the administration of the Fundwould become an integral part of a department in charge of promoting quality.

(ii) At the institutional level, institutions would use their planning or institutional development offices asInstitutional Implementation Units (IIU) to oversee the respective institution's project activities. In caseof absence of such an office, DIVESUP would provide technical assistance to the institution to establishtechnical capacity and organize an IIU. The IIU will have an "upstream" and a "downstream" function:the upstream tasks would consist of helping the institution prepare sub-project proposals for considerationby the Competitive Fund; the downstream tasks would focus on implementation, i.e., if a sub-project isapproved, the beneficiary institution would be responsible for implementing it through its IIU, underDIVESUP's supervision.

The following chart depicts the implementing agencies per component:

1. Policy Framework and Capacity Buildinga) Enhancement of the Legal and Regulatory Framework DIVESUP, Higher Council for Educationb) Policy and Institutional Capacity Buildingc) Establishment of a Management Information System DIVESUPd) Promotion of Technical Training2. Quality Assurance DIVESUP, Higher Council for Education and

CONICYT3. Financinga) Institutional Funding

(i) Establish a public funding policy, and (ii) Increase DIVESUPaccountability and develop a funding methodology

(iii) Competitive Fund to Promote Quality and DIVESUP (Competitive Fund Administration),Relevance Institutional Implementation Unitsb) Student Aid Studies DIVESUP _

Project coordination: MECE-SUP project's team has a full-time general coordinator that reports toDIVESUP's Chief. The team is organized in sub-teams, one per component, and each of the sub-teamshas its own coordinator. The general coordinator and the component coordinators constitute theCoordination Committee for MECE-SUP. This Coordination Committee also includes the Chief ofDIVESUP, the Executive Director of the Competitive Fund, and the Head of DIVESUP' s Department incharge of technical training.6

Project oversight: This will be carried out by the MECE-SUP Advisory Group. This high level grouphas already been established, and consists of 18 people with extensive experience. The council willadvise the Minister of Education, DIVESUP, and the project coordinator during both project preparationand implementation. Advisors will participate in periodical meetings and technical workshops. TheAdvisory Group will be assisted by a technical office at DIVESUP. An International SupervisoryCommittee would be established to advise MINEDUC and to evaluate the progress of the project and theCompetitive Fund's activities.

Accounting, financial reporting and auditing: A LAC Region Financial Management Specialist (FMS)visited the Project Coordinating Unit to assess the financial management arrangements umder which theProject would be implemented. The FMS has been providing guidance to Project Management on theinstallation of an appropriate project physical and financial monitoring mechanism. A. feasible actionplan has been agreed with Project Management leading to having in place, prior to Loan effectiveness,the necessary staff and a physical and financial monitoring mechanism acceptable to the Bank.Completion of the action plan would warrant satisfactory project management from its inception, thussatisfying O.D. 10.02 requirements. DIVESUP's Budget office would be responsible for project financialmanagement, accounting, reporting, and ensuring external auditing of all project related expenditures.The Budget office would have input from the institutions, and it would report to the project coordinator.Annual audit reports would be completed by Contraloria General de la Reputblica, and forwarded to theBank within six months of the end of each fiscal year.

6 Since all three components of MECE-SUP project include activities directly related to the technical training level, andgiven that this level is one of the government priorities, the inclusion of DIVESUP's responsibility for technicaltraining in the Coordination Committee would help to avoid neglecting the importance of this educational level.

Monitoring and Evaluation: Monitoring and evaluation activities under the project would be undertakenat three distinct levels:(i) Project: to assess the performance of DIVESUP in implementing the project, and the Higher Council

for Education and CONICYT in implementing the quality assurance component; to evaluate theeffectiveness of each component of the project with respect to their individual objectives and tomonitor the progress in implementing the reform and its global impact on higher education quality,equity, and efficiency. Progress reports will be completed biannually.

(ii) Competitive Fund: to monitor the institutional performance of this funding mechanism, verify itscompliance with established eligibility and selection criteria, and its transparency and overallfairness; to evaluate the results achieved by the sub-projects financed and their impact on quality andrelevance improvements in beneficiary institutions.

(iii)Individual Subprojects funded by the Competitive Fund: to monitor and evaluate activities underindividual subprojects.

D: Project Rationale

1. Project alternatives considered and reasons for rejection:

a. Investment in student loan scheme: it was decided to provide technical assistance to improve thestudent loan programs, rather than to invest in them. The Government is committed to and capable offinancing such an investment by itself. The Government recently introduced a new loan schemeknown as CORFO loans, which are arranged through the commercial banking system and targetstudents from middle income families attending public or private institutions. This schemecomplements the Ministry of Education loans (Fondos Solidarios de Credito Universitario),administered by AFD-supported universities, and targeted to lower income students.

b. Direct input investment: (e.g., equipment, buildings, training) across the board: it was decided notto provide inputs directly to all the institutions, because it would only improve their situationtemporarily, and would not sustain improved performance. Instead, a Competitive Fund to PromoteQuality and Relevance is proposed as a sustainable, output-oriented funding mechanism. InstitutiGnswill compete for investment funds on the basis of their own strategic planning and choices. They willpresent their proposals and argue for investments in human and physical resources. Thus, inputinvestments would be aligned with govermnental policy and institutional strategic plans, while thecompetitive process would select projects based on quality and relevance criteria.

c. Up-front legal framework reform: although the project aims to reform HE legislation, this cannotbe done in the short-term for political reasons. In particular, changes in the funding of the traditionaluniversities and some other programs would likely meet resistance from both political interests andstudents. As a result, the Government has a pragmatic approach to this issue, working within thepresent legal framework, and building the case for legislative action slowly and on the basis of resultsrather than more radical immediate reforms. The Government intends to build consensus and makeadjustments to the legal framework when necessary over the course of the project.

d. Direct focus on regional and less developed higher education institutions: this alternative wasrejected because it does not lead to a complete diversification of HE levels and programs. However,a performance-based resource allocation system would increase equity at the institutional level andwould respond positively to the governmental priority of regional development. The project willindirectly focus on regional and less developed higher education institutions by integrating criteria inthe: (i) competitive fund to promote quality and relevance; and (ii) reform of policy instrumentsthrough the improvement of the funding formula (AFD).

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

-~~~~~~~~~~~~~~~4 .. ...... .... .. .. .. ..S -' y: ::t

Implementation DevelopmentProgress (IP) Objective (DO)

Bank-financedTo enhance efficiency, quality, and equity Chile: Primary Education HS HSin selected schools in rural and urban areas Improvement (ongoing)

To improve efficiency, quality and equity Chile: Secondary S Sof secondary schools, and to strengthen Education (ongoing)managerial capacity

Other development agenciesTo enhance R&D performance of IDB: Research anduniversities, research institutes, and private Development (completedsector in 1996) _

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

3. Lessons learned and reflected in proposed project design:

The Bank has recent experiences from similar projects in Indonesia, Vietnam, Romania, Tunisia, Jordan,and Argentina. These experiences suggest that an effective mechanism for creating an incentive toimprove quality in the HE sector is to establish competitive funds within a well designed policyframework, supported by adequate sector management capacity and quality assurance systems. Thepurpose of this new paradigm for higher education financing, such as the one initiated in Argentina as aresult of the 1995 higher education law, is to move away from traditionally negotiated budgets and toestablish transparent and performance-based resource allocation mechanisms for public funding, and tostimulate diversification of income for higher education institutions.

Initial lessons from the ongoing Argentina Ihigher Education Reform Project (34091-AR):

Although only about mid-way through its implementation, the Argentina Higher Edlucation Projectprovides some initial lessons. The main one is that change comes slowly in this sub-sector, the result oflong-standing autonomy of most institutions, particularly the publicly funded universities, and theentrenched interests of maintaining the status quo. In terms of the relative change in funding patterns topublic universities, the new formula in Argentina thus far has only affected 17 percent of total publicfunding. The other main lesson is that, while the Competitive Fund is a flexible and adaptable tool, it canalso be too diffused and fragmented across faculties and institutions and thus have difficulty achievinginstitution- and sector-wide changes in performance.

The specific lessons from Argentina's experience include:

(i) there should be technical assistance to the universities to improve their strategic and budgetaryplanning and management; (ii) there is need for an enhanced university management informationsystem; (iii) the formula funding mechanism should be based on differential unit costs per student,according to disciplines; (iv) the selection criteria for the Competitive Fund should be tightly linked to

the improvement of productivity or budget management; (v) annual targets should be set for theimplementation of the financing policy, rather than setting a global target; (vi) there is a need for salaryincentives for professors doing research; and (vii) there is a need for stronger articulation of individualproject components and sub-components.

4. Indications of borrower commitment and ownership:

a) The Government made the modernization of education its first priority. It acknowledges theimportance of extending the reform to the higher education sector. A bill on the legal framework forpublic universities was introduced in July, 1997.b) The President of the Republic of Chile announced higher education as one of the main social prioritiesof the country for the remainder of his presidential period (ending in year 2000).c) Regarding equity, it was decided to substantially increase the number of scholarships and loans, sothat by 2000 all university students from low income families will have access to these benefits.d) Under the Bank's Advisory Services Program, which is financed by the Ministry of Finance, theGovernment specifically asked for Bank advice on reforming its higher education system in September1997. The Government was receptive to the Bank's analysis and requested Bank assistance and financialsupport for preparing the MECE-SUP project which emerged from that advice. Furthermore, DIVESUPprepared the project preparation plan and developed the official background document for the project.e) The MECE-SUP Advisory Group, an 18 member body, was established (April 1998) to advise theMinister of Education on higher education policies and to oversee the HE reform project.

S. Value added of Bank support in this project:

The initial impetus for the Bank's involvement in higher education came from the flexibility andneutrality of the Bank's advisory services program with Chile. Under that program, Chile seeks and paysfor the advice of Bank staff and consultants in a variety of areas which typically involve policy choices.In the case of higher education, the Bank's advice was sought because of its ability to bring globalexperience (in this case, including that of OECD countries as well as other middle-income countries) andits substantial involvement in the education sector in Chile through support for improvements in primaryand secondary education. Thus, in addition to international experience, the Bank is able to bring to thehigher education system many lessons and experience gained at the lower levels of the system and canprovide an integrated focus.

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

1. Economic (supported by Annex 4):

Economic evaluation methodology:

[x] Cost benefit [] Cost effectiveness []Other [specify]

NPV= US$ 494.5 million

Rationale for public sector intervention: Higher education has long been recognized as providingsignificant positive externalities. While Chile does not desire a higher education system completelydominated by the public sector, the public good aspects of the system can justify a major involvement bythe state. Moreover, if public sector spending on higher education is carefully targeted, it can have amajor long run impact on income distribution and therefore improve the current inequality gap.Improvement in income distribution is likely to be one result of the reallocation of public sector spendingin this project. Furthermore, both market failures and externalities make public provision and financingcritically important.

The project's justification is based on an analysis of the expected impact of the changes to the financingof institutions under the project (see Annex 4). This analysis attempts to measure the impact of the projecton educational performance in Chile, and to estimate the economic value of that impact in terms ofchanges to future student incomes. It also looks at the benefits from changes in student ccimpletion ratesand improvements in institutions' cost efficiency/productivity. A system as complicated as highereducation requires the participation of numerous actors, or stakeholders, for a successful project, and thisanalysis makes assumptions about how those groups would respond. Overall the project promises astrong return on investment, but additional modifications to the funding allocations towards institutionswhich have the most to offer in terms of poorer students and market oriented educational fields have thepotential to make the project even more cost effective.

The main benefits are derived from changes in student incomes. It is estimated that the additional annualincome accruing to students would be about US$ 42-50 million. If this annual flow of benefits isdiscounted to the present using an interest rate of 12%, the net present value is aboutUS$ 344-424million, depending on the extent to which the funding allocations are based on a nmix of studentenrollment and historical allocations, with the proviso that no institution receives less than before (see thetwo scenarios set out in Annex 4). The higher the proportion of funding based on student enrollment, thehigher the returns.

This calculation both overstates and understates the benefits. The number of students graduating in anyparticular year will only be a fraction of the total students receiving educational services that year. Thus,the additional income from the project should be reduced to the number of students graduating. At thesame time, the project will continue to operate for five years, which would increase the value of theproject by almost five times. If students take an average of five years to graduate, these two factorswould tend to cancel each other.

2. Financial (see Annex 5)

Financial summary: Table 1 of Annex 5 presents the total costs of the Higher Education Project duringthe implementation period (1999-2003) and during the post-implementation period after the close of theproject (2004-2007). In this analysis, most project costs are considered recurrent costs; however, a greatshare of those costs belongs to the Competitive Fund (94% of the project), which is a mechanism forfunding physical improvements, equipment, and institutional development, and thus should be consideredas investments. The responsibility for maintenance of these investments rests with the participatinginstitutions and, generally speaking, the impact of their maintenance ought to be manageable withinexisting institutional budgets.

Total project cost, including physical and price contingencies, and fees is estimated at US$241.45 million.Base costs were estimated at US$ 239 million, with physical and price contingencies estimated at US$1million for the non-competitive fund components, and a front end fee of US$1.45 million. The proposedBank loan would finance 60.2% of total project costs; the Government's share would be 39.8%. No otherdonor is currently planning to co-finance the project.

Fiscal Impact: Incremental recurrent costs associated with the project are within the capacity ofGovernment's higher education budget. From Table 10 of Annex 4, it can be concluded that the projectwill increase the higher education budget up to a maximum of 16% of current spending. Compared withthe "no-project" scenario (see Annex 4), higher education spending with the project in place is projectedto be US$37 million less (see Table 11 of Annex 4). A conservative growth projection is that theincremental amount for the period under consideration would be US$277 million, with the projectaccounting for US$240 million. The project will account for no more than 1.8% of the Ministry ofEducation's total annual budget, and a maximum of 0.3% of public sector spending, figures which furtherdemonstrate that the Project can be implemented without imposing a financial burden.

At the same time, project benefits which are to be realized through increased incomes for students shouldtranslate, over time, into increased tax revenues for the Government. This fiscal impact has not beenestimated.

3. Technical

The project is technically justified on the basis of the importance and the public nature of the problem itaddresses. It draws on best practice from the Bank and higher education reforms from OECD countriesand countries of similar levels of development. Project components and instruments have been preparedon the basis of international comparisons while taking into account country performance. During thepreparation process special attention has been given to designing elements of the components,particularly on the Competitive Fund. The preparation of the project has included study tours, seminars inChile, consultation/collaboration with stakeholders and technical assistance. All the analyses have beencarried out with technical assistance of international and local specialists.

The Competitive Fund is being pilot tested through a new line in the Institutional Development Fund.This new line, called convenios de desempeino ("performance contracts") will eventually evolve into theCompetitive Fund. The operational manual (OM) for the Competitive Fund is available. This OM hasincorporated experience gained in other Bank projects with competitive funds in Indonesia, Romania,Brazil and Argentina and has taken advantage of the lessons learned from these projects.

4. Institutional

The Borrower has the capacity to carry out the project: the Ministry of Education has already gainedexperience in managing large donor funded development project with the previous MECE projects (basicand secondary education). The primary implementing agencies (DIVESUP, Higher Council for Educationand CONICYT) have the capacity to initiate project implementation. There have been significantdevelopments in the institutional strengthening of DIVESUP. The first phase of DIVESUP'sreorganization plan has been completed, and includes the incorporation of the MECE-SUP project team.Highly qualified professionals have been added to the project, increasing by 50% the professional staff,and new office space was devoted to the project's activities. In addition, it is anticipated that theorganizational structure for DIVESUP will be further improved in the period 1999-2003. There have alsobeen advances in the consolidation of the information system, with improvement in the electronicexchange of information between DIVESUP and HE institutions.

Quality of governance by DIVESUP and Higher Council for Education has been satisfactory, althoughtheir regulatory and controlling roles have been limited to segments of the higher education system.Their performance history is satisfactory. For instance, the Higher Council for Education has a goodtrack record as a semi-autonomous institution, with very objective decision-making processes (e.g., indeciding whether or not to license new established institutions, or approve a new study program). Thisvaluable experience can be leveraged by expanding the Council's functions to all higher educationinstitutions. This seems to be the best option for a Quality Assurance entity, as opposed to creating a newinstitution or a new department within DIVESUTP with these responsibilities. CONICYT has alreadystarted an accreditation process for doctoral programs. DIVESUP will be in charge of policy andcapacity building activities. It is expected that in the future DIVESUP will have a more proactive role inhelping the development of the HE system, by setting policy orientations and providing technicalassistance to individual institutions.

The current management and human resource capacity of DIVESUP, the Higher Council for Education,and CONICYT will be augmented by activities to be carried out under the sub-component "Policy andInstitutional Capacity Building", and by using consultants and committees which include external experts.

For instance, expert committees will be used in the implementation of the Competitive Fund and theNational Accreditation system. The activities would consist of studies, technical assistance, training, andupgrading of equipment in order to: (i) develop policy on critical issues; (ii) establish new workingprocedures between the various types of higher education institutions and MINEDUC; (iii) buildcapacity for strategic planning and management at MINEDUC and other governing bodies; (iv) designand implement a new management information system and a labor market observatory; (v) design andimplement a marketing campaign to promote quality and technical education; and (vi) builddecentralized capacity for strategic planning and management at higher education institutions.

