Report and Recommendation of the President to the Board of Directors

Project Number: 50395-006 November 2018

Proposed Loan Republic of : Advanced Knowledge and Skills for Sustainable Growth Project

Distribution of this document is restricted until it has been approved by the Board of Directors. Following such approval, ADB will disclose the document to the public in accordance with ADB’s Public Communications Policy 2011.

CURRENCY EQUIVALENTS (as of 17 October 2018)

Currency unit – rupiah (Rp) Rp1.00 = $ 0.00006613 $1.00 = Rp15,121

ABBREVIATIONS

ADB – Asian Development Bank BAPPENAS – Badan Perencanaan dan Pembangunan Nasional (National Development Planning Agency) EIRR – economic internal rate of return HEI – higher education institution IEE – initial environmental examination IQF – Indonesian qualification framework MOEC – Ministry of Education and Culture MORTHE – Ministry of Research, Technology and Higher Education PAM – project administration manual PIU – project implementation unit PMU – project management unit RPJMN – Rencana Pembangunan Jangka Menengah Nasional (National Medium-Term Development Plan) SMK – Sekolah Menengah Kejuruan (senior secondary vocational education schools) TA – technical assistance TVET – technical and vocational education and training UNIMAL – University of Malikussaleh UNJA – University of UNRI – University of UPI – Indonesia University of Education

NOTE

In this report, “$” refers to United States dollars.

Vice-President Stephen Groff, Operations 2 Director General Ramesh Subramaniam, Southeast Asia Department (SERD) Directors Ayako Inagaki, Human and Social Development Division, SERD Winfried Wicklein, Country Director, Indonesia Resident Mission, SERD

Team leaders Rudi Louis Hendrikus van Dael, Senior Social Sector Specialist, SERD Sutarum Wiryono, Senior Project Officer (Education), SERD Team members Emma Allen, Country Economist, SERD Utami Hendrarini, Senior Operations Assistant, SERD Baurzhan Konysbayev, Principal Counsel, Office of the General Counsel Naning Mardiniah, Safeguards Officer (Resettlement), SERD Janice Maureen Mariano, Operations Assistant, SERD Suharyani, Senior Procurement Officer, SERD Maria Angelica Vivar, Associate Project Analyst, SERD Peer reviewer Jouko Sarvi, Lead Education Specialist, Central and West Asia Department

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page PROJECT AT A GLANCE MAP I. THE PROPOSAL 1 II. THE PROJECT 1 A. Rationale 1 B. Impact and Outcome 4 C. Outputs 5 D. Summary Cost Estimates and Financing Plan 6 E. Implementation Arrangements 7 III. DUE DILIGENCE 8 A. Technical 8 B. Economic and Financial 8 C. Governance 8 D. Poverty, Social, and Gender 9 E. Safeguards 9 F. Summary of Risk Assessment and Risk Management Plan 10 IV. ASSURANCES 10 V. RECOMMENDATION 10 APPENDIXES 1. Design and Monitoring Framework 11 2. List of Linked Documents 14

Project Classification Information Status: Complete

PROJECT AT A GLANCE

1. Basic Data Project Number: 50395-006 Project Name Advanced Knowledge and Skills for Department SERD/SEHS Sustainable Growth Project /Division Country INO Executing Agency Ministry of Research, Borrower Indonesia Technology and Higher Education 2. Sector Subsector(s) ADB Financing ($ million) Education Tertiary 200.00 Total 200.00

3. Strategic Agenda Subcomponents Climate Change Information Inclusive economic growth Pillar 2: Access to economic Climate Change impact on the Medium (IEG) opportunities, including jobs, made Project more inclusive Environmentally sustainable Global and regional transboundary ADB Financing growth (ESG) environmental concerns Adaptation ($ million) 2.26 Mitigation ($ million) 2.30

4. Drivers of Change Components Gender Equity and Mainstreaming Governance and capacity Organizational development Gender equity (GEN) development (GCD) Knowledge solutions (KNS) Application and use of new knowledge solutions in key operational areas Partnerships (PAR) Civil society organizations Implementation Regional organizations 5. Poverty and SDG Targeting Location Impact Geographic Targeting No Nation-wide High Household Targeting No SDG Targeting Yes SDG Goals SDG4, SDG13 6. Risk Categorization: Low . 7. Safeguard Categorization Environment: B Involuntary Resettlement: C Indigenous Peoples: C . 8. Financing Modality and Sources Amount ($ million) ADB 200.00 Sovereign Project (Regular Loan): Ordinary capital resources 200.00 Cofinancing 0.00 None 0.00 Counterpart 66.52 Government 66.52 Total 266.52

Currency of ADB Financing: USD

Source: Asian Development Bank This document must only be generated in eOps. 18102018114150688883 Generated Date: 24-Oct-2018 16:20:16 PM 108 o 00'E 132 o 00'E

INDONESIA ADVANCED KNOWLEDGE AND SKILLS FOR SUSTAINABLE GROWTH PROJECT

8 o 00'N 8 o 00'N

NANGGROE ACEH DARUSSALAM University of P A C I F I C O C E A N Malikussaleh Lhokseumawe

NORTH NORTH University of Riau NORTH RIAU o Tanjung Pinang EAST o 0 KALIMANTAN 0 RIAU ISLANDS WEST Gorontalo University JAMBI KALIMANTAN CENTRAL Jambi of Jambi NORTH CENTRAL SULAWESI WEST KALIMANTAN MALUKU WEST PAPUA WEST SUMATRA BANGKA-BELITUNG SULAWESI Palangkaraya SOUTH SUMATRA SOUTH Ambon SOUTHEAST BENGKULU LAMPUNG PAPUA KALIMANTAN SULAWESI J a v a S e a MALUKU DKI Jakarta CENTRAL B a n d a S e a EAST JAVA BANTEN WEST NUSA o 8 o 00'S 8 00'S TENGGARA WEST JAVA Indonesia University YOGYAKARTA EAST NUSA of Education TENGGARA A r a f u r u S e a

Kupang N

National Capital I N D I A N O C E A N 25 5 Provincial Capital Kilometers City This map was produced by the cartography unit of the Asian Development Bank.

