Do_umnt hOf

The World Bank

pOR oMcIL USE ONLY

Rkpd N&o P-4U11-IND

. REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON A PROPOSED LOAN

IN AN AMOUNT EQUIVALENT TO USt93 MILLION

To THE REPUBLIC OF INDONESIA

FOR A

SCIENCE AND TECHNOLOGY TRAINING PROJECT

June 13, 1985

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CURRENCY EQUIVALENTS

Currency Unit = Indonesian Rupiah (Rp)

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

GOVERNMENT OF INDONESIA FISCAL YEAR

April 1 - March 31

ACADEMIC YEAR

July 1 - June 30

ABBREVIATIONS AND ACRONYMSI

BAPPENAS - Badan Perencanaan Pembangunan Nasional (NationalDevelopment Planning Agency)

DGHE - Directorate General of Higher EducationEEO - Educational Exchange OrganizationGOI - Government of IndonesiaLPND - Lembaga Pemerintah Non Departemen (Non-Ministerial

Government Institute)Menneg Ristek - Menteri Negara Riset dan Teknologi (Ministry of State

for Research and Technology)OFPIU - Overseas Fellowship Project Implementation UnitREPELITA - National Five-Year Development Plan (Repelita 1, 1969-

74; Repelita II, 1974-79; Repelita III, 1979-84;Repelita IV, 1984-89; Repelita V, 1989-94;Repelita VI, 1994-99)

INDONESIAN RESEARCH INSTITUTES

BAKOSURTANAL - Badan Koordinasi Survei dan Pemetaan Nasional (NationalCoordinating Agency for Surveying and Mapping)

BATAN - Badan Tenega Atom Nasional (National Atomic EnergyAgency)

BPPT - Badan Pengkajian dan Penerapan Teknologi (Agency forthe Assessment and Application of Technology)

BPS - Biro Pusat Statistik (Central Bureau of Statistics)LAPAN - Lembaga Penerbangan dan Antariksa Nasional (National

Institute of Aeronautics and Space)LIPI - Lembaga Ilmu Pengetahuan Indonesia (Indonesian

Institute of Sciences)

FOR OFFICIAL USE ONLY

INDONESIA

SCIENCE AND TECHNOLOGY TRAINING PROJECT

Loan and Project Summary

Borrower: Republic of Indonesia. t

Amount: US$93 million equivalent.

Terms: Repayable in 20 years, including 5 years of grace, at thestandard variable interest rate.

ProjectDescription: The objectives of the project would be to: (a) strengthen

Indonesia's research and development capacity by developinga nucLeus of well-trained Indonesian scientific and techni-cal manpower through programs of study in science and tech-nical fields; (b) develop effective policies and proceduresfor the implementation and monitoring of overseas fellowshipprograms; and (c) develop and strengthen collaborative rela-tionships between Indonesian and foreign universities andresearch institutions. The project would focus on the sixkey government research institutes in science and techno-logy, which would provide a pool of qualified candidates foradvanced training. The project would provide overseas andlocal training and technical assistance in establishing amanagement system and graduate reintegration program.

The main benefit of the project would be the improved tech-nical and managerial competence of the project institutes'staff and an increase in the country's stock of well-trainedscientific and technical manpower. The project would alsohave a long-term impact on the university syste'm, which theBank is assisting under separate university developmentprojects. The major risk arises from the complexities ofmanaging such a sizable and diverse overseas fellowshipprogram. The technical assistance to support the establish-ment of a management system should reduce this risk.

TIhisdocumct has a restrited disuibution and may bcused by recipients only in the peformance oftheir ofriwiduties. Its contents may not otherwise be disAosed without World Bank authorization.

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Estimated Cost: /a Local Foreign Total- - (US$ million) -

Overseas Fellowship ProgramPre-degree preparation 1.3 11.6 12.9Overseas study 18.2 49.6 67.8Research 0.3 0.8 1.1

Subtotal 19.8 62.0 81.8

Local Training Program 16.2 - 16.2

ManagementOFPIU operations 3.2 0.8 4.0Educational exchange organizations - 4.0 4.0Consultant services 1.4 1.9 3.3Reintegration program 1.0 0.2 1.2

Subtotal 5.6 6.9 12.5

Total Baseline Costs 41.6 68.9 110.5

Physical contingencies 4.1 6.9 11.0Price contingencies 15.0 17.2 32.2

Total Project Costs 60.7 93.0 153.7

Financing Plan: Local Foreign Total(US$ million)

IBRD - 93.0 93.0Covernment 60.7 - 60.7

Total 60.7 93.0 153.7

EstimatedDisbursements: IBRD FY86 FY87 FY88 FY89 FY90 FY91 FY92 FY93

(US$ million)

Annual 3.0 3.0 9.0 15.0 20.0 20.0 16.0 7.0Cumulative 3.0 6.0 15.0 30.0 50.0 70.0 86.0 93.0

Rate of Return: Not applicable.

Staff Appraisal Report: No. 5425-IND, dated June 6, 1985

Map' IBRD No. 17980R1

/a Project costs include a small amount of taxes and duties (aboutUS$200,000).

REPORT AND RECOMMENDATION OF THE PRESIDENTOF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENTTO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLICOF INDONESIA FOR A SCIENCE AND TECHNOLOGY TRAINING PROJECT

1. I submit the following report and recommendation on a proposed loanto the Republic of Indonesia for the equivalent of US$93 million to helpfinance a Science and Technology Training Project. The Loan would have a termof 20 years, including five years of grace, at the standard variable interestrate.

PART I - THE ECONOMY!'

2. A basic economic report, "Indonesia: Growth Patterns, Social Pro-gress and Development Prospects" (No. 2093-IND dated February 20, 1979), wasdistributed to the Executive Directors on February 26, 1979, and a countryeconomic memorandum has been prepared in each subsequent year. The latest ofthese, entitled "Indonesia: Policies for Growth and Employment" (No. 5597-INDdated April 23, 1985), was distributed to the Executive Directors on April 30,1985. Annex I gives selected social and economic indicators for the country.

Background

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

Macroeconomic Developments and Resource Management

4. Until 1981, the economy had been growing at almost 8% p.a. for overa decade. This growth was associated with rapid increases in public expendi-tures, total investment and savings. The initial impetus for this occurred in

1/ Substantially unchanged from the President's Report on the Fifth Transmi-gration Project (No. P-4087-IND), circulated under cover of R85-167 datedMay 22, 1985, and approved by the Executive Directors on June 11, 1985.

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

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the period of recovery from the turbulence of the mid-1960s. The Governmentof Indonesia (GOI) took effective action to restore macroeconomic stability,liberalize the econDmy, rehabilitate infrastructure, and provide incentivesfor domestic and foreign private investment. However, the dominant externalinfluence over the past decade has been the huge expansion, and significantvariability, in foreign exchange earnings from oil. Net exports from the oiland gas sector rose from US$0.6 billion in 1973/74 to US$10.6 biLlion in1980/81, when the current account enjoyed a surplus of US$2.1 billion. Oilreceipts also provided about 60X of Central Government receipts by 1980/81 andhelped finance a sustained increase in demand. The pattern of expenditureshas also helped foster diversified growth. Of particular note has been thesupport for agriculture, through investment in infrastructure and support ser-vices. This supported an agricultural growth rate of almost 4% p.a. over thepast decade, and led to the recent achievement of self-sufficiency in rice.Manufacturing also enjoyed a high growth rate during the 1970s (of about 14%p.a.), although this was from a very low base and predominantly orientedtoward the protected domestic market.