5. Social

In order to strengthen the project, ensure participation and reduce risks, social assessment activities willbe carried out throughout the implementation of the project. An analysis of social issues has already beenconducted which identified certain key issues and areas where further work would be necessary. Theobjectives of the social assessment are to: (i) identify and address conflicts and risks related to equity andquality issues; (ii) define participation mechanisms related to policy framework and capacity building,quality assurance and financing; and (iii) propose recommendations for the project's design andimplementation. One of the main social challenges is to build consensus among the complexstakeholders involved. For instance, a main stakeholder group is the 371,000 students in the highereducation system. Within this group there are different sub-groups, including those attending thetraditional universities, those attending private universities and CFTs, those with student aid (45%) andthose without student aid, among other distinctions.

Main Social Issues

Equity: Though most opportunities are still concentrated in the richest quintiles, enrollment of poorstudents has increased from 4.4% to 8.5% for the lowest income quintile, and from 7.8% to 15.1% in thesecond lowest quintile (1992-1996). Thus, the situation is improving, and it is expectedl that by 2000students in the first three quintiles will represent between 64% and 69% of enrollment. Regarding studentfinancing, although 45% of students receive aid, 55% of those receiving aid are in the upper incomebrackets (third and fourth quintiles). Like enrollment, this situation is also improving, and it isanticipated that by the year 2000, 69,000 students in the first three quintiles will be receiving assistance,and by 2003, about 76,000 will be covered (compared to 58,000 in 1997). Targeting mechanisms wouldbe necessary in order to reach poor students in private universities, PIs, and CFTs where financial aid isnot readily accessible, and where there is a higher concentration of poor students. Another way ofincreasing access to higher education is through the improvement of the secondary education program,which may help increase scores on entrance exams; this issue is being addressed by the MECE-Secundaria project. MECE-SUP's response to the equity issue would be to increase available assistance,and to make such assistance more accessible. The project would also target certain groups of students(i.e, the poor and those in non-traditional universities) in order to increase equity. Another important goalis to make sure that students already in the system complete their education.

Quality: The main concern regarding quality assurance is that there is no single quality assurance systemcurrently being enforced. The project's response is a revision of the current qualityassurance/accreditation system and a Competitive Fund to increase incentives for quality. Broadconsensus among stakeholders on these issues is being built. However, private universities, professionalinstitutes and CFTs should have more participation. Students have raised certain concerns for quality,including support for research, full time professors, and an honest and trustworthy evaluation system, butthese concerns have not yet been formally addressed in a participatory manner.

8

Financing: The distribution of resources clearly favors the traditional universities in AFD and AFI(86.9% of total AFI). In recent years, the share of regional universities in other funds (FDI, student aid,FONDEF) has been increasing, although inequalities remain. Some alternatives which have beendiscussed are to change the scope and composition of funding, freeze the AFI, and increase direct studentsupport. The Competitive Fund would also make resources available to more institutions in need offunding.

Gender: Women and men are represented rather equally in the higher education system in general.Women's enrollment has grown from 110,000 in 1991 to 171,000 in 1997 (46% of total enrollment).There is less equality in the field of study chosen, where women continue to enroll in "soft fields" such associal sciences and education. This, in turn, has an impact on careers and future salaries. Promotionprograms designed to attract students to "hard fields" (i.e., engineering) should address women's needs,and a study on possible gender inequities is recommended.

StrategyThe strategy recommended for the social assessment includes further and more in-depth consultation withthe various stakeholders, as well as specific studies which would evaluate possible mechanisms forparticipation. In parallel with the consultation process, a diffusion and communication system would bedeveloped in order to ensure that the relevant stakeholders are informed of the project and its goals andcomponents. Specifically, the additional analysis would include: (i) studies related to the studentfinancing system; (ii) a gender equity analysis; and (iii) targeting mechanisms to improve equity. Duringthe Project Launch mission, a workshop will be held to focus on the social assessment and participatoryapproach mechanisms.

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

The project is expected to have a positive impact on environment, through its support of environmentaleducation (via sub-component "Competitive Fund to Promote Quality and Relevance").

7. Participatory Approach:

In the Chile Higher Education Project, participation of stakeholders is important not only in preparation,but also throughout implementation. With this in mind, participation is not a process which will becompleted in a given timeframe, but rather, is an on-going process which will build upon responses andoutcomes which could prove to be unpredictable. A participatory approach is desired in order to buildbroad consensus among the stakeholders, and to achieve the objectives of: (i) improving quality, equityand efficiency; (ii) supporting a redefinition of the political, financial and regulatory framework; (iii)building legitimacy of the higher education system; and (iv) supporting the regional higher educationsystem to promote decentralized development. Project preparation has involved initial consultation andcollaboration. More work is needed to ensure complete participation in all aspects of the project and willcontinue during implementation.

These participatory activities have been instrumental in the design of the project, and each projectcomponent is taking responsibility for ensuring the participation of the relevant stakeholders. One of themain challenges faced in this approach includes the large number and diverse nature of the studentpopulation (371,000 total) which may be identified by type of institution attended (which determineswhether or not the students may be unionized), by income level, by program of study, and by geographiclocation, among other factors. It is important to note the necessity of reaching students attending non-traditional universities and those attending PIs and CFTs, since thus far the project has primarily focusedon leaders of student unions, who attend the traditional universities. The project has had consultationswith the Rectors' Counsel which represents the authorities of these universities, but more attention is now

needed for including the 119 CFTs and 43 private universities. Therefore, further consultation wouldinclude: (i) regular (non-leaders) students in traditional universities; (ii) students in regional universities;(iii) students in private universities, PIs, and CFTs; (iv) academic and administrative personnel; (v)parents; (vi) relevant regional authorities; (vii) labor market leaders and specialists; and (viii) politicalpiarties. Consultations have been held to address the Quality Assurance System, involving institutionalmanagement, professional associations, students, politicians and other groups. Consultations areprogrammed for the: (i) financing component; and (ii) student aid studies. The Project Launch Workshopwill build on work already completed, and will suggest studies to be carried out and methods to be usedto ensure participation.

(i) Primary beneficiaries and other affected groups:

* Students IS/CON

* Higher Education Institutions IS/CON/COL

(ii) Other key stakeholders:

* Authorities (MINEDUC, Ministry of Finance) IS/CON/COL

e Faculty and support staff CON

* Parents CON

3 Intellectual and academic leaders CON

* Policy-makers CON

3 Employers CON

(IS: information sharing; CON: consultation; COL: collaboration)

F: Sustainability and Risks

1. Sustainability:

We have identified the following factors likely to be critical for the sustainability of project: benefits:

(i) Institutional Sustainability: A revised regulatory framework needs to be established with commonconsent, preferably within the first years of implementation, to codify and institutionalize the changesbeing introduced under the project. This would provide the sustainability from an institutional perspectiveneeded to preserve project benefits. * In addition, it is expected that, through the project's contribution toindividual institutions via the Competitive Fund, the overall institutional capacity of the system forhigher education will be raised. However, there is no guarantee for any particular institution and the goalis sustainability for the subsector, not necessarily for individual institutions. At the same time, the projectwould identify ways of enhancing both the strategic planning and the policy making capacities in theMinistry of Education in order to build sustained institutional capacity for policy making and oversight.Given the nature of the sector and the project's goals, there are risks in sustainability at all of these levels.The project will affect entrenched interests and will have different impacts on different groups. However,the general pattern of institutional and policy continuity in Chile bode well for the project's benefits to besustained over time.

(ii) Financial Sustainability: The project represents 16% of the state's total public expenditure on highereducation. If sustained, the Competitive Funding mechanism would require increasing budgets over time

as the scope and reach of the program are to be expanded. The adequacy of the entire financial envelopeand of each funding instrument should be reviewed in light of the new policy framework the governmentproposes to develop. To achieve legitimacy, the new funding system should be presented as an integratedand balanced package, and should be based on transparent criteria. Nevertheless, Chile is a country witha sustained record of growth and sound fiscal management. In articulating its goals for the educationsector, the Government has been clear as to the priority to be assigned to the sector. Thus, the prospectsfor being able to maintain--if not increase--levels of funding for education in general, and highereducation in particular, are high.

2. Critical Risks (reflecting assumptions in thefourth column of Annex 1):

Annex 1, cell "from Outputs to Objective"

Governing bodies are not capable of (or willing M Constitution of an oversight team thatto) implementing change would visit the institutions assessing the

change process and helping to removeobstacles

Lack of transparency in allocating the N Clear rules have been developed and theCompetitive Funds to qualifying institutions Bank will monitor the application of these

rules through regular detailedsupervision.

Annex 1, cell "from Components to Outputs"

The design of the regulatory and financial M Participation of intermediateframework does not take the input of all organizations and stakeholders to expressstakeholders into account their concerns

Resistance from traditional universities and some H Continued dialogue with traditionalpolitical groups to changing the current way of universities and political sectors, and theirdistributing the Direct Fiscal Support. involvement in the project development

process

There are not enough financially needy students M The Competitive Fund could support thewith acceptable academic qualifications that take organization of leveling and remedialadvantage of financial support schemes courses targeted to these students

A provision in the higher education budget is not M Slow the growth of AFD, phase AFI outmade to continue competitive funding after and transfer funds to the new mechanismproject completion

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

3. Possible Controversial Aspects:

Student opposition S S The government would guarantee studentparticipation in public institutions' governingbodies, and invite student participation instakeholder workshops

Type of Risk - S (Social), E (Ecological), P (Pollution), G (Governance), M (Management capacity), 0 (Other)

G: Main Loan Conditions

1. Effectiveness Conditions:

(i) Competitive Fund Administration Unit established(ii) Financial Management System satisfactory to the Bank implemented(iii) Operational Manual for the Project, including manuals for the Competitive Fund and the Quality

Assurance System, approved by the Bank(iv) At least three grant agreements executed with higher education institutions (a grant agreement model

will be included in the Competitive Fund Operational Manual)

1. Other Covenants:

(i) Maintain the Project Unit and Competitive Fund Unit(ii) Follow annual audit reporting requirements(iii) Follow operational manual requirements for the operation of the Competitive Fund and the Quality

Assurance System, and enter into satisfactory agreement with higher education institutions

H: Readiness for Implementation[X] The procurement documents for the first year's activities are complete and ready for the start ofproject implementation: a draft was assessed during appraisal.[X] The Project Implementation Plan has been appraised and found to be realistic and of satisfactoryquality: Draft PIP and OMs were assessed.

I: Compliance with Bank Policies[X] This project complies with all applicable Bank policies.

Lauritz Holm-Nielsenyvchi0 q avier Coll /c//A3 % Myrna Alexander i-lcglqeTask Team Leader 'irector LCSHD Director LCC7C

Annex 1Project Design Summary

Chile Higher Education Project

Monitoring and Ciltical AssumptionsNarrative Summary Key Performance Indicators Supervision

Sector-related CAS Goal: * 7.5 % increase in graduates employed in * tracer studies (Goal to Bank"objective of upgrading Chile's human their fields of study within six months of * independent Mission)capital, with a view towards improving graduation' client survey * incomethe country's competitiveness in the reports redistributioninternational arena" (annually) mechanisms work

Project Development Objective: * Improved positive views from (Objective to Goal)prospective employers on quality of * ICR * society demands

To improve the performance of the graduates2 high qualityChilean higher education system in the * Improved enrollment and graduation in graduates from allfollowing dimensions: relevant technical, undergraduate and HE levelsCoherence and Efficiency, graduate programs2

Quality and Relevance, and * % increase in proportion of low incomeEquity students that enter and graduate from the

HE system2

Outputs: * revision of the regulatory fraework for * progress (Outputs to Objective)1. New policy framework higher education by December, 2000 reports to * law amendmentsestablished at national level, and * credit transfer mechanisms introduced by MECE-SUP and/or revision,strategic planning implemented at July, 2001 Advisory and decrees passedsector and institutional levels * strategic plan for DIVESUP by December Group 'by authorities

1998 * mid-term * students take* institutional development plans Review and advantage of

developed by December, 1999 ICR transferopportunities

* governing bodiesare capable of (orwilling to)iimplementingchange

* governing bodiesiintegrate students,academia, andemployers

2. Quality Assurance system * revised procedures for licensing of * progress * results of qualityestablished for all institutions and universities and PIs at the CSE, and of reports to assessmentselected study programs CFTs at the DIVESUP, by June 30, 1999 MECE-SUP influence funding

* national accreditation board constituted Advisory * information onand operative by the end of 1999 Group quality programs,

* 50% of universities having complied with * mid-term credit transfer, andeligibility requirements for accreditation Review and flunding is available

* 40 programs evaluated in four areas of ICR for allstudy

'Baseline to be determined by studies under the project2 Baseline and target level to be determined by studies under the project

Annex I

3. Contractual and competitive * 28% of funding under contracting * progress * competition openfinancing system introduced for system3 reports to and fair and ininstitutional support, and... * 12% of funding under competitive MECE-SUP accordance with

matching grants mechanisms4 Advisory transparentGroup procedures,

... student aid revised to make it * recommendations to improve the student * mid-term eligibility, andmore equitable aid system ready by December 31, 1999 Review and selection criteria

ICR * unit costsallocation perstudent reflect realcosts

* social barriers foraccess are removed

Project Components / Sub-components: Inputs: (budget for each component) (Components to1. Policy framework and capacity Outputs)building * technical assistance * progress * Government is

* background studies and study-tours reports to committed toa Enhancement of the legal and * office equipment, hardware, and software MECE-SUP support reformsregulatoryframework * training seminars in strategic Advisory(i) develop definitions for tiers' roles management for system and institutional Group * the process takes(ii) establish mechanisms to facilitate managers and administrators (quarterly) the input of all

student and graduate transfers * overseas training * disbursement stakeholders intobetween tiers, institutions, and reports accountcareers (quarterly)

(iii) propose legal amendments * biannual * not a considerable(US$ 4.8 million) supervision resistance to

b. Policy and Institutional Capacity missions change fromBuilding traditional(i) develop policy on non-university universities, or

institutions, HE participation rates, political oppositioncontribution to regionaldevelopment, equity, andinformation management

(ii) develop new working proceduresbetween the various types ofhigher education institutions andDIVESUP

(iii) build capacity for strategicplanning and management atDIVESUP and other governingbodies

(iv) build capacity for strategicplanning and management athigher education institutions

c. Establishment of a ManagementInformation System (including a labormarket observatory)d Promotion of Technical Training

Baseline: 22% (1998) including CONICYTBaseline: 3% (1998)

Antex I

2. Quality Assurance * technical assistance * progress * incentives are(i) consolidate the national system for * background studies and study-tours reports to adequate for all

quality assurance a office equipment, hardware, and software MECE-SUP stakeholders to* certification and Advisory participate.

accreditation of (US$ 5.3 million) Groupinstitutions (quarterly)

* evaluation of selected * disbursementprograms reports

(ii) establish a qualification framework (quarterly)for study programs * periodic

(iii) design and implement a quality magazine to beawareness campaign published by

the qualityassuranceentity

* biannualsupervisionmissions

3. Financing * the process takesa. Institutional Funding * technical assistance * progress the input of all(i) establish a coherent policy basis * background studies and study-tours reports to stakeholders into

for public funding * office equipment, hardware, and software MECE-SUP account(ii) increase accountability and Advisory * enough qualified

develop a funding methodology * investment to finance competitive grants Group competitors(iii) establish a Competitive Fund to in accordance with transparent rules and (quarterly) * publication of:

Promote Quality and Relevance agreed eligibility and selection criteria * disbursement procedures,(yearly competitions for matching * first call for competition in frst reports eligibility andgrants) half of 1999 (quarterly) selection criteria,

* for technical training * institutional and publicinstitutions in fields of (US$ 227.4 million) (recipient) information abouthigher demand from the reports for grants and M&Eproductive sectors competitive results

* for undergraduate funds * enough funds forprograms in priority fields (semiannual) research, overseas

* for graduate programs * fund fellowships, andb. Student Aid studies administration' for post-docs(i) define system's inequities and s evaluation of provided through

develop a policy to overcome them institutional CONICYT(ii) revise the student support system reports * enough financially

according to the developed policy (annual) needy students* need-and-merit based * international with acceptable

scholarship scheme supervisory academic* student loan programs committee qualifications.

reports(annual)

* supervisionmissions(biannual)

Annex 2Project Description


Chile's Higher Education (HE) system is at a crossroads between an elite higher education system and acompletely diversified, mass higher education system. The proposed project aims at improving theperformance of the Chilean HE system, to help achieve Chile's objectives of "upgrading its humancapital" and "improving the country's competitiveness in the international arena" (CAS, paragraph 34).The performance of the HE system is expected to improve along three system-wide dimensions that arealigned with the major problem areas of the system, and with CAS objectives: (i) increased coherenceand efficiency; (ii) improved quality and relevance; and (iii) increased equity. These ambitious goalsdemand a wide scope, comprehensive project, that targets the main actors of the HE system: HEgoverning bodies, HE institutions at the three tiers (Universities, Professional Institutes, and TechnicalTraining Centers), and students attending or planning to attend these institutions.

The project will consist of capacity building, technical assistance, and investment funds. The technicalassistance will help to establish a state-of-the-art policy, legal, financial, and regulatory framework thatallows for an adequate development of the HE system along the three dimensions previously mentioned.This framework should help define a more appropriate role for the state in HE, and encourage a change inthe culture of the system, from one based on "historical" criteria and incremental adjustments, to onebased on performance criteria. Real institutional autonomy would be paired with accountability, and thestate will essentially buy the services from the best and most cost-effective providers. The proposedchanges in the system's framework and culture will be promoted and reinforced by the establishment of acompetitive fund. This fund will award matching grants to institutions, focusing resources to enhance thediversification of the system, and to enhance study programs of high demand and/or related to nationalpriorities.