182282 18INO ABV Provincial Boundary The boundaries, colors, denominations, and any other information shown on this map do not imply, on the part of the Asian Development Bank, any judgment on International Boundary the legal status of any territory, or any endorsement or acceptance of such boundaries, colors, denominations, or information. Boundaries are not necessarily authoritative.

108 o 00'E 132 o 00'E

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on a proposed loan to the Republic of Indonesia for the Advanced Knowledge and Skills for Sustainable Growth Project.

2. The proposed project will support advanced skills and knowledge for sustainable economic growth in Indonesia by upgrading three public universities in Sumatra and one public university in Bandung, West Java, as the first phase of higher-education reform. The project will support the construction and/or upgrading of new facilities that incorporate green-building and climate-proofing design features. The project will strengthen staff capacity at the universities and support demand-driven quality education and research aligned with local economic priorities. It will integrate new technologies in teaching programs, strengthen technical and vocational teacher education, and help the government develop a medium-term higher-education investment plan.

II. THE PROJECT

A. Rationale

3. Strategic context. The government seeks to accelerate economic growth by promoting technology-intensive industries, infrastructure development, and high-end services, while transforming agriculture and fisheries. Indonesia’s manufacturing industry aims to grow and integrate new technologies to increase productivity. New technologies such as big data, robotics, and the internet of things will transform the economy, and can create new industries and better- quality jobs, and thus, increase labor productivity. However, these new technologies will alter the skills required of the workforce, leading to lower wage growth for less-skilled laborers, or even loss of employment to automation, thereby exacerbating income inequality. Already, demand for jobs that require non-routine cognitive tasks have grown faster than jobs requiring routine and manual tasks. Without adequate skills development or retraining, workers with weaker skills face hurdles in seizing the opportunities that new technologies provide. As of end-2017, only 11% of the labor force had completed higher education, and in 2017 fewer than 20% of graduates held degrees in technology-relevant fields like engineering—with few women among them. Half of the labor force is underqualified for the jobs they are performing. About 10% of the labor force is overqualified, most of whom hold degrees, indicating an increasing risk of mismatch between demand and supply. Indonesia needs more higher-education graduates—both men and women—with degrees that better match emerging opportunities in the labor market.1

4. Higher education needs to accommodate an increasing volume of students. The gross rate of enrollment in higher education increased from 17% in 2004 to 31% in 2018, with student numbers increasing from 4.0 million to 7.5 million.2 Advanced skills education is provided by higher-education institutions (HEIs) such as universities and polytechnics. The Ministry of Research, Technology and Higher Education (MORTHE) administers public HEIs and licenses 3 private HEIs.F From 2004 to 2018, the number of students per public HEI grew significantly,

1 Asian Development Bank (ADB). 2017. Asian Development Outlook 2017. Manila; ADB. 2018. Asian Development Outlook 2018. Manila; and ADB. 2018. Indonesia: Enhancing Productivity through Quality Jobs. Manila. The unemployment rate for higher-education graduates in 2017 was 8.7%, a slight decrease from 9.9% in 2016. 2 Women enrollment in higher education is 50.2%. Women enroll less in engineering and more in education and health. Women face difficulties finding formal employment and are paid less than equally educated men for comparable jobs. 3 Nine years of basic education and three years of general and vocational secondary education is under the auspices of the Ministry of Education and Culture (MOEC), with administration of schools decentralized to districts and provinces. Education with more extensive religious content is provided by education institutions under the Ministry of Religious

2 resulting in very crowded institutions. During the same period the number of private HEIs grew significantly to accommodate more students. While Indonesia has made significant progress in providing access to higher education, additional effort is needed to meet growing public demand.

5. Education and research in higher-education institutions do not meet current and future industry needs. Indonesia’s labor force is underqualified. Employers indicate that higher- education graduates lack reasoning, problem solving, and teamwork skills. Curricula need to focus more on practical and soft skills like communication, teamwork, and work ethic, and should be updated more regularly. With a few notable exceptions, HEIs do not benefit from links to industry and rely for the most part on traditional lectures. Teachers lack the skills to adopt modern teaching techniques that integrate practical skills training with theoretical content. Few HEI staff have doctoral degrees. Moreover, the sharp increase in enrollment has led public HEIs to recruit more temporary, less-qualified staff and to focus mainly on education and neglecting research. Public HEIs are often overcrowded and have outdated and/or inadequate equipment, lecture halls, and laboratories.

6. Higher-education institutions outside Java need to improve to support local society and the economy. Of Indonesia’s 122 public HEIs, 40% are in Java, and so are nine of Indonesia’s top-10 public universities. HEIs outside Java cater to poorer parts of the country. They are rated lower in quality, have limited financial resources, fewer qualified staff, and hardly conduct any research. With adequate investment in facilities and human resources, the HEIs outside Java can play an important role in the local economy. They can provide the advanced skills needed for inclusive economic growth, collaborate with local industry to introduce new technologies, and enable a more diverse array of students to attend high-quality universities.