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

(a) a 28% devaluation of the rupiah against the US dollar in March 1983,without any change in the policy of full convertibility;

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

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

(d) a far-reaching financiaL reform, including the liberalization ofinterest rates and the abandonment of credit ceilings;

(e) introdaction of a comprehensive tax reform program, aimed atincreasing government revenues by broadening the tax base, simplify-ing the structure of rates and improving administration; and

(f) an ongoing effort to reduce the unfavorable impact of the regulatoryframework, including simplification of investment approval proce-dures and a major reorganization of customs, ports and shippingoperations.

6. These measures, aided by more favorable trends in the world economy,are already having their desired impact. GDP, led by strong performance inthe oil (including LNG and refining) and agriculture sectors, rose by an

estimated 4.7% in 1983 and 6.5% in 1984. The balance of payments situation isalso improving. In particular, the current account deficit was reduced fromUS$7.1 billion (8.5X of GNP) in 1982/83 to an estimated US$1.9 billion (2.4Xof GNP) in 1984/85. The major factors responsible for this improvement areimport cuts, resulting from the Government's efforts to curb aggregate demand,and higher export earnings from non-oil products, due to recovery in theindustrial countries and the Government's policies to promote non-oilexports. The Government's restraint is also evident in the budget, where reaLexpenditures have probably fallen over the past three years. This fiscaldiscipline, in turn, helped keep domestic inflation down to about 12% in 1983and 9% in 1984, despite the inevitable pressures associated with the 1983devaluation and the petroleum price adjustments.

Policies for MediumrTerm Growth and Transformation

7. Sustained growth of the non-oil economy by at least 5% p.a. isprobably necessary to have a significant impact on employment creation andpoverty alleviation over the remainder of this decade. To promote such agrowth rate, without generating unmanageable balance of payments pressures, isone of the major challenges facing the Government. Successful transformationof the economy will require continued action in three key policy areas:management of the public investment program (and improvements in the regu-latory/policy environment for private investment), rationalization of theexternal trade regime and development of the financial sector.

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

9. The recent decline in the price of oil has clearly demonstrated theimportance of reducing the economy's heavy dependence on a single source offoreign exchange and, more generally, the need to rationalize the externaltrade regime. -The Government has set a target of doubling non-oil exports innominal terms over the next five years. This target should be attainableprovided that economic recovery in the industrial economies is sustained,Indonesia's access to those markets is not constrained by protectionistmeasures and, most importantly, Indonesia follows appropriate trade andexchange rate policies. The Government has already introduced a range ofexport promotion measures intended to improve export incentives, ensure ready

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access to finance for exporters, raise product quality and enhance markecingcapacity. However, over the Longer term, there is no effective substitute forcomprehensive trade reform. On the import side, Indonesia's trade regime hashistorically been characterized by a predilection for high tariffs and quanti-tative restrictions. in March 1985, the Government announced a major reduc-tion in the range and level of nominal import tariffs. However, other actions-- including increased use of import quotas/bans and regulations requiringhigher local content in production - have served to promote some potentiallycostly and uneconomic investments which could prove counterproductive to theexport drive.

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

Incomes, Employment and Human Development

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

12. An analysis of household expenditures indicates that Indonesia'srapid economic development has been accompanied by significant progress inreducing poverty. Between 1970 and 1980, the proportion of the populationliving in poverty declined from 57% to 40%; the decline was particularly rapid

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in the Other Islands and in urban areas. The core of the poverty problem con-tinues to be in rural Java, where landless laborers form a large, and possiblyrising, proportion of the population and where, for most of the 1970s, thereis little evidence of any rise in real agricultural wages. However, there wasa significant rise in real agricultural wages around 1980-81, associated withthe sharp increase in rice output and booming overall economic growth.Increases in rural non-agricultural and urban wages also occurred at thebeginning of the 1980s. Despite the slowdown in economic growth and stabili-zation measures since 1982, the limited available evidence suggests that wagesand incomes have held up, partly as a consequence of continued agriculturalgrowth.

13. In the future, the availability of productive employment will be akey determinant of income distribution. The Labor force is expected to growat about 2.3X p.a. over the next decade, while economic growth will be lowerthan in the 1970s. The resultant squeeze in the labor market is not expectedto lead to a dramatic increase in unemployment but there is a serious risk ofstagnant or declining labor income in both rural areas and the urban informalsector. Given the balance of payments constraint facing the country,Indonesia's employment outlook depends crucially on the pattern of economicgrowth, and in particular the extent of labor absorption in the commodity-pr-iducing sectors. Although over the long term the structural shift inemployment away from agriculture should continue, this sector will stillaccount for half or more of total employment and the growth in agriculturaLincomes wiLl be an important determinant of job opportunities elsewhere innon-farm activities. This wilL require continued priority to agriculture inthe form of supportive pricing and investment policy, with some shift inemphasis toward the Other Islands. On Java, attention will need to be paid toissues of agricultural diversification and the pace of mechanization. Withrespect to the industrial sector, the development of an efficient, relativelyexport-oriented pattern of productior can also contribute to significant laborabsorption in the medium to long term, especially in Java; this will involve acontinuing major role for small-scale firms. If a favorable evolution of theemployment situation is to occur, there will aLso need to be an appropriatepattern of public expenditure and supportive policies for the urban informalsector; finally, the transmigration program can make a substantial contribu-tion, provided it is closely coordinated with complementary agriculturalinvestment programs, in tree crops, water resour^es and livestock development.

14. There has been substantial progress in extending the provision ofsocial services throughout the population. Universal enrollment in primaryeducation has been virtually achieved and the enrollment rate in secondaryschools is now about 35%. However, the weak educational base of the popula-tion continues to be a major obstacle to rapid economic development and asubstantial further expansion of secondary and tertiary education will benecessary as well as a major effort to raise the quality of the whole system.In the health sector, there has been a large expansion in facilities, notablyat the sub-district level, but continued investment and an improvement inquality will be necessary to increase effectiveness. This will have to becomplemented by a major expansion in water supply and sanitation if theimprovement in indices of mortality and morbidity during the 1970s is to bemaintained. By 1981, only 18Z of the rural and 40% of the urban populationhad access to safe water, compared with government targets of 60Z and 75%,respectively, for 1990.

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External Capital Flows

15. The recent improvement in Indonesia's balance of payments situationis evidence of the Government's commitment to manage short-term economicshocks. The ongoing program of economic reforms should also help to hold thecurrent account deficit to sustainable levels over the medium term. Even so,continued resource transfers from abroad will still be essential if theGovernment's modest growth targets (5% p.a.) for the next five years are to beachieved. Staff projections indicate that new public medium- and long-term(MLT) bor?owing will have to average about US$5.2 billion p.a. over the nextthree years, including about US$2.5 billion p.a. -f official developa2ntassistance and the balance from import-related cr dits and untied borrowing.Indonesia is well placed to arrange the necessary financing on reasonableterms; the profile of existing debts is good and a comfortable level of exter-nal reserves has been rebuilt over the past two years.

16. Total public debt outstanding at the end of 1984 is estimated atUS$22.9 billion, with an additional US$14.0 billion of undisbursed commit-ments. Of the total debt disbursed and outstanding, official assistance(including non-concessional multilateral aid) accounts for 50% and obligationsat variable interest rates for only 24X; there is no short-term public debt.The average maturity of public MLT debt at the end of 1984 is estimated at 16years. The Government continues to manage its external debt quite prudently.Until 1982, Indonesia had succeeded in maintaining its public debt serviceratio, based on net exports (i.e., net of oil sector imports), at or below20%. However, because of the sharp drop in oil export receipts over the pastthree years, the ratio rose to 25% in 1984. With the projected levels andcomposition of borrowings and export earnings, Indonesia's public debt serviceratio, again based on net exports, would rise to about 30% in 1989 and thengradually decline in later years. With private MLT debt included, Zhe totaldebt service ratio, based on the conventional concept of gross exports, wouldrise from 21% in 1984 to around 24% in 1989 and decline back to 22% by 1995.While debt management will require careful attention in the coming years, theprojected debt service ratios are not excessive by international standards.