The project will have the following three components: (i) Policy Framework and Capacity Building; (ii)Quality Assurance; and (iii) Financing. The Bank will finance technical assistance and capacitybuilding activities for the design and implementation of all components. Each component will contributeto one or more aspects of the development objective. Component one would lead to increased coherenceand efficiency. Component two would stimulate demand for quality education and guidethe consumersof higher education. Component three would contribute to change the institutional culture and to improveequity, quality, and relevance. Also, there will be strong relationships between components. Forinstance, institutions will have financial incentives to participate in quality assurance processes, and theresults of these processes will influence the institutional ability to get further funding.

(For a more detailed description of the project and project components, see the Project ImplementationPlan, PIP, in the project files: "Proyecto de Mejoramiento de la Calidad y Equidad de la EducacionSuperior -MECE-SUP 1998-2003").

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Project Component 1 - Policy Framework and Capacity Building - US$ 4.8 million (total cost ofcomponent)

The technical assistance to be provided under this component aims at "leveling the playing field" in theHE system, by enhancing the policy, legal, and regulatory framework, and building capacity to respond tothe changes that will be introduced. The framework would integrate and articulate all HE levels andinstitutions, enabling the HE system to develop adequately, and to respond to policy objectives (see sub-component a, Enhancement of the Legal and Regulatory Framework). Capacity building will be carriedout at governmental and institutional levels to strengthen the strategic planning and managerial capacities(see sub-component b, Policy and Institutional Capacity Building). The type of activities to be carriedout includes in-depth analytical studies, policy development, and design and implementation of amanagement information system (MIS). Some of the studies will form the foundation for the othercomponents, and the MIS will support all components.

The Division of Higher Education (DIVESUP) will be in charge of implementing this component. TheHigher Council for Education will assist DIVESUP in implementing task a.ii, and InstitutionalImplementation Units (IIU) will jointly implement task b.iv with DIVESUP.

a. Enhancement of the Legal and Regulatory FrameworkTasks to be undertaken in this sub-component would include:

(i) Develop definitions of the appropriate roles of the tiers involved in higher education: universities,professional institutes and technical training centers. The purpose will be to minimize unnecessary orinefficient overlaps while recognizing that some overlap may be beneficial (e.g., for reasons ofcompetitiveness and efficient utilization of infrastructure and human resources). Furthermore, thefollowing will be needed for an adequate policy framework:

- C larify the legal basis for the distinction between public and private institutions and also for thedistinctions between those institutions eligible for direct public funding and those not entitled tosuch funding.

- Specify the (perhaps different) forms of governance for those institutions (in each tier) which arein receipt of public funds to ensure that the supreme body of the institution is able to be heldaccountable for its use of public funds.

* Refine the sets of financial regulations under which publicly funded institutions will be requiredto work, including an examination of the appropriate levels of control over expenditure of publicfunds. This would also include defining the appropriate level of disclosure about the use of suchfunds - and also of other funds - including arrangements for any external audit(s).

(ii) Within the framework defined by the above, establish policies and mechanisms to facilitate transfersof students and graduates between institutions (both within a tier and between tiers) coveringcurriculum, quality and pedagogical matters as well as funding, financial and managementarrangements needed to ensure that such mechanisms work effectively. Move towards a system thatrecognizes the students' and graduates' learning achievements rather than a formalistic system thatplaces students and graduates in unrealistic categories.

(iii) Propose amendments to present and proposed laws to assure that all components are implementedsuccessfully and benefit all targeted institutions.

Annex 2 Page 3 of 8

Tasks under (i) form the preliminary work required in order to ensure that the transfer mechanisms oftask (ii) have a coherent and consistent framework in which to operate. It would seem appropriate to viewtasks under (i) as the basis for a study (S. 1 a, see studies list at this annex's end) to be undertaken prior tothe work on task (ii) as a main component of the whole project. Of course such a study would covermatters of wider significance than those of task (ii), but analysis to date suggests that such a study (S. 1 a)would be of significant benefit to the higher education system as a whole. It would also form thefoundation for the other components of the project.

b. Policy and Institutional Capacity BuildingThis sub-component will include the following activities:

(i) Develop policy (and appropriate delivery mechanisms for them) in five specific areas which areurgent: policies for non-university institutions; policies about target participation rates for highereducation (or at least about those rates which the government is prepared to fund); policiesconcerning the direct contribution which higher education institutions should make to regionaleconomic development; policies on equity for student access to higher education in the light ofinequity that might arise from students' secondary school participation and achievements, and/or fromtheir geographical location5. The fifth policy topic is concerned with developing improved methodsfor gathering and conveying information and signals about the future needs of the Chilean economy(and society more widely) in ways that can help inform decisions both in DIVESUP and in the highereducation institutions.

(ii) Develop new working procedures and arrangements between the various types of higher educationinstitutions (as defined under component la) and DIVESUP. This would include redefining theboundaries between the institutions and DIVESUP in policy terms and also the types, levels andfrequency of information exchanges - in both directions. In addition, this task should also establishthe roles, reporting lines and funding mechanisms for the other bodies (either government,autonomous or semiautonomous) which could play a useful role in the further development of highereducation (e.g. the Rector's Council, any accreditation body arising from the work of component 2,and various other government funding bodies). For government bodies, it will be important toarticulate their policies to ensure consistency (e.g. on research funding).

(iii)Build capacity for strategic planning and management at HE Division (DIVESUP) and othergoverning bodies, such as the Higher Council for Education. DIVESUP and the Higher Council forEducation would be reorganized in order to meet new demands arising from the changes in thesystem. DIVESUP's capabilities for policy design, implementation and evaluation will bestrengthened. New functions will be established, such as Monitoring and Evaluation (M&E),technical assistance for grant application, and procurement advisory services. DIVESUP will preparea sectoral strategic plan. More generally, this component will identify ways of enhancing both thestrategic planning and the policy making capacities in DIVESUP in terms of its decision makingprocesses, the analytical capacity and the information needed to inform decisions, the methods ofdata collection, and the staffing and managerial implications for DIVESUP. This is likely to include areview of at least part of DIVESUP and also a staff training and development program.

This iS separate from questions of student finance covered in sub-component 3b

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In terms of volume of effort (and cost), much of the work in this component will be needed undertasks (iii) and (iv). Task (ii) comprises work which is primarily concerned with management andpolicy implementation issues; task (i) is concerned with the development of specific policies whichcannot wait until the new policy making capacity of DIVESUP is in place (task iii). This wouldsuggest the finalization of two studies prior to the implementation of the main component of thework, one covering task (i) on management and implementation issues (S. 1 bi) and the second on thefive specific policy areas of task ii (S. lbii).

(iv) Build capacity for strategic planning and management at higher education institutions: this taskshould enhance the planning (and budgeting) capacity in higher education institutions to enable themto respond better to national needs and policies. This is likely to entail staff development.Institutionswould use their planning or institutional development offices as Institutional Implementation Units(IIU) to oversee the respective institution's project activities. The IIU will have an "upstream" and a"downstream" function: the upstream tasks would consist of helping the institutional community(e.g., departments) to focus on innovation and quality enhancement, and prepare project proposals forconsideration by the Competitive Fund; the downstream tasks would focus on implementation, i.e., ifa project is awarded a grant, the beneficiary would then be responsible for implementing it through itsIIU under DIVESUP's supervision.

(v) Design and implement a management information system (MIS) that provides system-wideinformation for stakeholder decision-making. The IS will provide information such as: (i) statisticsabout HE institutions; (ii) quality of programs; (iii) statistics about graduates entering the jobmarket; (iv) job market demands; and (v) disclosure of financial information. A Labor MarketObservatory will be established in coordination with relevant ministries.

(vi) Design and implement a marketing campaign to promote technical education: including a journal,"open houses" for secondary students and entrepreneurs, and news features on TV, the radio and thepress. The main objective of this campaign is to improve the social status of technicians.Consequences of a successful campaign would be greater demand of technical education by thestudents (reflected in increased enrollments) and greater demand for technical graduates byemployers (reflected in increased hiring and economic contributions to technical training institutions).

Project component 2 - Quality Assurance - US$ 5.3 million (total cost of component)

The technical assistance to be provided under this component will help to establish minimum standardsand acceptable, recognized levels in educational services. A quality assurance system is needed in orderto protect the public, allowing stakeholders6 to access reliable information on HE institutions, relevanceof degrees, effectiveness and efficiency in resource use, and institutional management capabilities. Theissue is clearly linked to the roles of the tiers (component I a) and the operation of any quality assurancesystem may be used to help inform the distribution of public funds - either for education or for research -or both (component 3a). This will include the following activities:

(i) Consolidate the national system for quality assurance: This component consists in the consolidationof a national system for quality assurance. A "National Board for Accreditation and Evaluation"would be created. This Board will have two main tasks: (i) certification and accreditation of

6 Families, employers, DIVESUP, Competitive Fund Administration.

Anne-x 2 Page 5 of 8

institutions, and (ii) evaluation of study programs. In the long run, it is expected that theaccreditation system will be: (a) open to all HE institutions; (b) voluntary; (c) linked to economicincentives; and (d) centered on learning outcomes from study programs or careers (skills), ratherthan from institutions. It is essential that the accreditation board is 'independent' both of government,and also of the institutions whose quality it guarantees. It will be important for the institutionaldesign (S.3) to ensure that both types of independence are assured. The Higher Council forEducation would be the implementing agency for this component, and the Higher Council itself maydevelop into the "National Board for Accreditation and Evaluation."

(ii) Establish a qualification framework for study programs: Quality standards will be set for the tenstudy areas defined by UNESCO, with specifics for technical, undergraduate, and graduate programs.The establishment of such standards would facilitate the transfer of students between related careersand study levels (sub-component 1 a.ii), by assuring that courses and degrees carry basically the sameweight at different institutions. Also, a mechanism for continuous quality improvement would beprovided through the periodic revision of standards.

(iii)Design and implement a quality awareness campaign: including a periodic magazine, visits toinstitutions, and reports targeted to legislators, government authorities, and the media. The mainobjective of this campaign is to make society aware that quality in HE matters, and guide prospectivestudents when selecting an institution.

Project component 3 - Financing - US$ 227.4 million (total cost of component)

This component consists of the revision of the HE financing system to ensure the articulation betweennational policies and financial instruments. The objective is to implement a new system that isperformance based, and is aligned with the development objective that would lead Chilean highereducation toward increased coherence, efficiency, equity, and quality.

The Chilean HE system needs direct investments such as in educational equipment, informationresources, staff development, and faculty training. Until now, public funding has been mainly based onhistorical criteria, without taking into account real teaching load (enrollment of full-time equivalentstudents) or performance indicators, such as % graduating from a student cohort. From a long-termperspective, it is essential to create a performance oriented culture within the system, with fundingincreasingly tied to performance. Then, the main strategic choice for this component is the establishmentof a sustainable and output-oriented funding mechanism, versus a one-time input investment. TheGovernment will develop performance-based contracts with the individual institutions regarding the useof public funding.

The major part of this component (task a.iii) would be implemented by the Competitive FundAdministration and by Institutional Implementation Units at the project level. DIVESUP wouldimplement policy activities (tasks a.i, a.ii, and b).

a. Institutional Funding

To increase institutional accountability, and thus efficiency, funds would be transferred to institutionswithin the framework of a contracting system. This means that future funding would be contingent onperformance and track record. This sub-component comprises the following activities: (i) Establish acoherent policy basis for public funding; (ii) Increase accountability and develop a fundingmethodology; and (iii) a Competitive Fund to Promote Quality and Responsiveness.

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(i) Establish a coherent policy basis as the foundation for a funding methodology. There are severalfundamental policy questions to be analyzed before any funding methodology can be designed;examples of such policy questions are:

* the basis for determining which institutions should be eligible to receive direct public fundingand on what conditions (see component la);

* whether or not the funding of education activities should be separate from direct publicfunding for research;

* the balance of public funding to be channeled directly to institutions compared with that to bechanneled through individuals (e.g. students for education funding, researchers for researchfunding);

* the extent to which direct funding should be made by reference to input or to outputs (or tothe processes in between);

* whether the underlying calculations of funding levels should start from estimates of costs orfrom considerations of price;

* which policy topics might the funding methodology be used to help implement (e.g.improved quality of education; regional equity; efficiency gains; expansion of the system).

Regarding the public funding of research, the first question is whether some research funding shouldbe included as part of the block grants for the funding of education or whether research fundingshould all be project based. A second question concerns the balance of research funds to be providedto individual researchers compared with those to be provided to the institution - and how the costs ofthe institution (direct and indirect) are to be funded. A third question concerns the funding of post-graduate programs and grants, and whether this should be considered an education or a researchactivity (or, more likely, both). The analysis will also need to refine the roles of the various (public)bodies involved in research funding.

(ii) Increase accountability and develop afunding methodology:

Develop a funding methodology for education starting from the policy basis determined under task i.Any funding methodology will need to recognize that there are major differences in the costs ofprovision (between subjects, between levels and at least historically, between institutions). Forexample, the University of Chile has the responsibility for the National Seismology Center (Chile hastwo to three thousand tectonic movements per year), but the financing of such a center should not bebased on the education performance of the department of Geology of the University of Chile. Ananalysis of factual costs will help design a methodology - but a cost analysis is different from afunding methodology.Other existing mechanisms, such as AFI ("Aporte Fiscal Indirecto") and FDI ("Fondo de DesarrolloInstitucional)" will be redesigned with the objective of having a coherent set of financing toolsaligned with the policy objectives.

Annex 2 Page 7 of 8

This sub-component will be carried out in three phases: (i) studies on new criteria for public fundingallocation, consensus building activities, contribution to the MIS system (e.g., determination of unitcosts); (ii) universities will be required to be accountable for the expenses covered with AFD funds;and (iii) change in AFD allocation criteria (e.g., a performance-based funding formula would bedesigned).Develop the approach to achieving accountability for the use of public funds: there are variousdefinitions of the concept of accountability ranging from simply identifying how the public fundswere spent, to the more complex question of establishing what was achieved with the public funds.The approaches to accountability are likely to be different for education funding compared withresearch funding. A full approach to achieving accountability for public funds will require a cleardefinition of what services the state intended to purchase; this would implicitly imply a contractbetween government and providers. Other aspects of accountability include the need for financialmonitoring of publicly funded institutions and the need for clear guidance on legitimate use of publicfunds - and in particular the legitimacy of any cross-subsidy from public funds used to supportprivate activities. The costs of any monitoring will be a factor in the design of the process.

This component is intensively analytical. It will require both considerable thought and experience; itwould be far too simplistic to rush into developing a funding methodology before the policies on thephilosophical underpinning have been examined. With no other constraints, the logical order for theanalysis would be as set out above; under Chile's current circumstances, it may be appropriate toexamine first the concept of accountability - given the greater level of acceptability that this conceptnow has. This whole component is primarily one study (S.3a). In addition to the study, the otheractivities within this component would be the subsequent reorganization of the relevant bodies andthe building of numerical model(s) as needed to operate the agreed system. Along with such acomprehensive study, an ongoing participatory process follows that would involve all stakeholders(see Stakeholder Analysis in the Project File).

(iii)Establish a Competitive Fund to Promote Quality and Relevance (see Operational Manual)Through yearly competitions, the Fund will co-finance institutional development projects that wouldenhance the quality and relevance of study programs in priority areas. This sub-component wouldpromote a results-driven resource allocation, that would support sectoral priorities. The CompetitiveFund would replace and perfect the current Institutional Development Fund (FDI), since theCompetitive Fund will: (i) allocate funds in priority program areas; (ii) increase cost-effectiveness,through the improvement of the selection process (including external review) and selection of bestprojects; and (iii) monitor and evaluate projects upon completion. Eligibility criteria will be clearlydefined and fair competition would be assured through a tiered competition with attention to priorityfields, innovation, and quality enhancement. Institutions will decide investments to make inequipment, information resources, and /or staff development and faculty training, and developproposals in accordance with their strategic plans. Proposals would be evaluated by peers, and theFund would select the best proposals for funding. The establishment of this Fund would requirecapacity building at the government and institutional level (lb.iii and iv). Also, coordination with theQuality Assurance System would be required, since eligibility should be contingent on satisfactoryperformance and compliance with established standards and quality criteria.The fund would provide matching grants through four funding lines:

* Grants for technical training institutions in fields of higher demand from the productive sectors.Targeted institutions are Technical Training Centers, Professional Institutes, and Universities(S.3bi). This raises questions about the roles of the tiers considered under component Ia.

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* Grants for undergraduate programs in fields of national priority, such as basic sciences, health,technology, agronomy, and education (S.3bii).

* Grants to enhance graduate programs, with emphasis on doctoral programs in general, andmaster and doctoral programs oriented to the productive sectors and to the improvement of HEteaching.

b StudentAid

The student loan and scholarships schemes will be assessed and revised to increase equity in access andopportunities for further education. Non-financial barriers to access, such as insufficient information onloan and fellowships, will be identified and removed. The new policy framework should include astrategy for student support addressing the issues of equitable access, participation, and careerprogression. Access is not fully equitable in geographic or socio-economic terms. It is necessary toarticulate the various tiers of the system, to offer credit transfer options, and to set up remedial courses(link with component 1).