7. Higher education needs to provide better teachers to meet growing demand for technical education. Senior secondary vocational education (SMK) students are not as employable as they should be, and thus the quality and relevance of SMK education needs to improve.4 Teachers at SMK schools and HEIs lack the practical skills and industry experience needed for the technical subjects they teach. They rely mainly on traditional lectures, instead of using more interactive, inquiry-based teaching methods.5 Employment rules for teachers focus on academic qualifications, which hampers recruitment of teachers with practical experience. Only 20% of SMK vocational subject teachers have the required qualifications, implying that 90,000 of such teachers require skills improvement. Teaching universities and institutions lack adequate programs, facilities, and industry linkages, and are ill-prepared to integrate new technologies to prepare teachers for the changing needs of technical education. Indonesia urgently requires better SMK teachers, as the number of SMKs and students has increased significantly since 2012.6 In response, the MORTHE and the Ministry of Education and Culture (MOEC) have introduced programs to strengthen teacher education. This includes changing

Affairs. Private providers enroll 73% of Indonesia’s 7.6 million HEI students and manage 90% of the 4,150 HEIs. The MORTHE oversees 122 public and 3,152 private HEIs. The 96 public and 1,019 private HEIs overseen by the Ministry of Religious Affairs enroll 700,000 students. The four project-supported universities are public institutions under the MORTHE. Private HEIs tend not to offer expensive courses, like engineering. 4 68% of SMK graduates are employed—79% of men and 52% of women. 5 SMKs provide high school diplomas in technical education; HEIs provide diplomas and degrees in technical subjects. 6 SMKs teach general and vocational subjects. The general senior secondary schools teach general academic subjects. In 2017, SMKs enrolled 50.7% (4.7 million) of senior secondary students, overtaking general senior secondary enrollment for the first time. The number of SMK schools grew from 10,670 in 2012 to 13,710 in 2017. Indonesia prioritized teachers. From 2003 to 2015, 30% more teachers were employed compared with 25% more students. The share of teachers with the minimum bachelor’s degree increased from 37% in 2003 to 90% in 2016. Quality of teachers remains an issue; when tested on a 100-point scale, average result was 53.

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employment rules to allow people with industry backgrounds to become teachers. Given the urgent need for more and better technical-and-vocational-education-and-training (TVET) teachers, the MORTHE and MOEC are preparing a strategy to educate TVET teachers, which includes integrating pre- and in-service training and increasing industry involvement.7

8. Efforts to improve quality and relevance need to become more effective. The higher education quality assurance mechanism and the Indonesian qualification framework (IQF) are the two main instruments to improve the quality and relevance of higher education. HEIs also operate their own internal quality assurance systems. An independent panel is in charge of assessing and accrediting HEIs at the program level and at the institution level. From 2019, the national accreditation body for higher education will introduce an improved instrument to assess HEIs at the institution level. The new instrument will focus on performance and processes.8 Under the IQF, which came into effect in 2012, national qualification standards for occupations are developed with inputs from industry to ensure that the education and training institutions provide skills development which meets industry needs. The IQF is meant to be the unifying framework for skills development. While progress has been made, the system needs to be strengthened so that IQF certificates issued under the national assessment and accreditation system become nationally—and possibly internationally—accepted.9

9. The government’s strategy. Higher education is a priority for the government. The National Medium-Term Development Plan, 2015–2019, the MORTHE’s strategy for 2015–2019, and the presidential decree on strengthening vocational education set out the directions to improve the quality and relevance of higher education.10 The government will focus on improving access to and the quality of science, engineering, agriculture, and health education and research; establishing stronger collaboration with industry; and strengthening teacher quality. The MORTHE’s investment program aims to strengthen the capacity of HEIs to meet increased demand for higher education. HEIs outside Java are included in the investment to ensure equitable growth. The MORTHE expects each university to become a center of excellence in a specific academic discipline to meet current and future (local) economic needs. The government is preparing its National Medium-Term Development Plan, 2020–2024, with a strong focus on the role of higher education to support technological change, innovation, and entrepreneurship. As part of the 2020–2024 plan, the MORTHE will prepare a medium-term investment plan for higher education. This investment plan will aim to accelerate innovation in new technology and stimulate entrepreneurship at top universities, and will also target the development of advanced skills at regional universities so local economies can also benefit from the technological transformation.

10. Financing requirements for upgrading higher-education institutions. Since 2010, the government has allocated 20% of the national budget to education, with the MORTHE receiving about 10% of the education budget. This includes revenue that public universities gain from tuition and other resources. However, this budget is insufficient to upgrade facilities to offer quality

7 Pre-service teacher education is the responsibility of the MORTHE. Core policies are the Vocational Higher Education Revitalization Program (2016) and the Teacher Training Institution Revitalization Strategy (2016). In-service training of SMK teachers is the responsibility of the MOEC, including retraining 90,000 teachers trained to teach the general subjects in SMKs into vocational subject teachers (footnote 6). 8 This updated instrument will be used in the project universities to measure progress in quality of education. 9 As of 2018, about 40% of Indonesia’s 160 industry associations have professional certification bodies attached. Those bodies have developed 1,720 qualification schemes, of which only about 13% can be properly labeled qualification standards (the others need to be improved). 10 Government of Indonesia, National Development Planning Agency (BAPPENAS). 2015. National Medium-Term Development Plan (RPJMN), 2015–2019. Jakarta. MORTHE. 2015. Strategic plan, 2015-2019. Jakarta. The Presidential Decree No. 9/2016. Revitalization of Vocational Education. 2016.