PART II - BANK GROUP OPERATIONS IN INDONESIA 3/

17. As of March 31, 1985, Indonesia had received 48 IDA credits total-ling US$938.5 million (less cancellations) and 93 Bank loans amounting toUS$7,021.0 million (less cancellations). IFC commitments totalled US$163.2million. Annex II contains a suummary of IDA credits, Bank loans and IFCinvestments as of March 31, 1985. The share of the Bank Group in Indonesia'stotal (disbursed) external debt outstanding at the end of 1983 was 13.1Z, andthe share of debt service, 10.32 compared with 13.3% and 7.9Z, respectively,in 1982. From 1968 until 1974, all lending to Indonesia was made throughIDA. Due to the country's improved creditworthiness following the commodityand oil price boom in 1973174, the bulk of the Bank Group's lending in the

3/ Substantially unchanged from the President's Report on the Fifth Transmi-gration Project (No. P-4087-IND), circulated under cover of R85-167 datedMay 22, 1985, and approved by the Executive Directors on June 11, 1985.

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remainder of the 1970s was through IBRD loans, with a modest amount of IDAlending being justified primarily on poverty grounds, as the per capita GNPwas well below the IDA cutoff level. IDA lending was discontinued in FY80.Given the critical importance of agricuLture (including transmigration) forempLoyment, food security and exports, over one-third of Bank Group-assistedprojects have been in this sector. In addition, loans and credits have beenextended to virtually all other sectors of the economy, including transporta-tion, education, urban development, water supply, rural development,industrial development financing (including small-scale industry), power,telecommunications, population and nutrition, and technical assistance.

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

19. The Bank has geared its lending and economic work program to addressthese needs and to maintain a high level of resource transfer. The approachis to continue to emphasize the ongoing dialogue on economic policy that hasbeen a cornerstone of the Bank's relationship with the Government for manyyears, and to coordinate discussion of macroeconomic issues with advice oninstitutional and policy reform in important sectors and subsectors, coupledwith lending operations and technical assistance that meet priority needs andsupport institutional improvements in specific areas. Emphasis in economicwork is being given to trade and industrial issues, development of the finan-cial system, and public resource management. In the lending program, agricul-ture continues to recei-ze the most attention. However, the program is broadlybased, and includes increasing emphasis on education and human resource deve-lopment. Continued attention is being given to power and energy, where theBank is concentrating on policies to diversify Indonesia's energy base,rationalize pricing and improve sector planning. In transportation, the Bankis focuzsing on efficiency improvements in the maritime sector and on improv-ing the national network of highways and rural roads. In urban development

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and water supply, lending is being directed more and more to developing inno-vative low-cost solutions, providing for cost recovery and strengthening localinstitutions, in order to minimize demands on the Government budget and decen-tralize the responsibility for addressing basic needs. In all, the Bank'slending program is intended to contribute about 20% of Indonesia's capitalrequirements during the next three years and is expected to be an importantcatalyst in attracting other funds. Where possible, we are seeking aLso towiden the impact of Bank lending through technical assistance, as well ascomplementary investments and coordinated policy dialogue with other donors.This is especialLy true in our lending programs for power, urban development,water supply and transportation.

20. There has47een a notable improvement in the last few years in thedisbursement ratio - from a low of 13Z in FY80 to over 192 in FY84. The poorFY80 ratio was in large part merely a result of the rapid increase in commit-ments during the FY77-79 period, when total Bank/IDA commitments to Indonesiaincreased by 122% compared to a Bank-wide increase of 83%. However, it alsoreflected implementation difficulties arising out of the Government's budget-ary, procurement and payment procedures, as well as the severe shortage ofLianagerial and technical manpower in Indonesia. A number of steps have beentaken by the Government and the Bank to address these issues. Several specialBank missions have visited Indonesia to analyze the problems and make recom-mendations for simplifying budgetary and financial procedures. The Governmentand the Bank have also instituted formal and regular joint review proceduresto identify general and project-specific problems and work out correctivemeasures. Procurement seminars were held in Jakarta in September 1979,November 1981 and May 1984. As a consequence of these joint initiatives, theGovernment has taken measures to streamline some of the complex budgetary andfinancial procedures affecting project implementation. In addition, in orderto reduce disbursement delays due to initial project implementation difficul-ties, many operations are now being presented for Board consideration at alater stage in the project cycle. The combined effects of all of these acti-vities are reflected in the increase in disbursements from US$206 million inFY79 to US$764 million in FY84. It is nevertheless clear that continuedefforts to improve project implementation and the pace of disbursements arerequired, as Indonesia continues to show a disbursement ratio below the Bank-wide average. A number of initiatives are underway. The Bank is helping theGovernment in a special effort to identify problems in the construction indus-try with a view to developing appropriate remedial actions and policies, asweaknesses in the domestic contracting industry have been identified as one ofthe major causes of implementation problems in Indonesia. Efforts are alsounderway to develop standardized tender documents in order to speed theprocurement process, and to improve project monitoring and land acquisitionprocedures. It is the Bank's and the Government's intention to devote conti-nued attention to these and other aspects of project implementation in thecoming year, in order to ensure that maximum benefit is realized from theGovernment's investm--nts, Bank-assisted and other.

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

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PART III - THE SCIENCE AND TECHNOLOGY SUBSECTOR

Overview

21. To achieve industrial diversifi:ation and growth, Indonesia requiresan increasing level of sophistication in its technology. The Government beganto emphasize the development of applied research, particularly in science andtechnoLogy fields, in the last decade. However, the major bottleneck - short-age of trained scientific and technical manpower - remains a severe problemwhich has hampered the progress of research and development. The Governmentis making efforts to narrow this gap by improving its higher education systemwith the assistance of the Bank and other donors. The Second UniversityDevelopment Project (Report No. P-4047-IND dated May 1, 1985), approved by theExecutive Directors on May 21, 1985, is specifically aimed at building thescientific infrastructure at Indonesian universities, but this is a long-termeffort. The Government is turning to overseas study in subjects where localacademic capacity is low or non-existent to help alleviate the immediateshortage.

Demand and Supply of Professional Manpower in Science and Technology

22. The shortage of high level manpower is most acute in the fields ofscience and engineering. Bank and UNESCO staff estimates of manpower demandshow that 16,000 new graduates in science and engineering are needed annuallyto meet economic growth targets during the next decade. Total universityenrollment in 1983 represents only 4% of the age cohort, compared with 22Z inSouth Korea and 21% in the Philippines. About 455,000 students were enrolledin public universities and 355,000 in private universities. Public undergrad-uate enrollment in science and engineering, was only 50,000 in 1983. Privateundergraduate enrollment in these subjects is estimated to be roughly at thesame level. Moreover, the rate of student output is extremely low: therewere only 5,000 graduates in science and engineering in 1983, and only 160have received post-graduate degrees since the mid-1970s, when graduate prog-rams were first introduced. The low enrollment in science and engineeringreflects difficulties in developing domestic teaching capacities in thesefields. There has been an extreme shortage of qualified teaching staff, andvery limited investment in essential physical facilities such as laboratoriesand experimental equipment.

23. Aside from limited physical capacity, Indonesian higher educationfaces major qualitative problems. University instruction and research inIndonesia are adversely affected by inadequate staffing, paucity of inputs,and low salary levels for university teaching, research and administrativestaff. Currently, only about 15% of academic staff in the natural sciencesand about 9Z of academic staff in the social sciences hold advanced degrees.There is a serious shortage of textbooks and other instructional materials inthe Indonesian language. Library holdings are extremely few in number andlimited in scope. Students often have little access to laboratory and practi-cal facilities to balance theoretical classroom learning. The internal effi-ciency is also low, due to such reasons as the low level of educationalattainment of the faculty and insufficient time devoted by staff to teachingduties.