Tasks to be undertaken would include:

(i) Define the various causes for the existing inequalities; these include for example: income status of thestudent (or her/his family), differential quality of secondary school attended, geographical location ofthe student, differential opportunity costs and direct costs facing students (e.g., from differinginstitutions' fee rates). For each concern, develop a policy on the basis of the extent to which theGovernment wishes to concern itself

(ii) Revise the various policy instruments that target students' needs in light of the stated national policy.This would include considering the relative roles of grants and loans systems together with possiblerepayment mechanisms. The issue is interlinked with the question of balance between student andinstitution based funding mechanisms (component 3a).

As with component 3a, this is an intensely analytical component consisting primarily of a study (S.3c). Inaddition to the studies, expenditure under this component is likely to be needed to cover the setting up,staffing and equipping of the body(ies) agreed to administer the resulting scheme(s).

Summary of proposed studies

S.1: (a) enhancement of legal and regulatory framework; (bi) policy and institutional capacitybuilding; and (bii) development of five specific policy areas.

S.2: quality assurance system.

S.3: (a) core institution funding; (bi) assistance to technical training; (bii) grants for innovation andquality improvements; and (c) student aid.

Annex 3Estimated Project Costs


(Please note thatfigures have been rounded to the nearest decimalpoint)Project Component Local Foreign Total

-----------------------US $ million--------------------1. Policy Framework and Capacity Building 4.3 0.5 4.8a) Enhancement of the legal and regulatoryframework 0.9 0.0 0.9b) Policy and institutional capacity building 0.8 0.0 0.8c) Establishment of a Management Information System 1.2 0.4 1.6d) Promotion of Technical Training 1.3 0.2 1.52. Quality Assurance 5.3 0.0 5.33. Financing 162.4 65.0 227.4a) Institutional Funding 162.3 65.0 227.2(i, ii) Establish a policy, increase accountability and develop a 0.4 0.0 0.4fimding methodology(iii) Competitive Fund to Promote Quality and Relevance7 161.9 65.0 226.8* Fund administration, monitoring and evaluation 1.8 0.0 1.8* Technical training programs 15.0 3.6 18.6* Undergraduate programs in science, technology, and 133.1 35.4 168.5

other priority fields for regional development* Domestic graduate programs 12.0 26.0 38.0b) StudentAid 0.2 0.0 0.2Project Coordination Unit 1.1 0.1 1.2Project Preparation Facility (PPF) 0.2 0.1 0.3Total Baseline Cost 173.3 65.7 239.0

Physical Contingencies 0.1 0.0 0.1Price Contingencies 0.9 0.0 1.0

Front End Fee 1.5 1.5

Total Project Cost 174.3 67.2 241.5

7 Eligible institutions would be grouped according their level and size to assure fair competition.

Annex 4Economic Analysis


Introduction

During the 1990s the Chilean economy has grown by more than 6% per annum on average. Allowing forthe growth of population and labor force, this represents a growth rate of about 5% per capita. Maintaininga high growth rate into the future means that obstacles to growth of productive capacity need to beremoved. One such obstacle is likely to be shortages of suitably skilled manpower, and the project can beseen as significant in maintaining Chile's growth potential. Human capital development is a necessary butnot sufficient condition for growth, and investment in human resources will have diminished long-runeffects if other aspects of economic policy are badly managed. Precisely because these other aspects ofeconomic policy are well managed in Chile it is important that the lack of skills does not emerge as anunnecessary constraint on continued high growth rates.

Another very broad concern is for income distribution. During the past two decades there has been apronounced tendency for earnings differentials to widen in many countries, and in some cases for theabsolute level of unskilled wage rates to fall. The generally accepted reasons are technology and trade (orglobalization). Technology is the more powerful factor: it has enabled capital to be substituted for unskilledlabor, which reduces unskilled labor demand and wage rates. By contrast, technological change hasincreased the demand for and the rewards to many kinds of skilled labor. In addition, trade liberalizationhas opened up opportunities for low-income countries to compete with higher income countries, especiallyin goods and services which are intensive in low-skilled labor as input. This trade effect has its mainimpact in high-income OECD countries, and in some cases Chile may benefit from trade liberalization withricher countries. But it can also face similar competitive forces from lower income countries, whether indomestic or in export markets. One way of countering these two factors making for greater inequality ofearnings is through human capital development which shifts the structure of labor supply in the samedirection as changes in labor demand.

For these two reasons, maintaining the growth potential of the economy, and countering possibletendencies for income inequalities to widen, there are broad macroeconomic and distributional aspects tothe project. In addition, one may estimate the long run costs and benefits in a more specific andmicroeconomic context.

The present economic analysis attempts to measure the impact of the project on educational performance inChile, and to estimate the economic value of that impact in terms of changes to future student incomes. Italso looks at the benefits from changes in student completion rates and improvements in institutions' costefficiency/productivity). In specific it aims at estimating the impact of one of its Project's Component,namely, the Contractual and Financing system. This project component, along with its Competitive Fundsub-component, account for about 95% of the total funds for the project). Overall the project promises astrong return on investment, but additional modifications to the funding allocations towards institutionswhich have the most to offer in terms of poorer students and market oriented educational fields have thepotential to make the project even more cost effective.

Background

The higher education system in Chile developed around a core group of institutions. Prior to 1980, thesystem consisted of a one-tier system, with 8 universities (2 state and 6 private), all funded by thegovernment. In 1980 a series of reforms were introduced with the idea of: a) introducing market forces toopen the traditional system to unregulated market private provision of higher education, b) creatingdifferent types of institutions within the system, and c) stimulating institutions to diversify their funding

Annex 4 Page 2 of 16

sources, including increased fees to students (cost-recovery). To accomplish this, a three-tier system(Universities, Professional Institutes and Technical Training Centers) was introduced. The Universities

8were forced to diversify their sources of income and to rely more on tuition fees .These policies have had a significant impact. The changes may be summarized as follows: (1) considerableincrease in the number and differentiation of higher education institutions; (2) rapid increase in enrollmentprovided almost completely by the new private institutions, with almost no cost to the state; (3) growth inthe number of professional careers and academic degree programs (from a few hundred in 1980 to morethat 3,500 in 1994); (4) move from grant block allocation of state funding to yearly budget allocations, butcomplemented with funds coming from diverse sources, both public and private.

Table 1. Higher Education System in principle before and after the reforms

Before 1980 After 1980

1. One tier, one sector, low institutional 1. Three tiers, two sectors: high institutionaldifferentiation differentiation2. No tuition. Selective access according to 2. Tuition fees introduced by all institutions.performance Selective access maintained in the traditional

universities that receive public funding. In theprivate institutions, open access to those who canand/or will pay.

3. State financing of HE on the basis of incremental 3. Multiple competitive sources of fundingfunding4. System coordination provided by State authority 4. System coordination provided by markets andand institutional oligarchies. policy regulations.

Chile's higher education system is not yet as developed as that of industrialized economies, but compareswell with countries of similar economic development, such as Argentina, some of the East Asian countries,and Hungary. Three key indicators lead to that conclusion: (i) qualification of teaching staff in mostOECD countries university professors are recruited from the Ph.D. level; Chile produces 1/20 (perpopulation unit) of the Ph.D.s produced on average by OECD countries, and less than 15 % of faculty haveadvanced degrees (Argentina: 15%); (ii) coverage: it is about 27% in Chile, compared to 35% inArgentina, and 17% in Hungary, but significantly lower than in Korea (48%)9, and (iii) incompletediversification: the subsector has relatively very low enrollment rates at the lowest tier (17%), two yearvocational and technical level), the highest tier and in high cost / low private return fields such as basicsciences (2.5%).

Rationale for World Bank and Public Sector Intervention

This project will contribute to the Bank's sector-related Country Assistance Strategy goal (CAS) of"upgrading Chile's human capital, with a view towards improving the country competitiveness in theinternational arena" (para. 34). Higher Education systems play a critical role in the enhancement of acountry's competitiveness, through the training of its workforce and the advancement of knowledge, whichin turn leads to new products and processes.

8 A student-income contingent loan was introduced to compensate the effect of the introduction of fees.However, only students enrolled in public, state supported universities were granted access to thisloans.

9 See annex 11 of the PAD for a comparison with OECD countries.

of 16 Annex 4

Higher Education has long been recognized as providing significant positive externalities to a country'seconomy. While Chile cannot support a completely public sector HE system, the public good aspects ofthe system would imply a major involvement by the public sector. Moreover, if the public sector spendingon higher education is carefully targeted, it can have a major long run impact on income distribution inChile. This improvement in income distribution is likely to be one result of the reallocation of publicsector spending in this project.

The Chilean Higher Education System

The higher education system in Chile consists of three tiers of institutions, which were created in the early1980s. Most students attend the public and private universities in the system, and most public sectorfunding goes to this level (see Table 2). Professional institutes and Technical Training Centers provide nonuniversity education in professions and as technicians, but receive almost no public funds.

Higher Education institutions are authorized to provide the following titles:

- Universities: professional titles (5 years undergraduate programs, masters and Ph.Ds.) and any other typeof programs that requires an undergraduate as previous education. Currently, they also confer titles ofhigher level technicians.

- Professional Institutes (IP's): professional degrees (that do not require undergraduate as previouseducation) and careers of high level technicians.

- Technical Training Centers (CFT's): titles of high level technicians.

Public Funded Universities (Universidades del Consejo de Rectores)

There are 25 Universities which receive direct public funding since the 1980 reforms'". They include 8 thatare public (i.e., under some form of Government control), with the rest private (with autonomous status).No more than 5 or 6 can be considered "complex" universities, capable of producing high level research.As Table 2 shows, traditional universities represent 9.5% of all higher education institutions of the country,with 46.7% of the total enrollment of the country in 1996.

This group of universities has access to a direct, annual grant, which is allocated on the basis of a lump sumto each individual establishment". Both public and private institutions compete for the best student-linkedsubsidies (Aporte Fiscal Indirecto), but this represents a small fraction of their income (about 6%). Theyare favored as well by state financed student loans and scholarships. This group of institutions hasconsiderable influence in the Chilean higher education system, and is able to defend its allocation of publicresources. Through their powerful network of alumni, they have direct access to the Executive level andthese students are well organized and articulate.

New Private Universities

Following the deregulation of the system in 1981, another group of 42 new private sector universities hasdeveloped. This group constitutes 16% of all HE institutes. In terns of financing, these universities

10 We will call these 25 Universities "traditional universities".

The percentage given to each establishment is determined by historical precedents.


receive a small amount (about 6%) of government resources through the "Aporte Fiscal Indirecto" (AFI)'2.In 1996, 5 of these 42 universities were autonomous, 29 were in the process of accreditation supervised byConsejo Superior de Educacion (CSE), and 8 are being examined by the process in operation before theLaw of 199013. The higher quality private Universities may be able to attract high score students who bringwith them AFI, but this is a limited phenomenon (less than 1%). Most of these schools operate on the basisof private funds, and are too small to be able to offer quality education.

The better among them want fair competition -- a "level-playing field"-- with the traditional privateUniversities which receive public subsidy AFD and most of AFI. Those undergoing accreditation find theprocess too bureaucratic. Those institutions doing well want the system to continue operating as a freemarket. This group has strong ties with the political right wing opposition, which will have the power toblock radical proposals.

Professional Institutes (IPs) & Technical Training Centers (CFTs)

The IPs deliver "Professional Degrees" and the CFTs, "Higher Level Technician" degrees. All of them areprivate. In 1996, there were 69 IPs (26,3% of all HE institutions and 14.6% of total enrollment), out ofwhich 5 were autonomous, 26 were under the process of accreditation and 38 under the process ofexamination (the one contemplated in the Law prior to 1990). Additionally, there were 126 CFT (48,1% ofall HE institutions and 17.2 of total enrollment), none of which were autonomous, 17 under the process ofaccreditation and 109 under supervision.

In terms of financing, public funding is limited to the AFI as well as in the case of the "new" privateuniversities"4. Additionally, CFTs have no access to public resources for student aid, despite the fact thatthere are over 70.000 students enrolled in this level. The technical training at the CFT level has not been apriority for the system, and they receive less than 1% of public funds. An emerging, competitive economy,however, will generate increasing demands for higher level technicians with a technological focus.Technical schools provide a good response capability, and strong ties to the modem labor market.

12 This is the indirect public support linked to a "best student formula" which allocates resources basedon the number of top scores admitted in each institution the previous year. Students are classified in 5categories, with a 12:1 subsidy rate. It represents 12% of all the public support

13 This process consists of the following steps: the new private institution must sign an examinationagreement with either one of the traditional universities or one of the new state institutions. Thisagreement takes the form of a private, fee for service, contract without any intervention by anyneither public body nor further government control. The new private institutions must submit theirteaching programs for approval by the examining institution.

14 In the case of the CFTs, access to AFI is basically theoretical, since this is base on the "best-studentformula", and these institutions simply do not capture the best students of the system.

of 16 Annex 4

Table 2. Higher Education Institutions in Chile (type, number, enrollment and type of public funding theyreceive)

Type and share o rType of institutions Number of Institutions Undergraduate enrollment Public funding

1980 1996 1980 1996 1997Traditional Universities 8 25 118,978 167,282 AFD, AFI, Loans

(9.5%) (46.7%) Scholarships(96.5%)

Private Universities 0 42 0 77,212 AFI(16%) (21,6%) (1.4%)

Professional Institutes (IPs) 0 69 0 52170 AFI(26.3%) (14.6%) (0.09%/0)

Technical Centers (CFTs) 0 126 0 61,418 AFII 1__ ____ ____ ____ ________(48.1 %) (17.2%) (0.03 %)

Total 8 262 118,978 358,082 100%1_. i (100%) 0 (100%) ___ _

Current Financing of the Higher Education System

A coherent financing policy framework is important for higher education in order to provide legitimacy forseparate policy decisions and particularly for the use and allocation of public funds. In Chile, a collectionof separate policies was added over time, each of which made good sense at the time, but resulted in apatchwork, which does not hang together well. The result is a system of disconnected allocationmechanisms which challenge system legitimacy. Additionally, it results in public funds being used in waysthat achieve little in terms of public policy intentions.

Funding mechanisms:

The current financing mechanisms are not significantly linked to any performance indicators. It is dividedinto the following components: Direct block grant allocation (Aporte Fiscal Directo, AFD), Indirect GrantAllocations (Aporte Fiscal Indirecto, AFI) and Funds for Institutional Development (Fondo de DesarrolloInstitucional, FDI) and Student Aid (loans and Scholarships).

(a) Direct grant allocation (AFD): it represents about 50% of all fiscal allocation and it isdistributed only to the 25 "traditional" Universities described in the preceding section. 95% of such fundsare distributed according to historical criteria, without any clear incentive to improve performance or

15efficiency. The other 5% are allocated according to 5 indicators of performance . In 1998, the MOEmodified the weight given to these five indicators to better reflect elements of quality, efficiency andscientific and academic production.

(b) Indirect Grant Allocation (AFI): it represents 8.5% of higher education expenditures. It isdistributed to those universities that attract students with the highest scores in the "Prueba de AptitudAcademica" (a national examination test)16. The distribution of the AFI is very unequal since preferences

5 The model governing the allocation of these 5% since 1989 uses the following variables:student/program, student/professor, % of professors with Ph.D., Research projects/professors,publication of international recognition/professors.

16 The 27,500 best scores in this national test.


of the best students are oriented more toward a very reduced number of universities, so most of this publicfund allocation goes again to the 25 traditional universities. Little or none goes to IPs and CFTs.

(c) Funds for Institutional Development (FDI): represent around 8.5% of total public funds and itis assigned by competition, to the 25 "traditional" universities. These funds are mainly used to fnanceinfrastructure needs for academic, teaching or administrative activities (i.e. construction and equipment ofclassrooms, labs, libraries, bathrooms, etc.). The state has recently modified the selection criteria and theevaluation and monitoring process to optimize its contributions to the institution's mission and that of thecountry. In 1998, a new line was introduced called "convenios de desempeflo" which aims at financingprojects in priority areas on a competitive basis and through a contract between the State and theUniversities.

(d) Student Aid: These indirect public subsidies aim at facilitating the admission of students fromlow socio-economic background into the 25 "traditional" universities (the ones eligible to AFD). Theyrepresent about 20.7% of all public funds to higher education. The system is a complex one, with at leastseven different loan and grant schemes. There are three main elements of undergraduate student support:Ministry of Education grants (Becas MINEDUC), Ministry of Education loans (Fondo Solidario de CreditoUniversitario) and CORFO loans17.

Currently, the student aid system has a number of deficiencies. Aid under the two main components coverson average, about 60% fees (the new Becas Juan Gomez Millas generally cover 100% of fees). Thus livingexpenses are generally not covered, and the proportion of the real opportunity cost of education covered islikely to be low. In addition, the two main schemes (MINEDUC loans and grants) apply only to the 25AFD-aided Universities. The Juan Gomez Millas grants are available to students in a wider set ofinstitutions, and the CORFO loans to a somewhat wider set again. But the latter two schemes are stillrelatively small, and over 95% of student aid goes to those enrolled in the 25 AFD-aided Universities. Theinstitutions whose students have the least access to student aid (the IPs and the CFTs) are those which arelikely to provide an avenue of advancement for low income and low social status groups.