4 education to an increased number of students, especially for public HEIs outside Java, which have fewer revenue-generating options. Hence, development partners are financing the HEI upgrades. 11 As part of the initiative, the MORTHE has requested support from the Asian Development Bank (ADB) to upgrade four public universities: the University of Malikussaleh (UNIMAL), the (UNJA), and the (UNRI) all in Sumatra; and the Indonesia University of Education (UPI) in Bandung, West Java.

11. The Sumatran universities are mid-tier universities providing higher education to support economic development in their regions. Financing is needed to provide lecture halls, laboratories, and other facilities to meet increased demand for higher education, improve quality and relevance of education and research, and ensure an inclusive, conducive, and gender-friendly teaching and learning environment. UNIMAL caters mainly to students from East Aceh, a post-conflict and post- tsunami area in which agriculture is the main economic activity. It will focus on sustainable agriculture to support local farmers and small agribusiness. UNJA, the only public university in poor but natural-resources-rich Jambi Province, will focus on sustainable management of natural resources to support the province’s transformation from an extractive to a sustainable economy. UNRI, located in Riau Province, which has seen strong economic growth, aims to strengthen its capacity in aquatic and marine science to accommodate agribusiness companies, related service industries, and farmers.12

12. UPI, a teaching university, will become a center of excellence for educating TVET teachers. The center will prepare TVET teachers to teach emerging technologies to meet current and future industry needs. The center will collaborate with other universities that specialize in TVET-teacher education; with other HEIs in Bandung; and with SMKs, the MORTHE, and the MOEC. UPI will establish a special unit to strengthen industry relationships within the center of excellence.

13. Lessons learned. The project design incorporated lessons learned from the ADB- supported Polytechnic Education Development Project and the Education Sector Analytical and Capacity Development Partnership. First, programs designed by industry and individual HEIs generally produce better results. Second, to reform an institution, a piece meal approach focusing at a few programs is not sustainable. The design should address all stakeholders and units within an organization, and ensure interconnectivity between these units so reforms reinforce each other and sustain. Third, education institutions should design their skills development programs based 13 on the skills needs of the local industry, as each location and each industry is unique..

B. Impact and Outcome

14. The project is aligned with the following impact: increased income and productivity of the working age population.14 The project will have the following outcome: strengthened access, relevance, and quality of targeted universities.15

11 The Islamic Development Bank, the Kreditanstalt für Wiederaufbau (Germany), and the Japan International Cooperation Agency also support the upgrade of universities. ADB, Global Affairs Canada, the government-financed Polytechnic Revitalization Project, and the State Secretariat for Economic Affairs (Switzerland), support upgrading of polytechnics. Development Coordination (accessible from the list of linked documents in Appendix 2). 12 The Universities and the Local Economy (accessible from the list of linked documents in Appendix 2). 13 ADB. 2012. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Republic of Indonesia for the Polytechnic Education Development Project. Manila; ADB. 2010. Technical Assistance to the Republic of Indonesia for Education Sector Analytical and Capacity Development Partnership. Manila; and University-Industry Partnerships: Lessons Learned (accessible from the list of linked documents in Appendix 2). 14 Government of Indonesia, National Development Planning Agency (BAPPENAS). 2015. National Medium-Term Development Plan (RPJMN), 2015–2019. Jakarta. 15 The design and monitoring framework is in Appendix 1.

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C. Outputs

15. The project will achieve its outcome through two outputs: (i) market-responsive programs delivered (Output 1), and (ii) training of TVET teachers improved (Output 2).

16. Output 1: Market-responsive programs delivered. This output will increase access to higher education by expanding and improving the physical capacity of the three targeted universities in Sumatra: UNIMAL, UNJA, and UNRI. The project will support construction of new lecture halls, laboratories, and other buildings with climate-proofing design features, and will support the completion of one unfinished building at UNIMAL. Construction of this building was not completed due to shortage of financing. All facilities constructed and/or upgraded will be gender-responsive, inclusive, and sustainable. Each university will construct or upgrade new day- care centers, lactation rooms, and related facilities. To improve the quality of higher education, the capacity of university staff will be strengthened through international and national training, internships, and joint research projects. To improve the relevance of higher education, UNJA, UNIMAL, and UNRI will establish centers of excellence in, respectively, sustainable natural resources, sustainable agriculture, and marine and aquatic science in collaboration with industry, community, and other stakeholders. Each center will work closely with local industry and communities to identify how they can address local economic needs. For example, UNIMAL is in dialogue with local industry on developing new seeds and better fertilizer. UNJA aims the use of new sustainable land management methods like agroforestry. UNRI is focusing on modernizing applied food technology for local industry. A separate technical assistance (TA) is proposed to support the MORTHE with the medium-term higher-education investment plan development as called for in the National Medium-Term Development Plan, 2020–2024 (para. 9).16