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24. Graduate programs were only introduced in 1975 and will requireconsiderable time and effort to reach international standards. Currently, theenvironment for scholarly activity in Indonesian universities is poor, withless than one fourth of faculty actively conducting research. Research prog-rams favor feasibility or evaluation studies and not the type of originalresearch required to nurture the development of a creative and versatilescientific community. For the most part, university research has been uncoor-dinated and determined primarily by the requirements of funding sources. Italso lacks the means to establish and maintain priorities and to disseminatefindings. The two university projects being assisted by the Bank willinitiate improvements in the rese-rch environment of major Indonesianuniversities.

Government Strategy for Provision of Higher Level Manpower

25. The Government attaches high priority to expanding the capacity andimproving the quality of Indonesian higher education institutions. TheGovernment's education sector strategy is to provide a broad-based educationalsystem, formal and nonformal, to support national development goals such anincreasing agricultural productivity, expanding industrial capacity andimproving the country's basic infrastructure. In the short and medium term,expatriate manpower, short-term training programs, and on-the-job trainingwill help to bridge some of the gaps between supply and demand for higherlevel manpower. In the long term, substantial investment in education beyondthe primary level will be required. The Government also recognizes the needfor continued development of the private higher education system, and theMinistry of Education and Culture provides subsidies, guidance and encourage-ment through the Directorate of Private Universities. To alleviate manpowershortages the Government has set ambitious targets for the growth of theuniversity system during the Repelita IV (1984/89).

26. However, given the low output and poor quality of universityprograms, expanding and improving domestic institutions is inevitably a long-term task. Furthermore, graduate programs in many scientific and technicalfields do not yet exist in Indonesia. Consequently, the Government hasdecided to embark on a greatly expanded program of overseas training inconjunction with the development of domestic graduate education. The benefi-ciaries of the program would become the nucleus of the next generation ofIndonesian scientists and engineers capable of developing researchapplications relevant to Indonesia's economic and social development and alsoof influencing teaching and research programs in Indonesian universities.

Other Donor Assistance

27. Bilateral assistance programs already include overseas fellowshipsin these fields, but their number is limited. Out of about 1,500 fellowshipawards funded by the major bilateral donors, only about 350 each year are forscientific and technical degree programs. The Government has sought a largernumber of fellowships from bilateral sources but has not succeeded in obtain-ing a substantial increase. In general, bilateral donors have not emphasizedscience and technology subjects, making it difficult for them to re-programtheir training efforts quickly enough to meet the Government's new emphasis onoverseas training in science and technology. Many of the fellowships offered

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are Linked to specific projects or restricted to certain fields. Overall, ithas been difficult for the Indonesian research institutions to plan trainingeffectively on the basis of bilateral fellowships, partly because so few areavailable, and partly because it is difficult to match the conditions offeredby the aid agencies with the particular needs of the institution.

Development in Science and Technology Research

28. The shortfalls in the higher education system have hampered thecountry's scientific and technological research which is essential to itsindustrialization and development efforts. In the last decade, the Governmenthas invested in procuring equipment and physical facilities for the majorresearch institutions both with its own funds and foreign aid. This includesa Bank-assisted project, the National Resource Survey and Mapping Project(Loan 1197-IND), which financed equipment and buildings for the NationalCoordinating Agency for Surveying and Mapping (Bakosurtanal). However,because of the lack of manpower to carry through the research programsplanned, the facilities of research institutes are under-utilized, and thebudget allowance for research is consistently underspent. The shortage ofwell-trained manpower is particularly severe among government researchinstitutions, which face stiff competition from the private sector foruniversity graduates.

29. Research Strategy. Indonesia's approach to the use of science hasbeen to concentrate on its direct application to the nation's development.Thus pure scientific research has been discouraged in favor of appliedresearch directly relevant to Indonesia's needs - for improving agriculturalmethods or output, conserving non-renewabLe energy supplies, or increasingindustrial self-reliance. Indonesia's science and technology researchprograms also emphasize the basic human needs of food, clothing, housing,nutrition, health and education and the social impact of technologicaldevelopment.

30. Organization of Science and Technology Research. In Indonesia, mostresponsibility for research in science and technology lies with the Govern-ment. In the private sector, the corporations which engage in research anddevelopment are predominantly multinationals which conduct most research intheir home countries where equipment and manpower are available. The Govern-ment's development expenditure on science and technology research was US$205million in 1984, estimated at 0.2Z of GDP (compared with 0.9% in Korea and

' 2.8Z in Japan). There are five classes of organizations carrying out scien-tific and technological research in Indonesia. Research in the privateindustrial sector is of minor importance, and directed mainly to the solutionof limited problems of immediate interest to the manufacturer. Research anddevelopment activities in state-owned industries are more significant, butthey are still concerned with the immediate production and developmentproblems within these industries, and so are relatively narrow in scope. Thecapability of the universities to conduct research has been limited by theshortage of qualified manpower, the demands on their time of teaching andadministration, and other constraints such as inadequate laboratories, equip-ment and libraries. These limitations will be addressed under the SecondUniversity Development Project (Report No. P-4047-IND, dated May 1, 1985).The ministerial research and development centers address problems of particu-

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Lar concern to their Ministry. In practice, neither their staffing nor theirLaboratory facilities permit extensive or demanding research projects, and itis common practice for these centers to contract out substantive work to uni-versities or to the non-ministerial research institutes. The key institutes inscience and technology research are the six non-ministerial government insti-tutes (Lembaga Pemerintah Non Departemen, LPND) which are concerned withscience and technology and related research: BAKOSURTANAL - NationalCoordinating Agency for Surveying and Mapping; BATAN - National Atomic EnergyAgency; BPPT - Agency for the Assessment and Application of Technology;BPS - Central Bureau of Statistics; LAPAN - National Institute of Aeronauticsand Space; and LIPI - Indonesian Institute of Sciences.

31. The LPNDs support the ministeriaL research centers by undertakingresearch conrracts from them, the universities by providing facilities andstaff, and private industry by developing industrial technoLogy and testingmaterials. The LPNDs usuaLly disseminate their research findings through theappropriate line Ministry. They also have close ties with universities, whichwere recently formalized through cooperative agreements allowing universitystaff and students to use the facilities of the research institutes. Manyresearch institute staff also teach at the universities. Consequently, stafftrained and employed through the LPNDs have a broad impact on the developmentof science and technology throughout Indonesia.

32. The LPNDs are equipped with the best research facilities in thecountry as a result of considerable public investment in buildings and equip-ment over the last decade. In addition to existing facilities, a Center forScientific and Technological Research, PUSPIPTEK, is being built to provideextra laboratory facilities for all of the LPNDs. This center is receivingabout US$300 million of aid for equipment from various donors, includingFrance, the Federal Republic of Germany, Japan and the United States. Theremaining constraint is the lack of manpower. Although the head of each LPNDis answerable directly to the President, and the ministerial research anddevelopment centers report to their respective Ministers, the Minister ofState for Research and Technology (Menneg Ristek) has an overall coordinatingrole for all research carried out by these bodies. The Minister is advised bya National Council for Research and Technology. He approves the five-yearplans and individual research programs proposed by the LPNDs and ensures thatthey will contribute to national priorities.

Bank Group Role and Rationale for Further Involvement

33. Since 1977, the Bank has assisted five higher education projects inIndonesia, involving total lending of about US$250 miLlion. These include twoteacher training projects, two polytechnics projects, and a university deve-lopment project. In December 1983, the Bank joined the Government in launch-ing a Higher Education Sector Study. OED Project Performance Audit Reports(PPARs) have been prepared for two education projects in Indonesia and thelessons learned have been incorporated in the design of the proposed project.The PPAR for the Technical Education Project (Credit 219-IND) (No. 2998, datedJune 2, 1980, SecM80-440) stressed the importance of including fellowships fordevelopment of teachers and school administrators and appointing key staff forproject implementation in a timeLy manner. The PPAR for the first Agricul-tural Training Project (Credit 288-IND) (No. 3508, dated June 30, 1980,

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SecH80-527) stressed the importance of advanced preparation and the need forcarefully designed and suitable technical assistance components.