Principal Characteristics of Higher Education Financing

Currently the system lacks coherence. There are minimal possibilities for allocating resources, or students,across the three tiers of institutional levels. Originally, the idea was that Universities would specialize inresearch and advanced study programs; IPs would specialize in the preparation of professionals, especiallyin careers directed to the productive sectors; and the CFTs would be oriented to provide technical careers.

With the proliferation of private universities in the 80's (with the new legislation), IPs have been losingtheir original orientation. There has been a tendency among the IPs to transform themselves intoUniversities. CFTs have diversified their spectrum, and are currently offering careers in business and

18services . At the same time, many Universities offer technical careers, which do not require accreditationor official evaluation19. At the end of the 80's, 22% of the students of technical careers were studying ininstitutes different from the CFTs.

17 A comprehensive description of these students loans can be found in the project files.

Is Only 1/3 of the careers offered at these institutions are real technical programs.

19 In the case of the CFT evaluation and supervision is required before opening a program.

of 16 Annex 4

Equity is a major concern with the current system of financing, not only in the Student Aid system, but alsoin access to the system and regional issues. A major problem is that the IPs and the CFTs have beeneffectively excluded from public financing. The current system lacks transparency, good qualitativeevaluation, and information. The result is that these lower level institutions must charge higher fees tocover operations. As Table 3 illustrates, this creates an equity problem because lower income students arethe principal market for the CFTs.

Table 3. Enrollment in CFTs by income quintile (annual pesos)

Income Percentage of the Enrollment rate in CFT<= to 24,425 (Ist quintile) 7.4

24,426 and 41,804 (2nd quintile) 13.141,805 and 66,797 (3rd quintile) 19.166,798 and 123,991 (4th quintile) 27.9

> than 123,991 (5th quintile) 32.5

Higher Education Project Impacts

The main objectives of the project are to improve the performance of the Chilean HE system in thefollowing dimensions: Coherence and Efficiency; Quality and Relevance; and Equity. There are threecomponents: (a) Policy Framework and Capacity Building, (b) Quality assurance system established for allinstitutions and selected study programs, and (c) Contractual and competitive financing system introducedfor institutional support, and revision of the student aid system to make it more equitable.

The improvement in coherence and efficiency within the education system aims at completingdiversification, creating a more coherent and flexible set of rules and an efficient regulatory framework thatestablishes clear and fair rules for the system. Over the long run, this will be an important component ofsystem performance, since it will move the allocation process away from historical patterns.

The quality assurance component seeks to provide concrete guidance to students, employers,Govermment, and the higher education sector itself. The establishment of a general accreditation andevaluation system of institutions and programs will accomplish this. This component would also promotestudy programs and levels of HE that are responsive to social demand and labor market needs, and thus,would have a direct impact on Chilean socio-economic development.

The new contractual and competitive financing system for HE will contribute to the alleviation ofseveral inequities in the system, as well as to ensure that financial decisions are in line with nationalobjectives. The first step will be to establish a coherent policy basis as the foundation for a fundingmethodology. The objective is to have a system of allocation of public funds based on performance as anincentive to increase quality and efficiency among institutions. Project sponsored changes in the systemwill include: (1) Establish a policy, increase accountability and develop a funding methodology, (2) theCompetitive Fund which aims at promoting a results-driven resource allocation, according to sectoralpolicy priorities. The fund will finance institutional development of programs in areas of national priority,such as the basic sciences, and (3) financial aid for students, in which the project will analyze the system ofscholarships and loans in order to identify ways to improve its allocation and increase equity in the system.

In terms of project operations, the Competitive Fund, which is part of the new financing system, is themajor component. This fund will account for about 94% of the total funds for the project. ThisCompetitive Fund will gradually substitute the current Fund for Institutional Development (FDI), whichnow accounts for 8.5% of total public funds and it is assigned by competition to the 25 "traditional"universities. Currently, the amount of money allocated through the FDI is around US $16 million per year.


With the project this amount will be increased to about US$ 45 million per year to be distributed on acompetitive basis (tiered competition) among all existing higher education institutions. In the newCompetitive Fund, resources will be allocated through three lines of competition: (1) Undergraduate, (2)Doctoral education and related major equipment, (3) Senior technician training.

The Economic Impact of Financing Changes

These project-sponsored changes in financing from the new Competitive Fund on the distribution of theFDI will have important consequences for the quality of teaching and the enrollment rates at theseinstitutions. Calculation of these benefits is problematic, since it is based on a number of assumptionsabout how the various parts of the education system will respond. Nevertheless, it is possible to develop ageneral picture of how the economic performance of the country will be affected. To do this, the economicanalysis calculates the benefits of the Competitive Fund in the Chilean Economy by estimating theadditional income generated from increasing enrollment in the different tiers of the higher educationsystem.

A series of assumptions was made about the share that each group of institutions (Public universities,private universities, IPs and CMTs) will have in the distribution of the Fund (US$225 million):

* Institutions were divided into 5 categories: the 4 existing groups, but with the 25 traditionaluniversities separated in two groups: (1) the 4 biggest (in terms of enrollment) Universities (U.Catolica, U. Chile, U. ,Santiago and U.Concepcion), and (2) The rest of the 21 traditional universities.

* For the distribution of the 3 lines of funding of the Competitive Fund two scenarios wereconstructed20. In Scenario I, the share each group of institutions have is between the share of studentenrollment of each HE institution group and their current share in public funds distribution. However,adjustments were made to these percentages so that no group of institution will receive fewer fundsthat what they are currently receiving. In Scenario II, the share was calculated according only to theshare in enrollment that each group of institutions have, provided, as in scenario I, that no group ofinstitutions receive less money than at present. Tables 4 and 4A present these allocations.

Table 4. Scenario I- Allocation of the Competitive Fund among Institutions

Group I Group 2Traditional Traditional New private Amount I (thousandUniversities Universities universities IPs CFTs of US $)

Line 1 28.0% 51.0% 12.0% 9.0% 0.0% 168,400Line 2 75.0% 22.0% 3.0% 0.0% 0.0% 38,000Line 3 15.0% 15.0% 2.0% 2.0% 66.0% 18,600Total 78,442 97,034 21,720 15,528 12,276 225,000Share 34.86% 43.13% 9.65% 6.90% 5.46% 100%

'Amount for the 5 years of the program

20 These two scenarios were constructed in order to show the benefits of the project under two differentsituations. One, which is closer to current public fund allocation and the second one that is morebased in actual enrollment.

of 16 Annex 4

Table 4. Scenario II- Allocation of the Competitive Fund among InstitutionsGroup I Group 2

Traditional Traditional New private Amount I (thousandUniversities Universities universities IPs CFTs of US S)

Line I 15.0% 50.6% 21.4% 13.0% 0.0% 168,400Line 2 60.0% 25.9% 14.1% 0.0% 0.0% 38,000Line 3 5.0% 10.1% 4.2% 10.0% 70.6% 18,600Total 48,990 96,931 42,177 23,752 13,132 225,000Share 21.77% ° 43.08% 18.75% 10.56% 5.84% 100%

'Amount for the 5 years of the program

* The annual cost of training a student for group 1 and 2 was calculated by dividing the operationalexpenditures (excluding capital expenditure and student aid) of the institutions by the number ofstudents enrolled in that year2". In the case of the new universities, IPs and CFTs, tuition fees wereused as a proxy to cost per students since they represent more than 90% of the income sources of thoseinstitutions and more accurate information on either income or expenditure is not available.

* The employment rate of the graduates was estimated 100% within 6 months of graduation. This seemsa realistic assumption in the Chilean context, sine in a study conducted on labor market, it was foundthat most of all new graduates found a job within 6 months of graduation. However, it has not beendetermined what portion of that is underemployment.

With these assumptions, Tables 5 and 5A (for scenario I and II respectively) show the calculations on theredistribution of funds for one year of the project and its impact on the Chilean economy. The first fivecolumns of these tables show current distribution of FDI funds (total and share) across the different tiersand the new distribution of funds after the project (total and share). With the new level and distribution offunds, most institutions will benefit by receiving additional funds to fnance projects (see column B and A-B). Using the assumptions about the average cost per student in each of these groups, we can estimate thenumber of additional students that can be funded by dividing the increase in FDI and the cost per studentThe last column shows the additional income that will be generated by educating these additional students.The average annual salary used was the difference between the average salary of a professional ortechnician in Chile minus the average annual salary of a person who has completed up to secondaryschool22 .

21 Only 1996 data was available to estimate the cost per student. Division de Educacion Superior, Chile.

22 The information on average annual salary was not available for the different tiers of institutions,therefore the same data was used for Universities and Professional Institutes. Instituto Nacional deEstadisticas (Chile), 1997.


Table 5.Scenario I- Impact of the new Competitive Fund

Amount of FIxAnnual amount by institutions Number of

of FDI by after the project Increase new studentsinsdtutions (thousand of US$ in FDI Cost/ per than can enroll Average Additional

(Thousand of Current and average per (thousan Share of student uinder the rew annual income to theUSS, 1997) Share of year) of USS) FDI after (USS) FDI salary Country

(A) total FIX (B) (A-B) the opject (C) (A-By(C) (US S) (USS)

Traditional niajorUrnversities 7,934 29.2 15,688 7,755 34.9 5,90 1,314 7,700 10,120,392

Rest TraditionalUniversities 19,213 70.8 19,407 194 43.1 2,20 88 7,700 679,103

Private Universities 0 0.0 4,344 4,344 9.7 3,000 1,448 7,700 11,149,600

TPs 0 0.0 3,106 3,106 6.9 2,000 1,553 7,700 11,956,560

CFI's 0 0.0 2,455 2,455 5.5 1,000 2,455 3,000 7,365,600

Total 27,147 1 100 45,000 = 100 I 6,859 41,271,256

X Average annual salary of a professional minus the average annual salary | 343,927,132 2of a person vP-th only secondary education2NPV of proyected life incomie

Table 5A. .Scenario 11- Impact of the new Competitive Fund

Amount of FDIby institutions

Annual after theamount of projet Number ofFDI by (thousand of Increase in new students

institudons USS nd FDI Cost/ per than can enroll Avrage Additional(Thousand of Cufrent avage per (thousand Share of student under the new annual income to theUSS, 1997) Share of year) of USS) FDI after (USS) FDI salary' Country

(A) total FD[ (B) (A-B) the project (C) (A-By(C) (US S) (USS)

Traditional majorUniversities 7,934 29.2 9,798 1,864 21.8 5,900 316 7,700 2,432,921

Rest TradidonalUniversities 19,213 70.8 19,386 173 43.1 2,200 79 7,700 607,003

Private Universides 0 0.0 8,435 3,435 18.7 3,000 2,812 7,700 21,650,757

IPs 0 0.0 4,750 4,750 10.6 2,000 2,375 7,700 18,289,040

CFTs 0 0.0 2.626 2,626 5.8 1,000 2,626 3,000 7,878,960

Total 27,147 100 44,996 100 _ 8,208 50,858,682

'Average annual salary of a professional minus the average annual salary 423322349 2of a person with only secondary education

2NPV of proyected life income

The additional funds in FDI that each group of institutions will receive will either increase the number of students inthe system or their economic value by increasing the quality of education. Thus, contributing in either of the twocases to increase the additional amount of income generated under the project.

The additional annual income in Chile would be about US$42 million in Scenario I and US$50 million inScenario 11. If this annual flow of benefits is discounted to the present using an interest rate of 12%, the net

of 16 Annex 4

present value is about US$ 344 million in scenario I and US$424 in scenario II. These are the benefits ofthe annual investment in education under two scenarios. It is clear that scenario II brings more benefits tothe country; however, it is not necessarily the more politically feasible, despite its greater benefits.

These calculations overstate and understate the benefits somewhat. The number of students graduating inany particular year will only be a fraction of the total students receiving educational services that year.Thus, the additional income from the project should be reduced to the number of students graduating. Atthe same time, the project will continue to operate for five years, which would increase the value of theproject by almost five times. If students take an average of five years to graduate, these two factors wouldtend to cancel each other.

The return to the project is very good considering the initial investment for the five years of US$ 240million. In addition there are a number of other benefits from the project. These include a gain inefficiency at the institutional level and from a greater change in annual salary of graduates23. In the lastcase the gain could come in two ways: (1) better quality students will be more valuable in the market andtherefore earn higher wages and (2) for graduating earlier and thus entering the labor force at an earlier agewill increase the present value of the stream of income. These effects would eventually be captured in thesalary column of Table 5.

Additional benefits could also be obtained through the component of the project which aims at modifyingthe way the core funding (AFD) is distributed to reflect performance indicators. The project will try todevelop a funding methodology that could be input or output related and that will recognize that there aremajor differences in the costs of provision (across subjects, levels and institutions). The idea is to changethe incentives that institutions have at present. By tying the core funding to certain output indicators,institutions would try to improve those indicators in order to obtain more public funding.

The formula that will be used for this allocation has not yet been developed so it is not possible to show itin this present analysis. However, it is possible to make some estimations of the potential impact. Since theformula has not yet been developed, the impact of a change in AFD distribution (especially on theincentives institutions currently have) will be measured through the FDI analysis performed previously.Several different scenarios can be used, including one in which universities become much more efficientand thus reduce cost per students and another one in which universities invest more either in infrastructureor in increases of salaries and thus increase cost per students. Table 6 shows the impact of these two

24scenarios on the NPV calculated above

Table 6. Impact on NPV of a variation in cost per students

Cost per student NPV % change

At current cost 343,927,13210% higher 312,661,029 -9.110% lower 382,141,257 11.1

23 The change in annual salary is measured by the difference between the income of a professionalminus the income of a person who has only secondary education. It is the additional income earnedby completing higher education studies.

24 For this analysis Scenario I was used for simplification purposes. The results are also valid to scenarioII and should be greater since the NPV under scenario II is larger than in scenario I.


To make the project unattractive, cost per student have to increase considerably (more than 50%), whichdoes not seem viable given that with the different components of the project, higher education institutionsand in special universities should become more efficient.

Another variable that could affect the NPV is the time it takes a student to graduate. The new fundingformula for AFD could be tied to output indicators, such as the number of graduates per year in aninstitution. This indicator by itself could induce institutions to produce lower quality graduates in a shorterperiod of time, but the design of the new formula will try to ensure that other indicators will be taken intoaccount so that the quality of graduates is not at risk. It can be assumed that the new formula will createincentives to the institutions so that students graduate in a shorter period of time. Currently it takes astudent in Chile an average of 8 years to graduate. The institutions could design certain rules to makestudents graduate earlier, such as give financial aid only for 5 years of the studies.

By making students graduate earlier and then reducing the average time of completion from 8 years to 7 or6 years, the benefits of the project will be further increased. The earlier students graduate, the earlier theywill enter the labor market and the earlier they will generate the income stream to the country. Graph Ishows the shape of the income stream of a student graduating at time "t" and another one graduating at "t-1". There will be gains in the income pattern of a student graduating earlier, assuming that the labor marketcan absorb students as they graduate. In a growing economy such as the Chilean, this assumption seems areasonable one.

Graph 1. Income stream of a student graduating at a certain year

Income

t-1 t year

Table 7 shows the impact on the NPV of reducing graduation time by one and two years. This can be avery important aspect of the economic value of the project, since the Net Present Value calculation is verysensitive to changes in the graduation time. If the project incentives are effective in reducing time tograduate without lowering the quality of education, the project can have an enormous impact.

Table 7. NPV of the project with different completion times ofprograms.

Graduation time NPV of project % changeAt current graduation rate 343,927,132 -

Graduation a year earlier 385,198,387 12.0

Graduation two years earlier 431,422,194 25.4

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Finally, the last point in the second component is on financial aid to students. The project will providetechnical assistance to the Chilean in producing several studies to assess the efficiency and effectiveness ofthe current system. At this point, only recommendations for the restructuring of the current system will bemade and thus an estimation of its benefits is not pertinent.

Analysis of Project Sustainability

Economic Environment and Higher Education Expenditure

In the interests of providing a broader perspective, it would be useful to examine the economic25environment in which the Project will be executed, focusing specifically on GDP, public sector spending,

26and education sector expenditure.

Chile's economy during the 1990s has enjoyed high rates of growth averaging approximately 7%annually. As a result, public and social expenditure levels, which had declined significantly during the1980s, increased, as did social investment. In 1997, per capita GDP was roughly US$5,000. Publicspending rose at the same rate as GDP, fluctuating in the range 21-23% of GDP. Government expenditurefor 1998 will total approximately US$17 billion.

The education sector has been a major priority of the Government's throughout the 1990s. This isparticularly evident from the rates of real expenditure growth for the Ministry of Education. Between 1990and 1997, the average annual rate of real growth of education expenditure was 12%, for a projected 1998total of $US2.567 billion. The education sector's relative share of total public spending has risen from11%in 1990 to 15%in 1998.

Higher education27 accounts for 13.5% of the education budget, or $US346 million in 1998. Theaverage annual growth rate during the period has been 7.5%. In addition, the 1998 science and technologybudget, allocated to CONICYT28, is approximately US$66.7 million. Most of these funds, earmarkedmainly for scientific and technological research projects, were requested by universities.

Scenario I- without the Project

In order to measure the fiscal impact of the MECE-SUP Project, it would first be helpful to considerthe scenario that would exist if no project were being implemented.

25 Includes all departments with budgets governed by the Public Sector Budget Act.

26 Includes the Ministry of Education and the decentralized departments covered in Part 9 (Ministry ofEducation) of the Budget Act.