17. Output 2: Training of technical-and-vocational-education-and-training teachers improved. This output will improve the quality of technical education by turning UPI into a center of excellence for the education of TVET teachers. Civil works will include classrooms, laboratories, a day care center, and other academic buildings. All constructed and upgraded facilities will be gender-responsive, inclusive, and sustainable. The capacity of university staff will be strengthened. The center of excellence will establish bachelor’s-level TVET-teacher-education programs related to six emerging technologies (i) information systems and technology, including big data; (ii) artificial intelligence and robotics; (iii) industrial instrumentation engineering; (iv) renewable energy engineering; (v) chemical engineering; and (vi) automotive engineering. As part of its TVET education research, UPI will develop new models for TVET education, focusing on improved industry collaboration, resource sharing, and introduction of new teaching–learning practices. UPI will develop and implement in-service SMK teacher training programs in collaboration with the MOEC, polytechnics, SMKs, and industry. UPI will become a professional certification body and a center for competency testing, able to provide IQF certificates. To address the need for more and better TVET teachers , the proposed separate TA will support the MORTHE and MOEC to develop a medium-term strategy to educate TVET teachers (footnote 16).

18. ADB added value. In addition to financing, ADB will add value by building links to industry in research and education. ADB will emphasize new technologies to improve relevance of education and research. ADB will improve quality assurance and monitoring of relevance of

16 A separate technical assistance (TA) is proposed to be financed by the Japan Fund for Poverty Reduction to support project implementation. The TA will assist development of centers of excellence and strengthen international networks. The TA will also support the development of the medium-term higher-education investment plan and the medium-term strategy to educate TVET teachers.

6 education and research, and strengthen collaboration with external and international partners from Australia, Germany, Malaysia, Singapore, and Taipei,China. In addition, ADB will also help incorporate green-building and climate-proofing design features. Through the separate TA, ADB will support the development of a medium-term higher-education investment plan (footnote 16). The project is fully aligned with ADB’s Strategy 2030 (Table 1).17

Table 1: Alignment with Strategy 2030 Strategy 2030 Priorities Project 1. Addressing remaining Improving education and training opportunities, upgrading the universities, and poverty and reducing establishing centers of excellence, which will lead to a greater number of graduates inequalities who are better-educated, more skillful, and more employable. 2. Accelerating progress in Providing campus facilities with gender-inclusive design elements, promoting female gender equality participation in male-dominated fields, and enhancing the quality of male and female graduates. Source: Asian Development Bank.

D. Summary Cost Estimates and Financing Plan

19. The project is estimated to cost $266.52 million (Table 2). Detailed cost estimates by expenditure category and by financier are included in the project administration manual (PAM).18 The major expenditure items are works, equipment, training, and consulting services.

Table 2: Summary Cost Estimates ($ million) Item Amounta A. Base Costb 1. Market-responsive program delivered 163.85 2. Training of TVET teachers improved 54.88 Subtotal (A) 218.73 B. Contingenciesc 22.19 C. Financial Charges During Implementationd 25.60 Total (A+B+C) 266.52 TVET = technical and vocational education and training. a The government will finance taxes and duties of $18.20 million through exemption. Such amount does not represent an excessive share of project cost. b In mid-2018 prices as of 3 July 2018. c Physical contingencies computed at 7% for civil works; and 7% for field research and development, training, surveys, and studies. Price contingencies computed at average of 1.5% on foreign exchange costs and 4% on local currency costs; includes provision for potential exchange rate fluctuation under the assumption of a purchasing power parity exchange rate. d Includes interest and commitment charges. Interest during construction for the ordinary capital resources loan has been computed at the 5-year United States dollar fixed swap rate plus an effective contractual spread of 0.5%. Commitment charges for the ordinary capital resources loan are 0.15% per year to be charged on the undisbursed loan amount. Source: Asian Development Bank estimates.

20. The government has requested a regular loan of $200 million from ADB’s ordinary capital resources to help finance the project. The loan will have a 19-year term, including a grace period of 6 years; an annual interest rate determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility; a commitment charge of 0.15% per year; and such other terms and conditions set forth in the draft loan agreement. Based on the straight-line method, the average maturity is 12.75 years, and there is no maturity premium payable to ADB.

17 ADB. 2018. Strategy 2030: Achieving a Prosperous, Inclusive, Resilient, and Sustainable Asia and the Pacific. Manila. 18 Project Administration Manual (accessible from the list of linked documents in Appendix 2).

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21. The summary financing plan is in Table 3. ADB will finance the expenditures for works, goods, information technology, staff training, consulting services, and operational costs for project management. The government’s contributions will cover works, goods, information technology, staff training, consulting services, studies, operational cost for project management, taxes and duties for project-financed items, and financing charges.

Table 3: Summary Financing Plan Amount Share of Total Source ($ million) (%) Asian Development Bank Ordinary capital resources (regular loan) 200.00 75.0 Government 66.52 25.0 Total 266.52 100.0 Source: Asian Development Bank estimates.

22. Climate mitigation is estimated to cost $2.3 million for solar panels in UNJA, and climate adaptation is estimated to cost $2.26 million.19 ADB will finance 100% of mitigation costs and 94% of adaptation costs. Details are in the PAM.