34. The First University Development Project (Loan 1904-IND) wasdesigned to strengthen university management and raise the quality and numberof graduates in engineering, science, agriculture and economics at three keyuniversities. Although the project suffered from several implementationproblems, which have now been overcome, most of the policy targets, such asteacher workload, staff-student ratios and admission policies, are well on theway to being reached. The recently-approved Second University DevelopmentProject will follow up on previous efforts by developing graduate education inscience and engineering fields, improving and expanding undergraduate educa-tion through the introduction of new programs, and strengthening universityplanning and management. The proposed Science and Technology Training Projectwould complement the university development projects by meeting criticalshortages of professional manpower in science and engineering fields for whichdomestic programs are not yet developed. The proposed project would be anintegral part of the effort to develop graduate programs and increase theoutput of high-level manpower in Indonesia. Because of close linkages betweenthe research institutions and many of the leading Indonesian universities, theproject is expected to have a long-term impact, not only on the researchinstitutions themselves, but also on the quality of teaching and research inthe university system. It is also in direct support of the Government'sstrategy of promoting overseas studies as a short-term measure to fill themanpower gap. Recent Bank projects have supported this strategy by includinglarge overseas fellowship components. In the short run, overseas training isa cost-effective way of meeting part of the country's manpower requirements,since the low efficiency, as well as the limited quality and capacity of localinstitutions, do not permit the production of the same number and caliber ofmanpower as well-established institutions abroad.

35. The proposed project would play an important role in the Govern-ment's efforts to accelerate industrialization. The Government is aiming at aquantum jump in its stock of scientific and technological manpower in order topermit major industrial progress during Repelita VI (1994-99). The proposedproject would also help establish ties bet-ween local and foreign institutionsto enable Indonesian researchers to keep abreast of developments in theirfields.

36. Another aspect of the rationale for Bank involvement is that theproject would develop effective procedures and local capacity for implementa-tion of fellowship programs. From the late 1950s to the early 1980s, theGovernment did not strongly encourage Indonesians to study abroad. Overseasfellowship programs started to increase in recent years through Bank and otheraid projects. However, because of limited experience and contact with foreignuniversities, the country has had to rely on international consulting firms tomanage its fellowship programs. The Government recently embarked on an effortto promote self-management and a national committee to coordinate overseasfellowships was formed (see paragraph 52). One of the tasks of the committeeis to formulate appropriate selection, preparation, placement andadministrative procedures. This project would help shape the nationalprocedures and benefit future education and training projects.

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PART IV - THE PROJECT

Background

37. The proposed project was prepared by the Ministry of State forResearch and Technology, with the assistance of consultants. A Bank missionappraised it in September 1984. Negotiations were held in Washington, D.C.from April 29 to May 1, 1985. The Indonesian delegation was led byMr. Wardiman Djojonegoro, Assistant to the Minister of State for Resarch andTechnology. The Staff Appraisal Report (No. 5425-IND) is being circulatedseparately. Supplementary project data are provided in Annex III.

Project Objectives and Scope

38. The principal objective of the proposed project would be to streng-then the country's research and development capacity by developing a nucleusof welL-trained Indonesian scientific and technical manpower. Since the majorpart of this study program would be provided in overseas universities, theproject would also seek to develop effective policies and procedures for theimplementation and monitoring of overseas fellowship programs. A third objec-tive would be to develop and strengthen collaborative relationships betweenIndonesian and foreign universities and research institutions.

39. The proposed project would be centered on the six LPNDs under theumbrella of the Minister of State for Research and Technology. Most of thecandidates would be existing staff of the LPNDs. Fellowships would also begiven to scientific and research personnel employed in other agencies butengaged in research related to the LPNDs, and to a number of undergraduates.

Overseas Fellowship Program (US$81.8 million excluding contingencies)

40. The project would finance about 1,500 fellowships in areas directlyrelated to the project institutes' research programs in the next decade.Because of the wide range of activities of the research institutes, the fieldsof study of the fellows would be diverse, but mainly concentrated in variousbranches of engineering and the physical sciences. A small number of fellow-ships would be in related fields such as management and information science,contract and patent law, and statistics. These subjects would support thescientific research programs and the institutes' social science research whichis concerned, among other things, with the impact of technology on society.The Government would prepare each year, beginning January 1, 1986, and furnishto the Bank for review and comment, a detailed fellowship program for thefollowing fiscal year (Section 3.04 of the draft Loan Agreement).

41. The 1,500 felLowships would include about 250 PhD programs, 650 MScprograms, 300 BSc programs and 300 non-degree training programs. The firstand main source of candidates would be the 4,000 existing professional staffin the LPNDs, of whom approximately 202 (750) would undertake graduate pro-grams under the project. Another 300 would receive short-term non-degreetraining, mostly in management, calibration, instrumentation and equipmentoperation and maintenance. The current pool of staff eligible for training isabout 3,000 people and is expected to increase by about 500 by 1988 as new

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staff are recruited. At the peak year of the program, about 500-600 staff (or15Z of the total professional staff) would be studying overseas. This is notexpected to have detrimental effects on the operations of the institutes.

42. A second source of graduate candidates would be an "associatesprogram," which would broaden access to training under the project to scien-tific and research personnel of other agencies who are closely associated withthe LPNDs' work. Most would come from government research institutions, but afew would come from private institutions. About 75 graduate degree fellow-ships would be awarded to associates. A third category of participants, alsoexpected to account for about 75 graduate degree fellowships, would be "mid-stream fellows," who are already abroad on the basis of other funding, and whowould be recruited in this way as future employees of the LPNDs.

43. To train middle-level technicians, about 300 fellowships would begranted for undergraduate education, mainly in engineering subjects. TheLPNDs face stiff competition from the private sector for universitygraduates. The opportunity for education and career advancement would offsetthe disadvantages of low government salaries and serve to attract new staff.By sponsoring undergraduates in this project, LPNDs would be able to selectfrom among the best secondary school graduates, thus ensuring a minimal supplyof young talented engineers to support their research programs. Undergraduatecandidates would include recent secondary school graduates, first-year univer-sity students, or existing staff of the research institutes with secondaryschool diplomas and several years of work experience.

44. All candidates, including those who are not yet in government ser-vice (e.g., private researchers and new secondary school graduates) would berequired to work in an LPND for two years for every year of study abroad.

45. Procedures for Selection of Candidates. Degree candidates wouldneed to: (a) hold a bachelor's degree for graduate studies and a high schooldiploma for undergraduate studies; (b) preferably have three years' workingexperience; (c) be younger than 40; (d) have good health; and (e) have demon-strated strong ability in their work. Equal opportunity would be given tofemale staff. The Government has designed selection procedures for thisproject, based on lessons from previous fellowship programs, which are inten-ded to measure the ability of candidates as objectively and consistently aspossible. Each research institute would prepare a list of its personnel who

t meet the eligibility criteria and conduct a first screening of the academicand work records of the potential fellows. The list of candidates would besubmitted to the Overseas Fellowship Project Implementation Unit (OFPIU)(paragraph 54 below) for the next stage of screening, which would consist of awritten examination and an individual interview by a panel. Language testswould be given to each candidate to assess the candidate's ability and train-ing requirements. Candidates who had passed the screening up to this stagewould receive pre-departure language training. (On the basis of their per-formance in the preparatory courses, some candidates would be eliminated,while others would be invited back for another try during the next year'spreparatory course cycle.) Successful candidates would apply for universityadmission. Assurances were obtained at negotiations that candidates would beselected in accordance with these or similar criteria and proceduressatisfactory to the Bank (Section 3.03 of the draft Loan Agreement).