27 Includes Budget Act Chapter 30 funds, plus "Enhanced Teacher Training" and "Teaching Fellowships"transfers from Program 02 and "University of Chile" transfers from Program 01.

28 National Commission for Scientific and Technological Research.


Table 8. Higher Education Without the Project, 1998-2003In billions of US$

I US$ = Ch$470.75

1998 1999 2000 2001 2002 2003

GDP 77,436 80,378 84,799 89,463 94,383 99,574GDP growth 4.8% 4.0% 5.5% 5.5% 5.5% 5.5%Public expenditure 17,107 17,757 18,733 19,764 20,851 21,998Public expenditure as % of GDP 22.1% 22.1% 22.1% 22.1% 22.1% 22.1%MINEDUC exp. 2,563 2,664 2,810 2,965 3,128 3,300MINDEUC exp. as % of public Expenditure 15.0% 15.0% 15.0% 15.0% 15.0% 15.0%Higher educ. Exp. 346 360 379 400 422 445Higher educ exp. as % of MINEDUC exp. 13.5% 13.5% 13.5% 13.5% 13.5% 13.5%Increase in higher education exp. - 4.0% 5.5% 5.5% 5.5% 5.5%

Sources:GDP projections for 1998-2003: Central Bank of Chile.1998 public expenditure: Budget Act.1998 MINEDUC expenditure: Budget Act + wage inflation factor.1998 higher education expenditure: Budget Act +changes.Exchange rate: 1998 average.

Table 8 presents a fairly conservative projection - given the crisis in Asia - of Chile's economicgrowth for the period 1998-2003. Against this background, equally conservative figures for governmentspending and the share thereof represented by the education sector and higher education are projected astending to remain close to the previous years' averages. This is particularly likely to be the case, given thebehavior of the same variables during 1990-98. In this scenario, the projected incremental resources forhigher education, taking 1998 as the base year, are as follows:

Table 9. Higher Education, 1998-2003Incremental Resources

In millions of US$

r | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | Total |lIncremental resources 0 14 33 54 76 100 277

Scenario II- with the Project

Next, assuming the same economic environment and level of public expenditure, the projectedimpact of implementation of the MECE-SIJP Project on resources for higher education is shown in table10. In order to assess Project impact without factoring in changes to other budget items, it is assumed thathigher education spending will remain constant over the period in question, i.e., at the 1998 level.

From the Table 10, it can be concluded that the Project will increase the higher education budget by up toa maximum of 16% of current spending. Compared with the "no-project" scenario set out in section III,higher education spending with the Project in place is projected to be US$37 million less (see table 11). Aconservative growth projection is that the incremental amount for the period under consideration would beUS$277 million, with the Project accounting for US$240 million. This figure clearly demonstrates that theProject can easily be absorbed into the higher education budget.

of 16 Annex 4

Table IO. Scenario with the projectIn millions of US$

I US$ = Ch$470.75

1998 1999 2000 2001 2002 2003

Higher Education, 1998 spending 346 346 346 346 346 346

MECESUP project 28 49 55 52 55

Total with project 346 374 395 401 398 401

Annual increase 7.5% 5.3% 1.5% -0.8% 0.7%

Project impact as % of HE spending 8.09 14.16 15.90 15.03 15.90

Project impact as % of education sector 0 1.1 1.7 1.8 1.7 1.7spending

Project impact as % of public expenditure 0 0.2 0.3 0.3 0.3 0.3

At the same time, project benefits which are to be realized through increased incomes for students shouldtranslate, over time, into increased tax revenues for the Government. This fiscal impact has not beenestimated.

Table I. Comparison ofprojected incremental resources with resources under the MECE-SUP project

1998 1999 2000 2001 2002 2003 Total

Incremental resources 14 33 54 76 100 277MECE-SUP project ,28 49 55 52 55 240

Difference 114 16 1 (24) (45) (3 7)

The more significant difference, perhaps, is the resource distribution over time: the incrementalcost projection shows gradually increasing levels, whereas spending under the Project scenario is expectedto stabilize during the third year.

The Project will account for no more than 1.8% of the Ministry of Education's total annualbudget, and a maximum of 0.3% of public sector spending, figures which further demonstrate that theProject can be implemented without imposing a financial burden.

It is worth noting that resource levels for other higher education budget items (e.g., institutionalsupport and student assistance) are subject to fluctuations determined by govermnent policy and theapplicable laws and regulations. Although such variables were not considered in this exercise formethodological reasons, these resources are likely to be affected by decisions resulting from the findings ofstudies conducted under the MECE-SUP Project, an exercise that, it is hoped, will improve the allocationof financial resources.

Someflnal remarks.

The project has been shown to have a large economic return, and is thus justified. Cost effectiveness is aseparate issue, relating to whether this is the least cost method of achieving the desired result. Thisanalysis did not examine closely the cost effectiveness of this approach, but several observations on the


efficiency of the project are possible. Among the issues that project designers may want to consider are thefollowing.

Competition among institutions is an excellent method of encouraging efficiency, but it only works whenthe various types of institutions are effectively able to compete. The fact that autonomous Universities canopen technical careers without the requirement of official evaluation creates unfair competition to theTechnical Training Centers since these are regulated by the government and require official evaluation.The project may want to consider this issue in the policy component.

Moreover, by denying direct public funding to IPs and CFTs, the state has signaled that the education theyprovide is less valued. Students in this level lack possibilities to continue their studies and their diplomashave very little value. There is no clear information on the needs of the labor market. This results in thatparents and students do not have enough information to make the right choices. The project may want toconsider methods providing greater market demand information to prospective students.

In terms of financing, as described in the Student Aid section, there is an issue of coverage. The two mainschemes apply to the 25 AFD-aided Universities only. There are other grants and loans available tostudents in a wider set on institutions, but they are still relatively small, and the vast bulk of student aidgoes to those enrolled in the 25 AFD-aided Universities (more than 90%). As mentioned before, studentsfrom IPs and CFTs are least likely to benefit from student aid, and they are the ones most likely to comefrom lower income families. Opening up eligibility to all students would pose budgetary difficulties in theshort run, but if schemes were extended to all institutions as they gained Autonomy through theaccreditation process, this would make for a more gradual and affordable increase in expenditure. It woruldalso put pressure on institutions to take the steps necessary to graduate to autonomous status.

Control of the educational institutions is an important consideration for their ability to respond to efficiencyincentives. In Chile the following institutions enjoy autonomy: (a) State universities, created by the Stateand by law or derived from the states universities, (b) Private traditional universities, these are the ones thatin the past the state acknowledged as autonomous and that have access to AFD29, (c) Those privateuniversities that have gone through the examination process established by the 1980 decree of the Ministryof Education, or those that have gone through the accreditation process. Those universities that have notended either the examination or accreditation process are not considered autonomous yet. This is an issuethat affects not only policy, but the ability of institutions to respond to changing environments, and shouldbe considered very carefully from the efficiency point of view.

Finally, one of the clearest signal of discontent with the current higher education system was a studentunrest that spread to the entire sub-sector during May/June 1997. Although grievances focused onfinancing and govemance issues, they revealed broader concerns having to do with the concept, identityand mission of Higher Education in Chile, its role in national development and the role of the state insupporting it. In the long run, students are the market that these institutions must serve. Building ingreater feedback mechanisms would contribute to the ability of these institutions to respond to studentneeds. One very effective mechanism would be to vest student scholarships with the students, who couldthen choose the institution to attend, rather than providing the student scholarship funds to the institutionitself.

29 These are universities recognized as autonomous in different dates but before January 3, 1981.

Annex 5Financial Summary


Years Ending 2003

(US$ millions)

Implementation Period Operational Period

1999 2000 2001 2002 2003 Total 2004 2005 2006 2007

Project costsInvestmnent costs 3.24 1.83 1.24 0.97 0.89 8.17 0 0 0 0Recurrent costs 25.95 47.15 53.23 51.16 54.33 231.82 55.96 57.64 59.37 61.15

Total 29.19 48.98 54.47 52.13 55.22 239.99 55.96 57.64 59.37 61.15

Financing Sources (% of total project costs)

% of totalproject cost

IBRD 60.2Government 39.8

Total 100.0

Annex 6Procurement and Disbursement ArrangementsChile Higher Education Improvement Project

Procurement

Goods and works shall be procured in accordance with the provisions of Section 1 of the"Guidelines for Procurement under IBRD Loans and IDA Credits" published by theBank in January 1995 and revised in January, August 1996 (The Guidelines) andSeptember 1997 and the provisions stipulated in the Loan Agreement.

Competitive Fund: Through yearly competitions, the fund will co-finance institutionaldevelopment projects that would enhance the quality and relevance of study programs inpriority areas. The total amount of grants is estimated at US$225 million. Winninginstitutions will sign agreements with the Ministry of Education for grants expected torange between US$100.000 and US$5 million. Institutions will decide investments tomake in infrastructure, equipment, information resources and/or staff development andfaculty training and develop proposals in accordance with their strategic plans. Anyprocurement of goods and works and contracting of consultants will be carried out by theinstitutions according to the Bank Guidelines and the procedures outlined below.However, due to the nature of the grants, aggregate amounts cannot be defined inadvance. Hence, the aggregated amounts indicated below do not include funds assignedto the Competitive Fund.

Works: Civil works are expected to consist mainly of rehabilitation and newconstruction of educational facilities under the Competitive Fund. All civil workscontracts estimated to cost over US$5.0 million equivalent, will be procured usingInternational Competitive Bidding (ICB) procedure. Civil works contracts estimated tocost less than US$5.0 million equivalent, may be procured using National CompetitiveBidding (NCB) procedures. Works estimated to cost less than US$350,000 equivalentmay be procured on the basis of at least three quotations from qualified contractors. TheProject does not foresee any procurement of works other than those procured under theCompetitive Fund.

Goods: All goods estimated to cost over US$350,000 shall be procured usingInternational Competitive Bidding (ICB). Sophisticated scientific equipment (regardlessof value) may be procured by the institutions using International Limited Bidding (ILB).All goods estimated to cost less than US$350,000 may be procured in accordance withthe NCB procedures up to an aggregate amount of US$0.4 million, excluding goodsfinanced under the Competitive Fund. For smaller purchases, National Shoppingprocedures may be used up to an aggregate amount of US$0.3 million for contractsvalued at less than US$100,000.

Employment of Consultants: Consultant's services shall be procured in accordancewith the provisions of the "Guidelines: Selection and Employment of Consultants byWorld Bank Borrowers" published by the bank in January 1997, revised in September1997, and the provisions stipulated in the Loan Agreement.

of 6 Annex 6

Consultants' Services with firms will be contracted through Quality-Cost BasedSelection (QCBS) except as indicated below. Consultants' services provided by firms fortechnical assistance, and research may be contracted through Quality Base Selection. Theshort-list of consultants for these services, estimated to cost less than $100,000equivalent per contract, may comprise entirely of national consultants. Other services ofstandard or routine nature such as surveys, background studies, study-tours, technicalassistance, training logistic support, etc., estimated to cost less than US$60,000 may beselected based on Least-Cost Selection procedures, up to an aggregate amount ofUS$2.5 million. Consulting services (such as technical assistance for grant application,procurement advisory services, data collection, etc.) may be procured under contractsawarded to individual consultants, in accordance with the provisions Section 5.1 of theGuidelines: Selection and Employment of Consultants by World Bank Borrowers, datedJanuary 1997.

Prior Review. Prior Bank review would be required before all bidding procedures forthe following procurement actions: (a) All contracts for goods and works costing morethan $500,000 and $5,000,000, respectively; (b) the first two NCB procurement of goodsand works; (c) all consultants' services estimated to cost US$100,000 or more if providedby a firm, and all consultants' services estimated to cost US$50,000 or more if providedby an individual; (d) any amendment of contracts resulting in the increase of the contractvalue beyond the review limits set in (c) and (d) above; (e) all Terms of Reference forconsultants. Random ex-post review of all other contracts will be carried out by Banksupervision missions.

A Procurement Plan, satisfactory to the Bank, for the first year of implementation of theproject (not including the Competitive Fund) should be submitted before effectiveness ofthe Loan. Standard Bidding Documents for national and shopping procurement andcontracting of consultants will be developed and approved to be used by the HigherEducation Institutions before the first round of competition. A project launch workshopwill be organized at an early stage in Project Implementation to familiarize theimplementing unit and other institutions involved in the execution of projects. Theworkshop will cover procurement, disbursement, reporting and auditing requirements.The General Procurement Notice is planned to be published by November 16, 1998.Annual financial audit reports, including the audit of procurement actions, would becompleted by independent auditors acceptable to the Bank, and forwarded to the Bankwithin six months of the end of each fiscal year.

Annex 6 Page 3 of 6

Annex 6, Table A: Project Costs by Procurement Arrangements \a

(in US$ million equivalent)

Expenditure Category Procurement Method Total Cost(including

contingencies)NCB Other N.B.F

1. GoodsCommunication andComputer Equipment,Publications 0.4 0.3 \b 0.7

(0.4) (0.3) (0.7)2. Services

Technical Assistance 4.3 \c 4.3(4.3) (4.3)

Training 1.0 \c 1.0(1.0) (1.0)

Studies 2.2 \c 2.2(2.2) (2.2)

Publicity 1.0 \c 1.0(1.0) (1.0)

3. PCU Staff 5.5 \c 5.5(5.5) (5.5)

4. Adm. Expenses 0.3\b 0.3(0.3) (0.3)

5. Competitive Fund 225.0 \d 225.0(129.0) (129.0)

6. Front End Fee 1.5 1.5(1.5) (1.5)

Total 0.4 241.1 241.5(0.4) (145.1) (145.5)

Note: N.B.F. = Not Bank-fmanceda. Figures in parenthesis are the amounts to be financed by the Bank loan creditb. National Shoppingc. Consultants selected as indicated in Annex 6, Table Al.d. Aggregate amounts for works and goods cannot be determnined in advance since

those will depend on institutional requirements of the selected projects.

of 6 Annex 6

Annex 6, Table Al: Consultant Selection Arrangements(in US$ million equivalent)

Selection Method Total CostConsultant Services Expenditure Category (including

contingencies)QCBS QBS LCS Individuals

1. Policy Framework and Capacity

Building Studies:

Management Information System 0.150

-Availability and Employment of 0.150Professionals & Technicians 0.120 0.120-Design of Institutional Management 0.130 0.130System-Labor Market Observatory 0.204Promotion of Technical Training 0.204 0.440- Quality of Superior Technicians Training 0.440 0.280- T. V. Promotion 0.280- Publications 0.130 0.1302. Quality Assurance Studies:-Public Information: National and 0.120 0.120International Backgrounds 0.120 0.120- Evaluation of Present License Systems- Relation Between Knowledge Areas and 0.400Occupational Streams 0.400 0.250- Quality Assurance Informnation System 0.250- Review of Present Accreditation System3. Financing Studies: 0.130 0.130Institutional Funding 0.130 0.130- Internal Efficiency .- Review of Public Funding Criteria 0.130 0.130Student Aid:- Criteria Student Aid Mechanisms

Routine contracts with individuals fortechnical assistance for grant application, 3.296 3.296procurement advisory services, data 5.543 5.543collection, etcUCPSub-total 1.724 1.010 2.427 8.839 5.161

Total 1.724 1.010 2.427 8.839 14.000Note: QCBS = Quality- and Cost-Based Selection

QBS = Quality-based SelectionLCS = Least Cost Selection

Annex 6 Page 5 of 6

Annex 6, Table B: Thresholds for Procurement Methods and Prior Review(In US$'000)

Expenditure Contract Value Procurement Contracts Subject toCategory (Threshold) Method Prior Review

US $ thousands US $ thousands1. GoodsCommunication and Computer >350 ICB All over 500EquipmentPublications

<350 NCB First two<100 National Shopping None

2. Services (a)A: Firms Regardless of Value SBQC and SBQ All over 100Technical Assistance, >50 LCS All over 100Training, StudiesPublicityB. Individuals Consultant All over 50

Guidelines TOR under 50Paragraphs 5.1 - 5.3

3. Competitive FundA. Works >5,000 ICB All

<5,000 NCB First two<350 Tree Quotations None

B. GoodsSophisticated Scientific Regardless of Value LIB All over 500EquipmentAll other goods in >350 ICB All over 500institutional plans <350 NCB First two

<100 National Shopping None

of 6 Annex 6

Annex 6, Table C: Allocation of Loan Proceeds

Expenditure Category Amount in US$ Financingmillion Percentage

Communication and Computer Equipment 0.2 80%Technical Assistance, Studies, Training, 8.1 100%Publicity and PublicationsPCU Consultants 5.0 100%PCU Operating Expenditures30 0.3 100%Unallocated 1.4Competitive Fund 129.0 57%Front End Fee 1.5 100%

Total 145.5 60.2%

Disbursement

The proposed loan will disburse over a period of five years, and the expected closing date is June30, 2004. Disbursements will be made for: (i) 100% of foreign and 80% of local expendituresfor communication and computer equipment (totaling US$0.15 million); (ii) 100% of services,including technical assistance, training, studies, publicity, publications, PCU consultants andPCU's operating expenditures (totaling US$14.85 million); and (iii) 90% of investment grants tobe awarded by the Competitive Fund (totaling US$129.00 million), and 100% of operating costsof the PCU. A PPF of US$500,000 will be refinanced by the loan.

Use of statement of expenses (SOEs):Contracts of less than US$500,000 equivalent for goods and less than US$5,000,000 equivalentfor works. Consultant contracts of less than US$100,000 for firms and US$50,000 forindividuals.