E. Implementation Arrangements

23. The implementation arrangements are summarized in Table 4 and described in detail in the PAM.

Table 4: Implementation Arrangements Aspects Arrangements Implementation period January 2019–December 2023 Estimated completion date 31 December 2023 Estimated loan closing date 30 June 2024 Management (i) Oversight body Project steering committee chair: secretary general of MORTHE; members: deputy minister of planning; director general, DGRSTH, MORTHE Planning Office; rectors of the four universities; and other directors general from MORTHE. (ii) Executing agency DGRSTH, MORTHE (iii) Implementing agencies UNIMAL, UNJA, UNRI, and UPI (iv) Implementation unit PMU under DGRSTH, PIUs at each of the four universities, with 35 total staff. Project management consultants will support PMU. Project management and construction supervision consultants will support PIUs. Procurement OCB-international 2 contracts $12.43 million advertisements OCB-national 31 contracts $164.01 million advertisements Consulting services QCBS 1,546 person-months $10.62 million ICS 24 person-months $0.17 million Advance contracting Advance contracting for works and consulting services is ongoing. Disbursementa The loan proceeds will be disbursed following ADB's Loan Disbursement Handbook (2017, as amended from time to time) and detailed arrangements agreed between the government and ADB. ADB = Asian Development Bank; DGRSTH = Directorate-General of Resources for Science, Technology and Higher Education; ICS = individual consultant selection; MORTHE = Ministry of Research, Technology and Higher Education; OCB = open competitive bidding; PIU = project implementation unit; PMU = project management unit; QCBS = quality- and cost-based selection; UNIMAL = University of Malikussaleh; UNJA = University of Jambi; UNRI = University of Riau; UPI = Indonesia University for Education. Source: Asian Development Bank.

19 Climate Change Assessment (accessible from the list of linked documents in Appendix 2).

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III. DUE DILIGENCE

A. Technical

24. The project design incorporates measures to mitigate risks related to climate change, pollution, and natural disasters. These measures include detailed engineering designs to address increased temperatures, and they meet or exceed earthquake codes, energy efficiency, and minimal-waste concept. Project designers have also modified campus designs to address seasonal flooding and to mitigate potential water shortages.

B. Economic and Financial

25. Economic analysis. The economic internal rate of return is estimated at 13%, which is above the 6% threshold for social sector projects. The principal benefits considered in the analysis were wages for graduates across different scenarios. Wages for SMK students benefitting from improved TVET teachers were also examined. The principal costs are civil works, equipment, opportunity cost of attending universities (wages to be earned by secondary-education graduates and out-of-pocket expenses), replacement of laboratory equipment, and recurrent costs including salary and maintenance. Analysis shows that the overall investment would remain economically viable in a range of contexts, including a 10% capital cost overrun and a 10% decrease in benefits.

26. Financial sustainability. The four universities are financed through an annual budget that includes nontax revenue from tuition and other income, and central government budget from tax revenue. The central government and the universities have committed adequate counterpart financing during implementation. Financing for post-implementation is expected to be sustainable. The government’s commitment to allocate at least 20% of the budget to education will ensure that the allocation is stable. Improving tax collection is a government priority and will minimize the risk that overall revenue increases too slowly to accommodate the post-implementation requirement from the central budget. Nontax revenue is expected to increase due to growth in student numbers and research activities.

C. Governance

27. Financial management. The financial management risk is moderate. The MORTHE and the universities have adequate financial management systems in place and have experience with implementing externally funded projects, although they do not have experience with ADB- financed projects. Delays in receiving budget allocations are possible as the annual allocation for all loan financing is capped. Delays can also occur because of the differing legal status of the universities, which forces them to use different financial management procedures. However, ADB, MORTHE, and the universities can mitigate these risks through close monitoring of expenditures, budget planning, prudent project planning, capacity development, and consultant support.

28. Procurement. The procurement capacity assessment concluded that the MORTHE and the four universities have the capacity to carry out the project, subject to the enforcement of fiduciary controls and timely decision making by the procurement committees in the universities. To strengthen procurement capacity, ADB and consultants will provide in-country support, advice, and training for the project management unit (PMU) and project implementation unit (PIU). The PMU will perform quality assurance to ensure that procurement complies with ADB guidelines and is carried out in a timely manner. An experienced procurement consultant will strengthen the PMU to coordinate and provide additional technical support and monitoring of the PIUs. All procurement of works, goods, and services will follow the ADB Procurement Policy (2017, as

9 amended from time to time) and the Procurement Regulations for ADB Borrowers (2017, as amended from time to time).

29. Anticorruption. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the government and the MORTHE. The specific policy requirements and supplementary measures are described in the PAM.

D. Poverty, Social, and Gender

30. As the government provides scholarship programs, more poor and disadvantaged youth are enrolling in higher education. Improved market orientation of programs, better TVET teachers in relevant subject areas, and increased enrollment will reduce youth unemployment. More women enroll in the four universities than men. However, transition to the labor market is more challenging for women in some disciplines. The project is categorized as gender equity theme, and a gender action plan has been prepared.20 The project will ensure (i) integration of gender- responsive physical design features into the construction of facilities in the universities (new day- care centers, separate and special-needs toilets, and safe and accessible buildings); (ii) fair participation of male and female staff in capacity development programs; (iii) conducting gender analysis and research with the university gender study centers; and (iv) training of TVET teacher instructors in gender-responsive and gender-inclusive teaching and learning methods.

