Argentina - Higher Education Reform Project

Docment of The World Bank Report No. 13935-AR STAFF APPRAISAL REPORT ARGENTINA HIGHER EDUCATION REFORM PROJECT JUNE 12, 1995 Human Resources Operations Division Country Department I Latin America and the Caribbean Region  CURRENCY EQUIVALENTS Currency Unit - Argentine Peso (A$) Official Rate: US$1 = A$1 FISCAL YEAR January 1 to December 31 ACADEMIC YEAR March 15 to December 15 ABBREVIATIONS AND ACRONYMS USED AGN Auditorfa General de la Nacion CIN Consejo Interuniversitario Nacional (National Interuniversity Council) CIS Comite Internacional de Seguimiento (International Supervision Committee) CNA Comisi6n Nacional de Acreditaci6n (National Commision for Accreditation) CONEAU Comisi6n Nacional de Evaluaci6n y Acreditaci6n Universitaria (National Commission of Evaluation and Accreditation) CRUP Consejo de Planificaci6n de Universidades Privadas (Council of Private University Rectors) CSU Consejo Superior de la Universidad FEL Federal Education Law FOMjEC Fondo de Mejoramiento de la Calidad (Fund for Enhancement of Educational Quality) ICB International Competitive Bidding IDB Inter-American Development Bank LIB Limited International Bidding MCE Ministerio de Cultura y Educacion (Ministry of Culture and Education) NCB National Competitive Bidding OECD Organization for Economic Cooperation and Development PIU Project Implementation Unit PMSIU Programa de Mejoramiento del Sistema de Infornacion Universitaria RIU Red de Informaci6n Universitaria (Interuniversity Network) SOE Statement of Expenditures SUP Secretarfa de Poifticas Universitarias (Secretariat of University Policy)  ARGENTINA HIGHER EDUCATION REFORM PROJECT TABLE OF CONTENIS Page No. LOAN AND PROJECT SUMMARY ............................. i I. ECONOMIC DEVELOPMENT AND HIGHER EDUCATION ... ...... 1 A. Post-Adjustment Economy and Employment Needs ............... 1 B. Main Issues in the Higher Education Sector ................... 5 C Government Strategy ................................. 8 D. Rationale for Bank Involvement and Lessons Leamed from Previous Bank Experience ........................... 10 HI. THEPFROJECT ....................13 A. Project Objectives .13 B. Project Description .13 C. Project Management and Implementation .18 D. Monitoring and Evaluation .19 MI. PROJECT COST AND IMPLEMENTATION ................... 22 A. Project Costs ...................................... 22 B Financing Plan ..................................... 24 C. Status of Preparation ................................. 25 D. Implementation Schedule ............................... 26 E. Procurement ...................................... 26 F. Disbursements and Accounts ............................. 30 G. Audits .......................................... 32 IV. BENEFS AND RISKS ................................. 33 A. Benefits ......................................... 33 B. Risks ........................................... 33 C. Sustainability ...................................... 34 D. Poverty Category .................................... 34 E. Environmental Impact ................................. 34 V. AGREEMENTS REACHED AND RECOMMENDATION ............ 35 A. Agreements Reached ................................. 35 B. Recommendation .................................... 37  - ii - TABLE OF CONTENTS (Continued) ANNEXES: Annex 1: Data on the Higher Education Sector ....................... 39 Annex 2: National Commission for University Evaluation and Accreditation (CONEAU) .......... .................... 43 Annex 3: Fund for Enhancement of Education Quality (FOMEC) .... ........ 47 Annex 4: Institutional Organization of SUP and Location of Project Implementation Unit ......... .................... 53 Annex 5: Monitoring and Evaluation ........... ................... 54 Annex 6: Summary Cost Table . ................................ 63 Annex 7: Selected Documents and Data Available in Project File .... ........ 