Special Account:To facilitate timely project implementation, the Government would establish, maintain, andoperate (under terms and conditions satisfactory to the Bank) a Special Account in US dollars.The authorized allocation will be US$9.0 million. The initial deposit will be limited to US$3.0million until the aggregate amount of withdrawals from the loan account plus the total amount ofoutstanding special commitments shall be equal to or exceed US$9.Omillion. After that point, theauthorized allocation of the Special Account will be US$9.0 million.

30 "Operating Expenditures of the Project Unit" means the cost of consultant fees, secretarial services,office leasing, utilities, office supplies and materials, and other related costs of the Unit referred to inparagraph 3.03 (a) of the Loan Agreement.

Annex 7Project Processing Budget and Schedule


A. Project Budget Planned Actual

US$200,000 US$200,000

B. Project Schedule Planned Actual1. Time taken to prepare the project (months) 10 months 10 months2. First Bank mission (identification) N/A 1/5/983. Appraisal Mission Departure 6/15/98 6/15/984. Negotiations 9/28/98 9/28/985. Planned Date of Effectiveness 12/15/98 TBD

C. Prepared by: Ministry of Education

D. Preparation Assistance: PPF and PHRD Grant (Japanese)

E. Bank Staff who worked on the project included:

Name SpecialtyLauritz Hohm-Nielsen Task ManagerMarian Kaminskis Task Assistant, Gender AnalysisCesar Yammal Consultant, Higher Ed. SpecialistGabrielena Alcala Consultant, EconomistFrancoise Delannoy Liason with MINEDUCMarta Molares-Halberg Country LawyerMarta Ospina ProcurementMaria Elena Castro-Munioz Social AssessmentQuentin Thompson Consultant, Policy AnalysisJean-Claude Martin Consultant, Institutional AnalysisJacques Mazeran Consultant, Technical EducationGeorge Preddey Consultant, Contracting for Higher EducationMax Brennan Consultant, Funding SystemsJohn Sheehan Consultant, Financial AnalysisElaine El-Khawas Consultant, Quality AssuranceBenoit Millot Peer ReviewerDoug Windham Peer Reviewer (external)Chris Shaw Peer ReviewerDonald Winkler Lead Specialist, EducationAlexandre Abrantes Country Sector LeaderJose Carvalho Country LawyerFebe Mackey Team AssistantRuth Izquierdo Team Assistant

Annex 8Documents in the Project File

Chile Higher Education ProjectA. Statistical References

1. Departamento de Informaci6n/Comisi6n Nacional de Investigaci6n Cientificay Tecnologica(CONICYT). Indicadores Cientificos y Tecnologicos; 1997.

2. Divisi6n de Educaci6n Superior: Departamento de Politicas y Estudios. Evolucion yProyectos del Fondo de Desarrollo Institucional para las Universidades; 1996-98.

3. Feres, H&ctor y Guillermo Gaete (Universidad del Bio-Bio). Chile: los Recursos del Pais alSistema de Educaci6n Superior y su Distribuci6n Regional; 1997.

4. Divisi6n de Educaci6n Superior (DIVESUP). Disponibilidad y Ocupabilidad de RecursosHumanos con Estudios Superiores en Chile: Informe de Avance: Primera Etapa; 1998.

5. Ministerio de Educaci6n, Division de Educaci6n Superior (Chile). El Sistema de Educaci6nSuperior en Cifras: Compendio Estadistico; 1996-97.

6. Minsterio de Educaci6n, Divisi6n de Educaci6n Superior (Chile). Directorio de Institucionesde Educaci6n Superior en Chile; 1998.

7. Ministerio de Educaci6n (Chile). Educaci6n Superior: Anexo al Compendio de Informaci6nEstadistica, 1992; 1990-92.

B. Accreditation Documents

8. Ministerio de Educaci6n: Divisi6n de Educaci6n Superior. Sistema de Acreditaci6nInstitucional para los Centros de Formaci6n Tecnica; 1997.

9. Persico, Maria Cecilia and Pablo (CPU). Acreditaci6n en Chile: La Experiencia de unLustro; 1997.

1 0. RedLatinoamericana de Cooperaci6n Universitaria. Noticias de la Red: Reuni6n ConsejoConultivo de Acreditaci6n; 1997.

11. Consejo Superior de Educaci6n (CSE). Boletin Oficial: Normas Generales

12. Consejo Superior de Educaci6n (CSE). Boletin Oficial: Acuerdos 1996

13. Consejo Superior de Educaci6n (CSE). Boletin Oficial: Guias de Procedimiento

C. Legal Documents

14. Aportes Fiscales a la Educaci6n Superior (Public Funds to Higher Education); 1998.

Annex 8 Page 2 of 5

15. Documento de Posici6n para la Consulta del H. Senado sobre Asuntos Universitarios:Corporaci6n de Promoci6n Universitaria; 1997.

16. Informe al Consejo de Rectores del Grupo de Trabajo MINEDUC-Consejo de Rectores sobresistemas de Informaci6n para la Educaci6n Superior; 1997..

17. Marco de Politicapara la Educaci6n Superior; MINEDUC, 1997.

18. Mensaje de S.E. El Presidente de la Repuzblica con el que Inicia un Proyecto de Ley Marcode Universidades Estatales; 1997.

19. Propuesta sobre Aportes para Convenios o Contratos de Desempefio MINED UC-Universidades del Consejo de Rectores, para Proyectos Prioritarios, en el Marco de losPlanes de Desarrollo de las Universidades Tradicionales; 1997.

20. Reglamenta Normas para la Acreditaci6n de los Centros de Formaci6n Tdcnica; 1997.

D. Project Background Documents

21. Arellano, Jose' Pablo (MoE, Chile). Politicas para la Educaci6n Superior; 1997.

22. Brunner, Jose Joaquin. La Educaci6n Superior Chilena como Objeto de Analisis y dePoliticas; 1996.

23. Brunner, Jose Joaquin and Guillermo Briones. Higher Education in Chile: Effects of the1980 Reforn.

24. Comisi6n de Estudio de la Educacion Superior (Chile). Una Politica para el Desarrollo de laEducaci6n Superior en la Decada de los Noventa; 1990.

25. Cox, Cristian. Higher Education Policies in Chile in the 90s; 1996.

26. Gonzdlez, Luis Eduardo (MoE, Chile). Regulaci6n, Acreditaci6n y Optimizaci6n de laCalidad en la Educaci6n Superior Chilena; 1997.

27. Lemaitre, Maria Jose. Chile: A Decade After the Reform: The Challenge of Assuring andEnhancing Quality; 1997.

28. Lemaitre, Maria Jose. Elementos para una Definici6n de Politica para la Educacion Superior;1998.

29. Lolas, Fernando. Chilean Education: An Overview (with an emphasis on higher education);1996.

30. MECE-SUP, Ministerio de Educaci6n (Chile). Ayudas Estudiantiles en la Educaci6nSuperior; 1998.

31. MECE-SUP, Ministerio de Educaci6n (Chile). Desafios de la Educaci6n Superior Chilena yPoliticas para su Modemizaci6n: Informe a su Excelencia El Presidente de la Repiublica;1994.

of 5 Annec 8

32. MECE-SUP, Ministerio de Educaci6n (Chile). Fondos Concursables y Nuevos Mecanismosde Convenios de Desmpefno; 1998.

33. MECE-SUP, Ministerio de Educaci6n (Chile). Informe del Grupo de Trabajo MINEDUC -Consejo de Rectores sobre Disefio de Estandares de Calidad y Otras Medidas Iniciales Haciaun Proceso de Evaluaci6n y Acreditaci6n de la Calidad de los Programas de Pre-Grado;1997.

34. AECE-SUP, Ministerio de Educaci6n (Chile). Introducci6n del Instrumento Contratos deDesempenio en las Universidades Tradicionales Durante 1998; 1998.

35. MECE-SUP, Ministerio de Educaci6n (Chile). Politica de Educaci6n Superior en Chile:Bases para el Proyecto MECE Edacaci6n Superior; 1998.

36. MECE-SUP, Ministerio de Educaci6n (Chile). Policy Goals, Principles and Overall View;1998.

37. MECE-SUP, Ministerio de Educaci6n (Chile). The National Commission for Scientific andTechnological Research (CONICYT); 1998.

38. Ministerio de Educaci6n: Consejo de Rectores de la Universidades Chilenas: Panel 5,Presentaci6n de las Experiencias de las Universidades Chilenas en Internacionalizaci6n.Estado de la Situaci6n de las Universidades Chilenas en Relaci6n con la Globalizaci6n y laInternacionalizaci6n; 1997.

39. Muga, Alfonso and Jose Joaquin Brunner. Chile: Politicas de Educaci6n Superior, 1990-1995; 1996.

40. El Programa de Fortalecimiento de la Formaci6n Inicial Docente, MINED UC; 1997.

41. Relanzamiento del Foro de la Educaci6n Superior; 1997.

42. Velasco, Carlos, Ministerio de Educaci6n: Divisi6n de Educaci6n Superior (Chile). LosCentros de Formaci6n Tecnica y la Formaci6n de Tecnicos de Nivel Superior en Chile; 1998.

43. Ministerio de Educaci6n, Divisi6n de Educaci6n Superior. Integrantes del Consejo Asesorpara la Preparaci6n y Seguimiento del Proyecto MECE Educaci6n Superior, 1998.

44. Trayectoria, Desafios y Propuestas para la Educaci6n Superior. Discurso del Ministro deEducaci6n, Jose Pablo Arellano, en la celebraci6n del 44 aniversario del Consejo deRectores; Slon de Honor Ex Senado, agosto 14 de 1998.

45. Discurso de S.E. El Presidente de la Repuiblica, Don Eduardo Frei Ruiz-Tagle, en laUniversidad Metropolitana de Ciencias de la Educaci6n. Presidencia; 26 de agosto de 1998.

E. General Sector Background

46. Albrecht, Douglas and Adrian Ziderman. Deferred Cost Recovery for Higher Education:Student Loan Programs in Developing Countries (WB Discussion Paper 137); 1991.

47. Arbeldez, Augusto Franco. Cuanto vale E$studiar in Po$sgrado en America Latina?;

Annex 8 Page 4 of 5

48. Arriagada, Patricio R. Financiamiento de la Educaci6n Superior en Chile: 1960/1988; 1989.

49. Banco Mundial. La ensefianza superior: Las lecciones derivadas de la experiencia; 1995.

50. Brunner, Jose Joaquin and Hernan Courard, Cristidn Cox. Estado, Mercado yConocimiento: Politicas y Resultados en la Educaci6n Superior Chilena: 1960-1990; 1992.

51. Centro Interuniversitario de Desarrollo, CINDA. Gesti6n Docente Universitaria. ModelosComparados; 1997.

52. Programas de Posgrado en Argentina, Brasil y Chile; Caracteristicas y Proyecciones; 1996.

53. Centro de Investigaci6n en Creatividady Educaci6n Superior (U de Santiago de Chile).Creatividad Educaci6n y Desarrollo; 1997.

54. Courard, Herndn, ed.. Politicas Comparadas de Educaci6n Superior en America Latina;1993.

55. Ddvilia, Amanda, ed.. Desafi6s de la educaci6n superior; 1993.

56. Inter-American Development Bank. Higher Education in Latin America and the Caribbean:Strategy Paper; 1997.

57. Mallea, John R. Panel 3: International Trade in Educational and Professional Services:Implications for Higher Education; 1997.

58. Mendes, Candido and Cldudio de Moura Castro. Qualidade, Expanslo e Financiamento doEnsino Superior Privado; 1984.

59. Revista de Educaci6n. Noviembre, 1997.

60. Riveros Cornejo, Luis and Nassir Sapang Chain. Retos y Dilemas de la Gesti6nUniversitaria; 1996.

61. Subbarao, K and Laura Raney, Halil Dundar and Jennifer Haworth. Women in HigherEducation: Piogress, Constraints, and Promising Initiatives(WB Discussion Paper 244);1994.

62. Winkler, Donald K. La Educaci6n Superior en America Latina: Cuestiones sobre Eficienciay Equidad (WB Discussion Paper 77s); 1994.

63. Albrecht, Douglas and Adrian Ziderman. Funding Mechanisms for Higher Education (WBDiscussion Paper 153); 1992.

64. Eisemon, Thomas Owen and Lauritz Holm-Nielsen. Developing Capacity for Research andAdvanced Scientific Training: Lessons from World Bank Experience (ESP Discussion Paper62); April, 1995.

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65. Eisemon, Thomas Owen and Lauritz Holm-Nielsen. Reforming Higher Education Systems:Some Lessons to Guide Policy Implementation (ESP Discussion Paper 60); April, 1995.

66, Crawford, Michael, Thomas Eisemon and Lauritz Holm-Nielsen. Interactive Technology andElectronic Networks in Higher Educaiton and Research: Issues & Innovations (HCOWorking Paper 62); October, 1995.

67. Eisemon, Thomas Owen and Jamil Salmi. Increasing Equity in Higher Education: Strategiesand Lessons from International Experience (ESP Discussion Paper 61); April, 1995.