E. Safeguards

31. In compliance with ADB’s Safeguard Policy Statement (2009), the project’s safeguard categories are as follows.21

32. Environment (category B). The project will develop lecture rooms, teaching laboratories, and other academic facilities across seven campuses of four universities. An initial environmental examination (IEE) was prepared and disclosed in accordance with ADB’s Safeguard Policy Statement and the applicable national environment requirements.22 The universities carried out meaningful consultations with stakeholders, including residents, university staff, students, and public and private local agencies. The IEE identifies environmental impacts and mitigation measures for construction and operations with regard to (i) waste management, (ii) air quality and noise, and (iii) occupational and community health and safety. The project is category B as environmental impacts are location-specific, can be readily mitigated, and the locations are not ecologically sensitive or high risk with respect to community health and safety. The PMU and PIUs will undertake environmental management and monitoring during implementation. The IEE proposes (i) capacity building for the PMU and PIUs, including consultant support; (ii) inclusion of an environmental management plan in bidding documents; and (iii) inspection and supervision during construction. At the detailed engineering design stage, the PMU will update the IEE to reflect the detailed design and national approval requirements and seek ADB approval. The PMU will ensure effective environmental monitoring at all stages of project implementation. University management, supported by PIUs, and the PMU will be responsible for any grievances.

33. Involuntary resettlement (category C). All universities will use land already within their campuses. Involuntary resettlement as per ADB’s Safeguard Policy Statement is not triggered.

20 Gender Action Plan (accessible from the list of linked documents in Appendix 2). 21 ADB. Safeguard Categories. 22 Initial Environmental Examination (accessible from the list of linked documents in Appendix 2) includes environmental audit for one unfinished building to be completed under the project.

10

34. Indigenous peoples (category C). No indigenous people live within the project area. Therefore, ADB’s Safeguard Policy Statement is not triggered.

F. Summary of Risk Assessment and Risk Management Plan

35. Significant risks and mitigating measures are summarized in Table 5 and described in 23 detail in the risk assessment and risk management plan. 1

Table 5: Summary of Risks and Mitigating Measures Risks Mitigation Measures The unfinished building in the Procurement will be subject to approval from ADB and the University of Malikussaleh may government, based on a structural assessment, an independent have hidden deficiencies. audit, and confirmation by the local public works office. The new design will mitigate potential deficiencies. Universities and MORTHE are not Project costing includes budget for additional salary for core PIU able to retain qualified and full-time and PMU staff and budget for hiring full-time additional support available staff for implementation, staff. Project management consultants will support PMU and PIUs. causing delays in implementation. Delays in budget allocation Disbursement planning for the project is closely coordinated with because of capped annual the MORTHE’s budget wing. PIUs manage project planning and allocation to loan-financed projects implementation to fully expend annual appropriations. Capacity for might cause delays in project management will be strengthened with consultant support. implementation. PMU and ADB will closely monitor. ADB = Asian Development Bank, MORTHE = Ministry of Research, Technology and Higher Education, PIU = project implementation unit, PMU = project management unit. Source: Asian Development Bank.

IV. ASSURANCES

36. The government and MORTHE have assured ADB that implementation of the project shall conform to all applicable ADB policies, including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement as described in detail in the PAM and loan documents.

37. The government and MORTHE have agreed with ADB on certain covenants for the project, which are set forth in the draft loan agreement.

V. RECOMMENDATION

38. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve the loan of $200,000,000 to the Republic of Indonesia for the Advanced Knowledge and Skills for Sustainable Growth Project, from ADB’s ordinary capital resources, in regular terms, with interest to be determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility; for a term of 19 years, including a grace period of 6 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft loan agreement presented to the Board. Takehiko Nakao President 2 November 2018

23 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).

Appendix 1 11

DESIGN AND MONITORING FRAMEWORK Impact the Project is Aligned with Income and productivity of the working age population increased (RPJMN, 2015–2019)a Data Sources Results Performance Indicators with Targets and and Reporting Chain Baselines Mechanisms Risks Outcome By 2025: Access, a. Cumulative enrollment increase of 20,000 (at a.–c. MORTHE Policy changes relevance, least 50% female) students from targeted database, influence the and quality of universities (2018 baseline: male: 45,900; universities’ government’s targeted female: 67,760) annual reports, commitment to universities and tracer higher and strengthened b. Average study duration for bachelor (S1) studies vocational students from targeted universities decreased to education. 55 months for male and 52 months for female (2017 baseline: 60 months for male, 56 months Changes in the for female) economy require different skills c. Average share of graduates of targeted that are not universities finding paid employment within 6 included in the months of graduation increased to 37.1% for programs. male and 34.4% for female (2018 baseline: 32.1% for male and 29.4% for female)b

d. Cumulative university accreditation score of d.–e. National the targeted universities increases to 1,442 Accreditation (2018 baseline: 1,305)c Board for Higher e. Cumulative program accreditation score of the Education targeted universities increases to 141 programs accreditation rated A (2018 baseline: 93 rated A) representing summaries 38% of all programs rated as A (2018 baseline: 27% rated A) Outputs 1. Market- 1a. UNIMAL, UNJA, and UNRI upgraded through 1a.–f. Progress Planned responsive constructing and equipping 33 new buildings, reports and activities may programs and finishing and equipping one unfinished routine not complete on delivered building (including gender-responsive,d inclusive, monitoring by time due to and sustainable infrastructure) by 2023 (2018 UNJA, delayed baseline: 0) UNIMAL, allocation UNRI, and 1b. At least 586 additional teaching, MORTHE Supported management, research, and support staff (of universities and which at least 40% women) of UNIMAL, UNJA, MORTHE are and UNRI trained, resulting in increased not able to retain understanding of market-responsive programs qualified staff for and research by 2023 (2018 baseline: 0). project implementation. 1c. At least 40 upgraded or new curricula delivered by UNIMAL, UNJA, and UNRI COEs by Coordination is 2024 (2018 baseline: 0) insufficient between MOEC 1d. At least 21 new research programs and MORTHE connected to the COE launched by UNIMAL, on implementing UNJA, and UNRI by 2024 (2018 baseline: 0) new models for

12 Appendix 1

Data Sources Results Performance Indicators with Targets and and Reporting Chain Baselines Mechanisms Risks providing pre- 1e. At least 65 additional training or service service and in- programs connected to the COE conducted by service SMK UNIMAL, UNJA, and UNRI by 2024 (2018 teacher baseline: 0) education.