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46. The selection procedure would be different for the undergraduateprograms in the case of candidates still in school. They would be selectedfrom first-year university students or recent secondary schooL graduates usingthe Ministry of Education and Culture's normal selection procedures foruniversity admissions as a preLiminary screening. From this pool, the OFPIUwould screen the potentiaL candidates for overseas study through aptitude andachievement tests. Successful candidates would have to pass the in-countrylanguage training course before applying to universities abroad.

47. Procedures for Program Identification. To assist in identifyingappropriate and cost-effective study programs overseas, the following stepswould be taken. An Educational Exchange Organization (EEO) in each country ofstudy would submit about five possible programs for each academic field. TheOFPIU would review the submissions and seLect a limited number of institu-tions. A team from the OFPIU including a representative from each LPND wouldvisit the shortlisted institutions to assess their capabilities, followingwhich the OFPIU would establish. a list of favored institutions for each fieldof study. This procedure would be repeated on a smaller scale in subsequentyears in order to update information and identify new courses as needed. TheBank would review this list each year as part of its annual discussion of thefellowship program for the following year (paragraph 40 above). It is expec-ted that most fellows would study in Australia, Canada, the Federal Republicof Germany, France, Japan, the Netherlands, the United Kingdom and the UnitedStates.

48. Pre-degree Training. To ensure adequate knowledge of language,foreign study skills and quantitative skills, the project would provide up toone year of pre-degree preparation for each participant, in three stages.First, prior to leaving Indonesia, candidates would be placed in specialcourses for 6-12 months to bring their foreign language proficiency andquantitative skills to the level required for admission to an overseas univer-sity. This training would also further screen the candidates on the basis oftheir performance. Second, once a candidate's language proficiency reached acertain level, the student would proceed to a further three months of languagetraining overseas. Third, on admission to a university and completion of thelanguage course, candidates would move to the university and enter a three-month preparatory course in their particular subject of study.

49. Research. The project would include funds to support research in tthe course of the fellow's study. An average of US$1,000 would be provided toeach PhD fellow for this purpose. A number of the PhD students would conducttheir practical research projects in Indonesia with the help of visitingprofessors. Such domestic research would probably be tailored more closely tothe needs of Indonesia, or the particular programs of the sponsoring LPND, andthe fellow would be working with equipment that he could expect to continue touse on his return. The project budget would include international travel forthese participants ard a research grant for local research and travel. Toreinforce collaboration between the research institutes and foreign academicinstitutions, the project would finance a limited number of visits toIndonesia by foreign faculty members.

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Local Training Program (US$16.2 million excluding contingencies)

50. The project wouLd also incLude training in local universitiea andinstitutions in degree and non-degree programs. The institutes would trainabout 50 staff in PhD programs and 750 in MSc programs. They would alsofinance about 75 selected undergraduates in their last year of study as ameans of recruiting new graduates. In addition, short courses would beoffered in areas such as computer operation and administration. Like theoverseas fellowship program, the local training program is based on themanpower requirements of the institutes' research programs. The criteria forselection of candidates would be similar to those for the overseas program.

Project Management (US$12.5 million excluding contingencies)

51. The project would develop a system for implementing and monitoringoverseas fellowship programs, thereby reducing the Government's dependence onforeign agencies for project management. Responsibility for the project wouldbe shared by: (a) a National Steering Committee; (b) a Project SteeringCommittee; (c) an OFPIU; td) local and foreign consultants; and (e) overseaseducational exchange organizations. The reliance on foreign agencies woulddecrease as the OFPIU and local consultants gained experience in implerentingthe fellowship program.

52. National Steering Committee. The Ministry State for AdministrativeReform has recently formed a National Steering Committee for the Utilizationof Foreign Aid for Training Civil Servants. It coordinates all government-sponsored overseas training and is concerned with developing effectivenational procedures for the planning and implementation of overseas fellow-ships program. The national committee also oversees implementation of twofellowship programs for the core agencies - General Participant Training IIfunded by USAID and the training component under the Bank-assisted PublicWorks Manpower Development Project (Ln. 2258-IND). This national committeewould provide appropriate advice to the Project Steering Committee.

53. Project Steering Committee. The Ministry of State for Research andTechnology would have overall responsibility for the project and would consultwith the National Council for Research and Technology on matters of nationalpolicy. Project activities would be supervised by a Project SteeringCommittee chaired by the Assistant for General Planning at the Ministry andincluding representatives of the LPNDs and the National Development PlanningAgency (BP2PENAS). The Project Steering Committee would: (a) approve allcandidate selections; (b) review budgeting procedures and quarterly finAncialreports; (c) review consultant contracts; and Cd) ensure coordination withother Government fellowship programs (Section 3.06(a) of the draft LoanAgreement).

54. OFPIU. Responsibility for the day-to-day functioning of the projectwould rest with the OFPIU which has been established under the Ministry. Itwould make the final selection of candidates and overseas institutionsproposed by the LPNDs and consultants, coordinate the implementation units ofthe research institutes, and be responsible for disbursement of funds andsigning of contracts with language schools and consultants. The Bank's finan-cial assistance to the OFPIU would include funds for equipment and inter-

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national travel. The office is adequately staffed for the initial period ofproject implementation with a director and seven officers from the Educationand Training Division of each LPND. However, it may need to be expandedduring the peak years. The Government would maintain the OFPIU throughout theproject and furnish to the Bank for review and comment any proposals forchanges in OFPIU management and staffing patterns (Section 3.06(b) and (c) ofthe draft Loan Agreement).

55. Consultant Services. The project would finance about 170 man-monthsof foreign consultant services and 360 man-months of local consultant ser-vices. The consultants would help the OFPIU to identify educational institu-tions and programs overseas, establish a data base for the program, operatethe monitoring and evaluation system, and development of detailed arrangementsfo- the reintegration of returning fellows.

56. Educational-Exchange Organizations (EEOs). These would be agencieswithin each country of itudy, experienced in placing, caring for, and monitor-ing overseas students, and familiar with their country's higher educationsystem. An EEO could be a government body, a commercial firm, a university orgroup of universities, or an individual, provided that it can fulfill itsobligations efficiently in terms of speed, accuracy and human care.

57. Reintegration Program. A critical aspect of project managementwould be arrangements for successful reintegration of fellows following thecompletion of their studies. The project would ensure that the LPNDs plannedtheir programs in such a way as to ensure that returnees' newly developedskills would be put to good use. Psychological problems of reintegration andpotential conflicts with co-workers and management would also be addressed.The details of a reintegration program would be developed and furnished to theBank for review and comment by July 1, 1987 (Section 3.05 of the draft LoanAgreement).

58. Monitoring and Evaluation. The OFPrU would establish monitoring andevaluation procedures to govera the program and ensure achievement of targetsfor academic performance, cost effectiveness and administrative efficiency. Amonitoring and evaluation system for the entire program, satisfactory to theBank, would be established by December 31, 1985 and a mid-term evaluation ofthe project would be furnished to the Bank, for review and comment, byDecember 31, 1987 (Sections 3.06(d) and (e) of the draft Loan Agreement).

59. As part of the monitoring and evaluation process, mid-program con-sultations would be held with fellowship holders. At the end of their firstyear of studies, all fellows would be consulted to evaluate their respectiveEEO's performance, assess the quality of the academic and preparation programsand provide general feedback. Within six months of the return of a particulargroup of fellows to Indonesia, a post-return seminar would be held. Thiswould provide an opportunity for comment on the relevance of the fellowshipprograms to their jobs and the quality of the reintegration program.