68. Sheehan, John. Reform of Higher Education Finance (ESP Discussion Paper 59); April,1995.

F. Project Implementation Documents

69. Project Implementation Plan, DIVESUP; 1998.

70. Operational Manual: Competitive Fund, DIVESUP, 1998.

71. Operational Manual: Accreditation System, DIVESUP, 1998.

72. Stakeholder Analysis, collaborative team effort, 1998

Annex 9Statement of Loans and Credits

tAmmt inS us ete4

~~~~~ Loan ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~aclor ______________________________~~~~~~~~~~~~~Un is di:rez . tPxo~~~~~~ct 'Credit . 191W~~~~~~~~~BR IDA Cnll Odi- Orig. Fr ReV'd

-ations busa

Number of Closed Loans/credits:53

Active LoansCL-PE-6676 IBRD397 1996 GOVT OF CHILE SECANO AG DEV I 15.00 0.00 0.00 11.37 4.88 0.00

40CL-PE-6661 IBRD383 1995 MIN PUB WORKS THIRD RD SCTR 120.00 0.00 0.00 87.15 58.63 0.00

30 (MOP)CL-PE-6673 IBRD388 1995 REPUBLIC OF SECONDARY ED 35.00 0.00 0.00 30.55 15.35 0.00

36 CHILECL-PE-6677 IBRD366 1994 REPUB. OF CHILE 14UNIC DEVT 10.00 0.00 0.00 4.14 4.15 0.00

80CL-PE-6612 IBRD352 1993 MINISTRY OF IRRIG DEV 45.00 0.00 6.01 34.52 0.00

80 FINANCE 31.00

CL-PE-6639 IBRD352 1993 REPUBLIC OF HEALTH SECTOR 90.00 0.00 0.00 26.28 26.19 24.92

70 CHILECL-PE-6664 IBRD352 1993 REPUBLIC OF ENVIRON/INSTIT DEV 11.50 0.00 0.00 1.42 1.31 0.00

90 CHILECL-PE-6636 IBRD347 1992 GOVT OF CHILE SMLL FARMER 95.00 0.00 0.00 36.21 34 .43 0.00

30 URE SERVICESCL-PE-6668 IBRD341 1992 GOVERNMENT PRIMARY 170.00 0.00 49.21 4.00 50.34 4.02

00 ED&IMPRVMENNT

Total 591.50 0.00 80.21 207.73 230.40 28.94

Active Loans Closed Loans Total

Total Disbursed (IBRD and IDA): 304.91 2,600.51 2,905.46

of which has been repaid: 23.39 1,867.60 1,890.99

Total now held by IBRD and IDA: 489.10 733.11 1,222.21

Amount sold 0.00 7.19 7.19

Of which repaid : 0.00 7.19 7.19

Total Undisbursed : 207.73 .15 207.88

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

Rating of 1-4: see OD 13.05. Annex D2. Preparation of Implementation Summary (Form 590). Following the FY94 Annual Review of Portfolio performance (ARPP), a

letter based system will be used (HS - highly Satisfactory, S = satisfactory, U = unsatisfactory, HU = highly unsatisfactory): see proposed Improvements in

Project and Portfolio Performance Rating Methodology (SecM94-901), August 23, 1994.

Note: Disbursement data is updated at the end of the first week of the month.

Annex 9 (continued)CHILE

STATEMENT OF IFC'sCommitted and Disbursed Portfolio

As of 3 1-Mar-98(In US Dollar Millions)Committed Disbursed

IFC IFCFY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic1987/88/89 Celulosa Arauco 0.00 0.00 15.00 0.00 0.00 0.00 15.00 0.001989/91 Escondida 13.42 7.48 0.00 1.64 13.42 7.48 0.00 1.641989/93/94 CELPAC 10.64 0.00 0.00 5.83 10.64 0.00 0.00 5.831990 ING-MLF-Nature F 1.20 0.00 0.00 1.80 1.20 0.00 0.00 1.801990/92/93 CTC 18.45 0.00 20.00 29.66 18.45 0.00 20.00 29.661990/94 Leasing Andino 8.75 0.00 0.00 15.00 8.75 0.00 0.00 15.001991/93 Aconcagua 0.0+0 6.45 0.00 0.00 0.00 6.45 0.00 0.001991/93 FIBRANOVA 0.00 1.54 2.00 0.00 0.00 1.54 2.00 0.001991/94 BOMASA 2.06 2.00 2.80 2.25 2.06 2.00 2.80 2.251993 Pangue 0.00 4.70 0.00 0.00 0.00 2.82 0.00 0.001994 Pionero Fondo 0.00 10.00 0.00 0.00 0.00 10.00 0.00 0.001994/96/97 Moneda Asset Mgt 0.00 .46 0.00 0.00 0.00 .46 0.00 0.001995 Latasa-Chile 6.50 2.50 0.00 0.00 6.50 2.50 0.00 0.001995/96 Refimet 15.00 0.00 0.00 46.00 15.00 0.00 0.00 46.001996 FEPASA 14.50 0.00 6.00 6.00 9.90 0.00 6.00 4.101996 Proa Fund 0.00 8.40 0.00 0.00 0.00 8.32 0.00 0.001997 Agrisouth Chile 10.00 0.00 0.00 0.00 10.00 0.00 0.00 0.00

Total Portfolio: 100.52 43.53 45.80 108.18 95.92 41.57 45.80 106.28

Approvals Pending Commitment

Loan Equity Quasi Partic

1994 MERSAN 0.00 0.00 3.00 0.00

Total Pending Commitment: 0.00 0.00 3.00 0.00

Annex 10Chile at a glance

Chile Higher Education ProjectLatin Upper-

POVERTY and SOCIAL America middle-Chile & Income Development

Population mid-1996 (millions) 14.4 485 479GNP per capita 1996 (USS) 4,920 3.710 4,540 Life expectancyGNP 1996 (billions USS) 70.9 1,799 2,173 _

Average annual growth, 1990-

Population (I%) 1.5 1.7 1.5 GNP GrossLaborforce (%) 2.1 2.3 1.8

per primaryMost recent (latest year available since 1989) capita enrollment

Poverty: headcount index (% of population)Urban population (% of total population) 86 74 73Life expectancy at birth (years) 72 69 69Infant mortality (per 1,000 live 12 37 35 Acces to aafe waterChild malnutrition (36 of children under 5) 1 .. ..Access to safe water (% ofpopulation) 96 80 86Illiteracy (% ofpopulation age 15+) 5 13 13 ChileGross primary enrollment (%of school-age population) 99 11 107 Chie

100 Upper-middle-income group

KEY ECONOMIC RATIOS and LONG-TERM

1975 1985 1995 1996

GDP (billions US$) 7.2 16.5 67.3 70.3Gross domestic investment/GDP 17.0 17.2 27.4 27.7Exports of goods and services/GDP 25.4 28.1 29.3 26.2 Openness of economyGross domestic savings/GDP 15.0 19.6 29.3 25.5Gross national savings/GDP 11. 8.1 27.5 23.3

Current account balance/GDP -6.8 -8.6 0.2 4.1Interest payments/GDP 2.7 9.9 2.2 1.7 Savings InvestmentTotal debtlGDP 76.4 123.8 38.0 41.5Total debt servicetexports .. .. 25.7 20.4Present value of debVGDP .. ,. 36.3Present value of debtlexports .. .. 121. Indebtedness

1975-85 1986-96 1995 1996 1997-05(average annual growth) ChileGDP 3.8 7.2 8.5 7.2 6.0Upe-ndlcoegruGNP per capita 0.2 6.3 5.0 .8 5.0 Upper-middle-income groupExports of goods and services 7.0 10.4 33.5 -3.0 8.0

STRUCTURE of the1976 1988 1995 1996

(% of GDP) Growth rates of output and investmentAgricuiture 6.6 7.4 8.8 8.4 30Industry 38.1 36.4 30.0 29.720

Manufacturing 20.3 15.7 18.4 17.8Services 55.3 56.2 61.2 61.9 o

Private oonsumption 69.3 67.0 62.0 65.2 91 92 93 94 95 90General govemment consumption 15.7 13.4 8.8 9.3 GDI GDPImports of goods and services 27.4 25.7 27.4 28.4

1975-85 1986-96 1995 1996(average annual growth) Growth rates of exports and importsAgriculture 2.6 6.0 5.5 1.8 40Industry 3.3 6.4 6.8 5.7

Manufacturing 2.2 6.5 6.5 3.5Services 3.9 7.8 9.9 7.9 20

Private consumption 3.6 7.5 11. 8.8 10General govemment consumption 0.4 3.0 2.3 2.5Grossdomesticinvestment 3.6 12.4 12. 11. - 5 92 93 94 95 99Importsofgoodsandservices 4.7 13.5 22.2 11. Exports -mportsGross national product 1.8 8.0 10. 6.3

Note: 1996 data are preliminary estimates. Figures in italirs are for years other than those specified.*The diamonds show four key indicators in the country (in bold) oompared with its inoome-group average. If data are missing, the diamond will

be incomplete.

Chile

PRICES and GOVERNMENT FINANCE1975 1985 1995 1905

Domesk prices Inflation (%)(% change) 30 -Consumer prices 374.7 30.7 8.2 7.4 25Implicit GDP deflator 334.6 30.7 12.2 7.0 _

Government finance s(% of GDP) cCurrent revenue 24.8 26.2 21.5 22.6 91 92 93 94 as goCurrent budget balance .. .. 5.3 5.6 - DP def. -- cPIOverall surplusldefcit -2.6 -6.3 2.5 2.2

TRADE1975 1985 1995 1996 -

(millions USS) Export and import levels (mill. USS)Total exports (fob) 1,590 3,804 16,137 15,353 180_

Copper 868 1,789 6,487 6,029 iex, 000Fruits 16 515 1,117 1,205 14.Mo

Manufactures 395 1,168 6,720 6,435 1o5o _ITotal imports (dif) 1,708 3,268 15,914 17,828 8XO

Food 361 222 361 471 es-Fuel and energy 252 . 1,447 1,907 4Capital goods 328 588 4,177 4,736 2

Export price index (1987=100) .. 85 163 143 90 91 92 93 94 95 Ha

Importpriceindex(1987=100) .. 99 133 138 rurS Termsoftrade(1987=100) 86 122 104

*ALANCE of PAYMENTS1975 1985 1995 1996

(millions USS) Current account balance to GDP ratio (%)Exports of goods and services 1,832 4,497 19,297 18,711 -

Imports of goods and services 2,049 4,013 17,979 20,087Resource balance -217 484 1,318 -1,376 o- --- i,. --

90 9 92 92 194 s9 H6Net income -284 -2,043 -1,481 -2,016 -1 . |Net current transfers 10 147 310 473

Current account balance, .

before official capital transfers -491 -1,412 147 -2,919

Financing tems (net) 206 1,313 914 4,100 4Changes in net reserves 285 99 -1,061 -1,181 .4

memo:Reserves including gold (mill. USS) 238 2,950 14,820 15,487Conversion rate (locallUS$) 4.9 161.1 3968 412.3

EXTERNAL DEBT and RESOURCE FLOWS1975 1985 1995 1996

(millions USs) - I Composition of total debt, 1995 (mill. US$)Total debt outstanding and disbursed 5,520 20,384 25,562 29,223

IBRD 129 487 1,372 1,093 A eIDA 22 18 11 10 1372 11 0G 1487

Total debt service 637 2,271 5,150 3,721 6955 EIBRD 20 37 841 352 713IDA 0 1 1 1

Composition of net resource flowsOfficial grants 15 32 53Official creditors 2 436 -1,802Private creditors 43 684 2,261Foreign direct investment 50 114 1,695 .. FPortfolio equity 0 0 274 .. l124

World Bank programCommitments 20 541 155 15 A- IBRD E - BilaeralDisbursements 16 231 83 75 |B-IA D - Other mufluaterat F - Pti'mtePrincipal repayments 11 20 705 264 c - IMF G -short-erm 3Netfiows 6 211 -622 -188 1 , . , _

Interest payments 10 18 137 89Net transfers -4 193 -759 -278

Development Economics

Annex 11Chile Higher Education


Upper-mid1985 1995 LAC* income*

Socio-economic contextPer capita GNP (US$) 1,420 4,130Adult illiteracy rate (%) 7.8 4.8 16 15.8Average years of schooling of adults 6.5 -- .. ..

Structure and coverage of the system

Duration of education (years)Primary level 8 8 7 6Secondary level 4 4 5 6Compulsory schooling 8 7 8

Gross enrollment ratioPrimary level 105 99 107.3 100.7Secondary level 67 69 55.4 74Tertiary level 15.6 28.2 .. 18

Percentage enrolled in population aged 6- .. .. .. ..

Student flow--secondary levelProgression to secondary level (%) 91 55 _ -------

Public expenditure on educationTotal spending as a percentage of GNPCurrent spending per student (% of per capita GNP)

Primary level 13 8.5 .. 20Secondary levelTertiary level 54 :: -:- :

Girls' enrollmentPrimary level (%) 48.7 48.7 49 48.7Secondary level (%) 52.1 54Tertiary level (%) :- 45.7 _ _ ::-_-_

Enrollment in Private InstitutionsPrimary level (%) 32 40 15.4 10.3Secondary level (%) 39 44 .. 16.4Tertiary level (%) 58.2 62.2 .. ..

* Unweigted Group Average

Table 2. Description of the Higher Education System in Chile

DistributionType and share of AFI

of Public (thousand Distribution

Type of institutions Number of Institutions Undergraduate enrollment funding pesos) of student aid

1980 1996 1980 1996 1997 1997 1997

Traditional Universities 8 25 118,978 167,282 AFD, AFI, 13,719,983 39743102.1

(9.5 %o) (46.7%) Loans, (86.90/o) (99.90/%)

Scholarships(96.5%)

Private Universities 0 42 0 77,212 AFI 1,892,668 12000

(16%) (21,6%) (1.4%) (12%) (0.03%)

Professional Inatitutes (Ps) 0 69 0 52,170 AF 131,159 4908.4

(26.3%) (14.6%) (0.09%/°) (0.8%) (0.01%)

Technical Centers (CFTs) 0 126 0 61,418 AFI 43,326 0

(48. 1%) _____ (17.2%) (0.03%) (0.3%)

Total 8 262 118,978 358,082 100% 15,787,136 39760010.5

.____________________ ._______ _ (1I 00%) __________ (100% ) ___________ ( I00%/o) (1000/% )

Table 3. Distribution of fiscal support within the 25 traditional universities.(million of pesos, 1997)

AFD % AFI % FDI % Student Aid % Institutional aid % Fondecyt % Total %

U. Chile 14,625 23.9 2,401 19.5 5,419 48.8 1,786 9.4 22,445 265 4,369 39.5 51,045 25.6

Catolica 7,569 12.4 2,098 17.1 414 3.7 761 4.0 10,081 11.9 2,669 24.1 23,592 11.8

Concepcion 5,309 8.7 1,109 9.0 413 3.7 1,873 9.9 6,831 8.1 920 8.3 16,455 8.3

Santiago 4,560 7.5 1,893 15.4 366 3.3 1,890 10.0 6,819 8.1 661 6.0 16,189 8.1

Austral de 3,493 5.7 410 3.3 390 3.5 1,206 6.4 4,293 5.1 697 6.3 10,489 5.3

ChileCatdel 3,201 5.2 744 6.0 395 3.6 958 5.1 4,340 5.1 342 3.! 9,980 5.0

ValparaisTecFSanta 2,707 4.4 474 3.9 287 2.6 845 4.5 3,468 4.1 208 1.9 7,989 4.0

MariaC delNorte 2,678 4.4 252 2.0 200 1.8 504 2.7 3,130 3.7 145 1.3 6,909 3.5

Metro. Cs 2,043 3.3 106 0.9 254 2.3 764 4.0 2,403 2.8 54 0.5 5,624 2.8

EducTarapaca 1,860 3.0 85 0.7 214 1.9 685 3.6 2,159 2.6 82 0.7 5,085 2.6

Valparaiso 1,725 2.8 425 3.5 209 1.9 545 2.9 2,359 2.8 110 1.0 5,373 2.7

Antofagasta 1,717 2.8 140 1.1 190 1.7 421 2.2 2,047 2.4 95 0.9 4,610 2.3

Talca 1,444 2.4 241 2.0 195 1.8 513 2.7 1,880 2.2 125 1.1 4,398 2.2

Frontera 1,370 2.2 341 2.8 224 2.0 852 4.5 1,935 2.3 192 1.7 4,914 2.5

Serena 1,283 2.1 200 1.6 194 1.7 619 3.3 1,677 2.0 107 1.0 4,080 2.0

Bio Bio 1,191 1.9 329 2.7 236 2.1 1,160 6.1 1,756 2.1 32 0.3 4,704 2.4

Atacama 757 1.2 20 0.2 173 1.6 330 1.7 950 1.1 2 0.0 2,232 1.1

Los Lagos 739 1.2 55 0.4 226 2.0 434 2.3 1,020 1.2 114 1.0 2,588 1.3

Magallanes 616 1.0 33 0.3 192 1.7 260 1.4 841 1.0 51 0.5 1,993 1.0

PlayaAncha 613 1.0 67 0.5 208 1.9 559 3.0 888 1.0 13 0.1 2,348 1.2

Metropolitana 565 0.9 482 3.9 208 1.9 722 3.8 1,255 1.5 7 0.1 3,239 1.6

Arturoprat 494 0.8 46 0.4 183 1.6 403 2.1 723 0.9 8 0.1 1,857 0.9

Temuco 240 0.4 103 0.8 108 1.0 247 1.3 451 0.5 19 0.2 1,168 0.6

Concepcion 239 0.4 129 1.0 115 1.0 359 1.9 483 0.6 33 0.3 1,358 0.7

Maule 152 0.2 115 0.9 100 0.9 207 1.1 367 0.4 1 0.0 942 0.5

61,190 100 12,298 100 11,113 100 18,903 100 84,601 100 11,056 100 199,161 100

Table 4. Distribution of fiscal funds across instruments (in thousand of 1998 US dollars)

Percentage of Percentage oftotal public total public

Fiscal funds US$ 1997 funds US$ 1998 funds

AFD 185,322 45.4 187,498 42.9AFI 38,033 9.3 37,120 8.5FDI 30,431 7.5 38,044 8.7

Performance contracts 0 0.0 9,773 2.2U. Chile agreements 12,318 3.0 12,022 2.8

Student Aid 73,443 18.0 93,482 21.4Credits and loans MINEDUC 45,293 11.1 60,170 13.8MINEDUC Scholarship 21,822 5.3 24,904 5.7Juan Gomez Millas Scholarships 0 0.0 2,273 0.5Scholarships for pedagogical programs 0 0.0 705 0.2CONICYT scholarships 2,525 0.6 2,659 0.6Others 3,803 0.9 2,771 0.6

FONDEF (only to traditional Us.) 20,133 4.9 19,664 4.5FONDECYT (to all institutions) 37,437 9.2 37,396 8.6Programs for students in pedagogy 6,732 1.7 5,913 1.4Other 4,118 1.0 5,513 1.3

Total 407,967 100.0 436,652 100

Graph 1. Evolution of AFD, AFI and FDI, 1990-1998

90000 T

80000 I

70000 I

. 60000O 50000

°40000 t£30000:

20000 T AFI

10000 5 FDI

1990 1991 1992 1993 1994 1995 1996 1997 1998

ENROLLMENT

Graph 2. Enrollment in Higher Education Institutions

400000

350000 L _ _Total

300000 9

2500(00. i.Traditionai

200000 . _ I universities+~~~~~~~~~~~~~~~~~~~~New private Us

100000 , lPs

500002

0 I - 00 0 -c r O, , '

Co Co Co Co 0' 0' G 0 0' 0' 0' 0' 0'0' _' _ _ _ _ _ _ _ _ _ _ 0 0 0 0 0

Table 5. Enrollment, student aid, income distribution of studentswithin 25 traditionaluniversities.

Students from bottomquintile

Enrollment % of % of As % of As % of1994 enrollment student aid, institutional students

1992 enrollment from bbottomquintile*

U Chile 20,258 12.6 9.4 8.0 18.2Concepcion 15,102 9.4 9.9 8.0 24.6Catolica 14,421 9.0 4 2.6 8.3U. Santiago 14,248 8.9 10 9.3 30.2Austral de Chile 9,403 5.8 6.4 6.5 31.9Cat Valparaiso 7,898 4.9 5.1 4.6 27.1Tec F. Santa maria 7,090 4.4 4.5 4.9 31.9Bio Bio 6,995 4.3 6.1 5.6 37Cat del Norte 6,301 3.9 2.7 4.5 33.1de la frontera 6,213 3.9 4.5 4.2 31.6Tec metropolitana 6,169 3.8 3.8 3.6 27.1Metrop. Cs Educ 6,159 3.8 4 5.1 38.3Serena 4,667 2.9 3.3 4.7 47Valparaiso 4,472 2.8 2.9 2.5 25.4Tarapaca 4,299 2.7 3.6 4.8 51.3Antofagasta 3,561 2.2 2.2 2.6 34.4Playa Ancha 3,231 2.0 3 2.9 42.2Talca 3,013 1.9 2.7 2.3 35.6Los Lagos 2,988 1.9 2.3 2.8 44.1Arturo Prat 2,899 1.8 2.1 2.1 32.8Maule 2,741 1.7 1.1 2.3 39.1Atacama 2,602 1.6 1.7 2.5 43.8Cocepcion 2,084 1.3 1.9 1.1 24.6Catolica de Temuco 2,027 1.3 1.3 1.5 34.5Magallanes 1,969 1.2 1.4 1.0 22.6

Total 160,810 100 100 100* Only students from bottom quintile enrolled within the 25traditional universities

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