1f. At least 21 additional memorandums of understanding with industry and other stakeholders signed by UNIMAL, UNJA, and UNRI, by 2023 (2018 baseline: 0)

2. Training of 2a. UPI upgraded by completing construction 2a.–f. Progress TVET and equipping six new buildings (including reports and teachers gender-responsive,d inclusive, and sustainable routine improved infrastructure) to become COE in TVET-teacher monitoring by education by 2023 (2018 baseline: 0) UPI and MORTHE 2b. At least 53 teaching, management, research, and support staff (of which at least 40% women), trained, resulting in increased understanding of designing and delivering accredited TVET- teacher-education programs by 2023 (2018 baseline: 0)

2c. Six new bachelor TVET-teacher-education programs established by UPI by 2023 (2018 baseline: 0)

2d. At least 240 SMK teachers (of which at least 40% women) at UPI completed in-service training programs, in collaboration with MOEC, polytechnics, SMKs, and industry by 2023 (2018 baseline: 0)

2e. At least 300 teachers and other participants (of which at least 35% women) certified by the Professional Certification Body and the Center of Competency Testing established in UPI by 2023 (2018 baseline: 0)

2f. At least two case studies on models to improve TVET-teacher education disseminated by UPI by 2023 (2018 baseline: 0)

Key Activities with Milestones 1. Market-responsive programs delivered 1.1 Complete detailed engineering design for selected civil works (gender-responsive, inclusive, and sustainable infrastructure) for UNIMAL and UNJA (Q1 2019). 1.2 Start procurement for first civil works for UNIMAL and UNJA (Q2 2019). 1.3 Start implementation of capacity development program for UNIMAL, UNJA, and UNRI (Q2 2019).

Appendix 1 13

1.4 Start development of revised curricula and research proposals in sustainable agriculture, sustainable natural resources management, and marine and aquatic science based on labor market needs (Q2 2019). 1.5 Start to arrange industry contacts in Sumatra (Q2 2019). 1.6 Start civil works (Q4 2019). 1.7 Start implementation of new education and research programs (Q3 2019). 1.8 Complete review of models used for COEs supported in UNIMAL, UNJA, and UNRI (Q4 2021). 2. Training of TVET teachers improved 2.1 Complete detailed engineering design for construction (gender-responsive, inclusive, and sustainable infrastructure) for UPI (Q4 2018). 2.2 Complete draft version of COE plan for TVET-teacher education (Q4 2018). 2.3 Complete first set of in- and pre-service vocational teacher and instructor qualifications and curricula (including module on gender-responsive and gender-inclusive teaching, learning, and evaluation methods) (Q4 2020). 2.4 Start implementation of capacity development plan for UPI (Q1 2020). 2.5 Start civil works (Q3 2019). 2.6 Assess models used to improve TVET-teacher education and identify which one can be put in practice (Q4 2019–Q4 2020). Project Management Activities Establish project management units and project implementation units (Q4 2018). Start recruitment of project management unit consultants (Q4 2018). Introduce new tracer study methodology and accreditation methodology to establish baseline and targets, and set monitoring and evaluation schedule; all data sex disaggregated (Q1–Q2 2019) Conduct midterm review (Q1 2021). Inputs Asian Development Bank: $200 million (regular ordinary capital resources) Government of Indonesia: $66.52 million Assumptions for Partner Financing: Not applicable

COE = center of excellence, MOEC = Ministry of Education and Culture, MORTHE = Ministry of Research, Technology and Higher Education, Q = quarter, RPJMN = National Medium Term Development Plan, SMK = senior vocational secondary school, TVET = technical and vocational education and training, UNIMAL = University of Malikussaleh, UNJA = University of Jambi, UNRI = University of Riau, UPI = Indonesia‐ University of Education. a Government of Indonesia, National Development Planning Agency (BAPPENAS). 2015. National Medium Term Development Plan (RPJMN), 2015–2019. Jakarta. b Baseline and target to be reconfirmed when the new tracer study tool is implemented in early 2019. ‐ c Baseline and target to be reconfirmed after introduction of new accreditation tool at institution level in early 2019. d Specific examples of gender-responsive physical design features are mentioned in the main text (para. 16). For more details, refer to the Gender Action Plan (accessible from the list of linked documents in Appendix 2), which specifies the features that will be integrated. Source: Asian Development Bank.

14 Appendix 2

LIST OF LINKED DOCUMENTS http://www.adb.org/Documents/RRPs/?id=50395-006-3

1. Loan Agreement 2. Sector Assessment (Summary): Education Sector 3. Project Administration Manual 4. Contribution to the ADB Results Framework 5. Development Coordination 6. Financial Analysis 7. Economic Analysis 8. Country Economic Indicators 9. Summary Poverty Reduction and Social Strategy 10. Risk Assessment and Risk Management Plan 11. Climate Change Assessment 12. Gender Action Plan 13. Initial Environmental Examination

Supplementary Documents 14. The Universities and the Local Economy 15. University-Industry Partnerships: Lessons Learned