Implementation Schedule

60. The project would be implemented over an eight-year period. Thelong project period is necessary for the following reasons. Because of the

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large number to be trained, the departure of the participants would be phasedover five years. Some of those leaving during the fourth and fifth yearswould not return until the eighth year. Given the importance of reintegra-tion, full Bank participation in this process is desirable. The project comrpletion date would be June 30, 1992 and the loan closing date would beDecember 31, 1992.

Project Cost and Financing Plan

61. The total cost of the proposed project including contingencies wouldbe US$153.7 million equivalent, of which US$93 million would be in foreignexchange. Taxes and duties (about US$200,000) would be negligible. Costestimates are based on April 1985 prices. Costs for overseas fellowshiptraining were estimated at about US$18,000 per man-year (including tuition,living and academic allowances, travel and management). This is an averagebased on a recent survey conducted by the Bank on fellowship costs in variouscountries. The contingency allowance of US$43.2 million includes: (a) phy-sical contingencies (US$11.0 million) estimated at 10% of base costs; and(b) price contingencies (US$32.2 million) calculated on the basis of thefollowing percentages: local - 8% for 1985-90 and 5% for 1991 and subsequentyears; foreign - 5% for 1985, 7.5Z for 1986, 8% for 1987-90, and 5% forsubsequent years.

62. The proposed Bank loan of US$93 million would meet the full foreignexchange costs of the project, or about 60% of total project costs. TheGovernment would finance the remaining US$60.7 million of project costs fromits own resources. Retroactive financing of up to US$2 million would beincluded to cover project expenditures incurred after appraisal, i.e.,August 31, 1984. These include start-up costs for the project managementsystem and the costs of preparing the first group of students for overseasstudy in the academic year beginning September 1985. Annual recurrentexpenditures generated by the project are estimated at about US$1.0 miLlion(at 1984 prices) in 1992. This represents an increase of about 4% in theresearch institutes' recurrent budget and would not pose a significant burdenon the Government. Moreover, in addition to government allocation, theinstitutes have other means of cost recovery, such as carrying out researchcontracts for other agencies, to meet some of their operating expenditures.

Procurement

63. Equipment to oe procured under the project is estimated at aboutUS$300,000, including contingencies, and would mainly consist of microcomrputers and typewriters. They would be off-the-shelf items not exceedingUS$50,000 for each package and would be procured on the basis of a comparisonof quotations received from at least three suppliers. Books and journals inforeign languages would be purchased directly from publishers or distributorsafter negotiating for the best discount-. Consultants would be selected inaccordance with the "Guidelines for the Use of Consultants by World BankBorrowers". Foreign academic and scientific institutions to which studentsare sent would be selected mainly on the basis of academic quality and costsand their selection would be reviewed with the Bank.

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Disbursement

64. The proposed loan of US$93 million equivalent would be disbursed onthe basis of: (a) 100% of total expenditures for overseas fellowships, studyvisits and pre-degree training; (b) 100% of foreign expenditures forequipment, 100Z of local expenditures (ex-factory) and 70% of local expendi-tures for other items procured localLy; (c) 100% of total expenditures forconsultants' services; and (d) 100% of foreign expenditures for books,journals and research allowances. No disbursements would be made for localtraining and local research and operating costs.

Accounts, Audits and Reports

65. All project agencies would prepare and maintain separate projectaccounts in accordance with sound accounting practices. Accounts and documen-tation supporting statements of expenditure would be maintained separately andwould be readily available for review by visiting Bank missions. During nego-tiations, the Government provided assurances that: (a) accounts, statementsof expenditure, and financial statements for each fiscal year would beprepared and audited by independent auditors acceptable to the Bank; and(b) certified copies of the audited accounts and financial statements, foreach fiscal year, together with the auditor's report, would be furnished tothe Bank as soon as available, but not later than nine months after the end ofeach fiscal year (Section 4.01 of the draft Loan Agreement).

Benefits and Risks

66. As a result of the proposed project, a nucleus of about 1,500 scien-tists, engineers and other professional-level manpower would be trained abroadand another 1,200 would be trained within Indonesia. On their return, theywould directly strengthen the research and development functions of the LPNDs,with the objective of accelerating the country's industrialization. Theywould also add considerably to the small stock of Indonesian scientific andtechnological manpower conducting research in the public sector and wouldinfluence teaching and research in their fields of study in Indonesianuniversities. The links between local and foreign institutions that would beestablished during the project would enable Indonesian researchers to keepabreast of developments in their field. Furthermore, a mechanism forassessing degree courses overseas, placing, administering and monitoringstudents would be developed and the reliance on overseas implementing agenciesreduced. This experience would assist the National Steering Committee ontraining to develop national policies for the management of overseas trainingwhich can be used by other ministries and projects.

67. Through the establishment of the management system proposed underthe project, the risks inherent in such a large fellowship program would bereduced. The selection procedures involve a series of specially designedtests and interviews that would ensure the objective selection of the bestpeople. While not infallible, they should ensure that candidates are selectedprimarily on the basis of merit. The selected candidates would go through apreparation program for training in language and basic skills, which is expec-ted to keep failures to a minimum. Another risk of the project is that of apossible "brain drain". From past experience, the return rate of Indonesian

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students is extremely high. The monitoring system to be set up under theproject, the continued contacts between the research institutes, and partici-pants during their studies overseas, and the reintegration program shouldserve to minimize this risk further.

PART V - LEGAL INSTRUMENTS AND AUTHORITY

68. The draft Loan Agreement between the Republic of Indonesia and theBank and the report of the Committee provided for in Article III, Section4(iii) of the Articles of Agreement are being distributed to the ExecutiveDirectors separately. Special conditions of the project are listed in SectionIII of Annex III.

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

PART VI - RECOMMENDATION

70. 1 recommend that the Executive Directors approve the proposed loan.

A.W. ClausenPresident

AttachmentsJune 13, 1985Washington, D.C.

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15-4 IRs 56.2 53.4 57.3 57.6 56.065 AND Aovz3.1 2.5 3.1 3.3 4.1

POvUMnION COM RATE (1)TOrAL 2.1 2.0 2.3 2.3 2.4UNBAR 3.7 3.6 4.5 4.3 3.6

CRUDE UInTH RATE (PER IOUS) 44.2 41.0 33.6 30.1 31.3CRUDE DElAT RAIl CPR TNOUS) 22.9 17.6 13.0 9.5 6.1GtOSS RER0DOUCTICS BATE 2.7 2.7 2.2 2.0 2.0

FAMILY PLNKICACCETOIS. ANIUAL (IROUS) .. 161.1 3051.0USES (Z OF "mAD lrsE) .. .. 53.0 Ic 52.7 40.3

WOOD A oni

IN OF MMOPOD- EUII PECPXTA(1969-71-100) 93-0 102.0 L17 -0 123.0 114.3

.El CAPIO SUPPY oFCAWm CZ OF l:QlllRtE1U) 86.0 96.0 tlO.O 114.4 110.6PROrEIl (GRAMlS PER DAY) 38.0 ".0 49.O 57.0 67.3

OF W ANIIUL AND FL 6.0 6.0 7.0 Id 14.1 34.1

Q=D (AGES I 4) OE STZ 22.9 16.9 23.0 7.2 5.7

LIt EXPECI. Ar Ulllll YAR) 41.2 47.0 53.3 60.4 647DlAUr -RI. UAIE tCpz T7WII) 149.9 120.9 102.0 66.3 60.6

v5w5a oe 0

TOTL 3. 3.0 23.0 37.0 65.4PROENS 10.0 41.0 57.8 76.3RCFAL C. 1.0 I7.0 26I4 46.2

OINAL . 15.0 23.0 41.3 5609ORUI .. 19.0 20.0 37.0 67.0

RRAL ,, 1.0 24.0 33.3 74.5

PORUALAT1 STCIAX 4780.0 165.0 110.0 26 779.4 97.7POP. Me llUISxC PERSOO 4510.0 if 7680_0 m3om T7- 2460.4 815.8POP. PEI CT DSPITAL SSD

ALN 1360. 1.0 120.0 7 104.2 367.2UU^li 250.0 . . JO.O 77; 651.2 *1t.5RURAL .. .. 260.0 32.6 2636.3

Ara.IvsP N ROSP-L 4510.0 _ 2234 . 27-0 27.3

AVRG STZE OF BlXXElILDT0AL 4vs oS ,. ....

A 4.0 5.3 .. .2 .2RTOAL 4.3 4.7

AVERAZ No. OF PERSoNS/NOSTOTAL .. 1.5URBAN 1.6RIURL .. 1.5 . ..

ACCSS TO ELECT. C( O DOULLINS)

TOTAL.. .. . ..

RURAL.. .. . ..

:.: ~~~~~~~Tmk

ANNEX I-23 - Page 2 of 5 pages

INDONESA - SOCIAL INDMCATORS DATA SIllXIDONUI.A RIWERENC O (WIZZTED AV1RAURS) a

MOST (MMS RECET IThUT8) /bRECENT HIDDLR 1NCC MIDOL zucar

196ot 197iLb ESUMTEL ASIA & mPCIFC LA1. AS 6ICA aR

ADJUSTED ENROLIXM RATIOSPRIMARY: TOTAL 71.0 77.0 100.0 102.0 105.4

MALE 86.0 83.0 106.0 105.9 106.3FEULE 58.0 71.0 94.0 98.2 104.5

SECONDARY: TOTAL 6.0 15.0 30.0 46.0 43.2HALE 10.0 20.0 36.0 48.7 42.3FEULE 3.0 10.0 24.0 43.1 44.5

VOCATIONAL CZ OF SECODNDAR) 20.4 22.1 13.4 17.5 33.6

PUIL-TEACES3 RATIOPRDImaf 39.0 29.0 32.0 31.8 30.1SECONDRY 14.0 13.0 16.0 23.5 16.8

ADULT LITERACT A122 (Z) 39.0 56.6 62.0 72.9 79.5

PASSENGER CARS/TROtSAND POP 1.1 2.1 4.4 10.1 46.0RADIO RECEXVERS/IHOUSAND POP 7.2 21.9 42.4 113.6 225.6TV RECEIVERS/7BOUSAND POP 0.1 0.8 9.6 50.1 107.2NEWSPAPER (ULY GENERAL

INTZEREST) CIRCI.TIOSPER THOUSAND POPULIAION 11.0 .. 17.7 5 S3.9 63.5

CIMNA ANNUAL ATTENDANCE/CAPITA 2.8 .. 0.8 di 3.4 2.8

TOM 1ABOR FORCE (Ta0) 34791.0 £1090.0 54689.0FPAUE (PERCENT) 27.8 30.9 29.1 33.5 23.2ACRICULTURE (FERUENT) 75.0 66.0 56.0 52.2 31.5INDUS (PERCENT) 8.0 10.0 12.0 17.9 23.9

PARTICIPATION RLTE (PERCENT)TOTAL 36.7 35.4 35.8 38.7 32.2MALE 54.2 49.5 51.1 50.9 49.3FEALE 2O.0 21.6 20.7 26.6 15.2

ECONOaC DEPENDENCT RATIO 1.2 1.3 1.2 1.1 1.4

IN DrsnmPERCENT OF P9I1AIE INCUSRECEIVED BY

RISEEST 5 OUSEOLDS .. .. 23.5 I 22.2REST 20: OF HUSEBIOWS .. .. 49.4 7 48.0

LOWEST 20X OF HOUBEHOLDS .. .. 6.6 7 6.4LOWEST 40Z R BOUSUOLDS .. .. 14.4 L 15.5

s TARG IOUS-SINM A UZ POSRY INCS

LEVEL COUS PER CAPITA)URAN .. 124.0 /t 124.0 /i UIS.6 288.2RURAL .. 106.0 71 106.0 71 152.0 184.0

ESTIMATED WE T POERI ICUSLE CUSS PERM CAPITA)

URBAN .. .. 119.0 /i 177.9 522.8RURAL .. .. 98.0 7 L64.6 372.4

* ESTIDAfl POP. BElW ABSOLUTEPOVERTY INCOM LEVEL (S)

URBAN .. 51.0 /i 26.0 /i 23.4RURAL .. 59.0 7T ".0 7' 37.7

NOT AVAILAZ-BOY APPLICABLE

N O T E S

/a Tbe group averags for eclh indlator are population-weigtod arithmetic sean. Coverage of contrie. aong theIndicatora depends on avalLab..ity of data and i. not uniform.

/b Unlea otherwie mated, lDatdt for 1960' refer to any year between 1959 and 1l1; 7 ata for 1970 betwe 1969 ad1971; ad data for "Not leat EatiatoC between 1980 ad 1982.

/c 1983; /d 1977; 1a 1979; /f 1962; 4L 1976; / 1975; /i 1980 price.

JUNE, 1984

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- 25 -ANNEX Irags * of 5 Pages

Populatlon 155.8 *lllion (mid-1983)CGP per Capita: USSS60 (L983 estimate)

INDONESIA - ZCNONOIC INDICATORS

Amun(million US$ at Annual growth rate (Z) /bcurrent prices) Actual Prolected

Indicator 1983 1950 1981 1695 195L3 1541 Is L95. U56 1987 188 lS8Y 199D

NATIONAL ACCOUNTSGross domestic product Ic 78,344 9.9 7.9 -0.2 4.7 6.5 2.9 4.6 5.1 4.7 4.1 4.3

Agriculture 20,651 5.2 4.9 2.1 4.8 5.0 3.7 3.7 3.7 3.7 3.7 3.7Industry 29,896 12.5 8.5 -6.4 5.0 9.8 0.9 4.5 5.5 4.6 3.0 3.5Services 27,797 11.8 9.8 5.5 4.3 4.0 4.5 5.5 5.5 5.5 5.5 5.5

ConSumption 62,731 12.4 15.8 3.0 0.7 7.2 3.1 3.1 4.2 4.2 4.2 4.2Gross invesement /d 18,908 18.9 11.1 8.5 -7.0 -9.0 5.1 5.1 5.3 5.5 5.7 5.5Exports of CMPS 19.508 -5.6 -2.4 -12.6 14.2 3.5 1.4 6.4 5.2 3.9 1.4 3.0Imports of CGNS 22,803 15.1 27.1 3.2 -8.6 -7.5 3.6 1.5 2.4 2.6 2.6 3.4

Gross untlonal savings 12,273 33.2 -20.0 -11.3 3.7 1B.4 -3.3 8.9 8.0 6.9 5.3 5.2

PRICESCDr-defLator (1981 - 100) 91 100 113 131 142 154 168 183 199 217 237Exchange rate (Rp per USS) 627 632 661 909 1.026

Share of GDP at market prices (Z)(at current urices) _ _ er 1 annual increase (Z) /b

1960 1970 197S 1980 19B5 1990 1960-70 1970-5 1975-8D 1980-83 1Y55-90

Gross domestic product 100 100 100 100 100 100 3.9 8.4 7.4 4.3 4.6Agriculture 54 47 32 25 26 25 2.7 4.1 3.3 4.1 3.7Industry 14 18 34 43 38 38 5.2 12.0 9.8 3.4 4.2Services 32 35 35 32 36 37 4.8 9.7 9.5 5.6 5.5

Consumption 91 89 79 71 78 76 4.1 8.4 9.2 6.0 4.0Gross investment /d 8 14 20 21 18 19 4.8 18.3 12.2 2.6 5.4Exports of GNFS 13 13 23 31 25 24 3.6 9.2 2.9 -1.1 4.0Imports of CNFS -13 -16 -22 -22 -21 -19 3.2 22.1 14.0 2