64 This report is based on the findings of activities and research financed by a grant from the World Bank, Project Preparation Facility (PPF 233-0-AR) and carried out between May and December 1994. An identification mission took place in January 1994, a preparation mission in May 1994, and an appraisal mission in November 1994. Members of preparation and appraisal missions carried out prior to and during this period are: William Experton (Iask Manager, LAIHR); Lauritz Holm-Nielsen (ESP); Hideki Mori (LA3HR); and Jean-Claude Martin, Huguette Haugades, Douglas Albrecht, Luis Secco, and Anita Artaza, consultants. Leain-Hong Ding, Shahrzad Gohari, Karla McEvoy and Patty Villagomez (LAlHR) provided assistance in the preparation of this report. The Department Director, Projects Adviser, and Sector Division Chief are, respectively, Gobind T. Nankani, Orville Grimes, and Alain Colliou.  -111- ARGENTINA HIGHER EDUCATION REFORM PROJECT LOAN AND PROJECT SUMMARY Borrower: Argentine Republic Implementing Agency: Ministry of Culture and Education Beneficiary: Not applicable. Poverty: Not applicable. Amount: US$165 million equivalent Terms: Repayable in 15 years, including five years of grace, at the Bank's standard variable interest rate. Commitment Fee: 0.75% on undisbursed loan balances, beginning 60 days after signing, less any waiver. Financing Plan: See paragraph 3.6 and Table 3.3. Net Present Value: Not applicable. Staff Appraisal Report: Report No. 13935-AR Project Identification Number: AR-PA-34091   ARGENTINA HIGHER EDUCATION REFORM PROJECT BASIC DATA SHEET A. General Country Data GNP Per Capita (US$, 1992) $6,109.4 Area (million km2) 2.8 Population Estimate (Millions) 32.3 Density (inhabitants/km2) 11.0 Urban Population 87.0 B. Basic Social Indicators Crude Death Rate (per 1,000) 7.9 Annual Rate of Population Growth (%) 1.4 Total Fertility Rate 2.8 Infant Mortality Rate (per 1,000) 25.7 Life Expectancy at Birth (years) Men 67.0 Women 74.0 Adult Illiteracy Rate (% of persons 18 and over) 5.0 Average Schooling of Adults (years) 8.5 C. Basic Education Enrollment Ratios (net): Preschool (Age 3-5) (%) 39.0 Primary (Age 6-13) (%) 90.0 Secondary (Age 13-18) (%) 56.0 a Higher Education Higher education enrollment in 1992 (public universities) 699,203 Higher education graduates in 1992 (public universities) 32,387 Enrollment ratios (Age 20-25) 20 E. Education Expenditure Data Public education expenditure in 1994 (in millions of current pesos) 10.822 Public expenditure on education in 1994 (as % of total public expenditure) 14.47 Total public expenditure by education level (1994): Primary and Secondary education 77.2% Higher education 22.8% Total public education expenditure as % of GDP 3.83% Higher education expenditure as % of GDP 0.91%   L ECONOMIC DEVELOPMENT AND HIGHER EDUCATION A. Post-Adjustment Economy and Employment Needs 1.1 Since Argentina has now emerged from the economic crisis of the late 1980s and has established a more solid base for sustainable development, the Government is turning its attention to addressing the large social deficits that if unattended could slow economic progress. Within the social sectors, the role of the education system in supplying the human resources required for faster economic growth and successful competition in global markets is crucial. As the economy shifts to more outward-looking policies, and attempts to integrate itself into Mercosur and other international markets, concern has heightened for developing a well-educated, highly-skilled and flexible labor force which, given the relatively high wage level, will allow the country to compete in the production of high value-added products and services. 1.2 In the next decade, two major trends will affect employment: (i) an expected strong expansion of the labor force in Argentina (over two percent growth per year), due to the growth of the working-age population which should exceed overall population growth (reversing a tendency which has been predominant since World War II) and an increasing participation of women (the current women's labor force participation level of 26 percent is low compared to countries with a similar level of development and the rest of Latin America); and (ii) a dramatic shift in employment as a consequence of the economic crisis and the restructuring and modernization of the economy. As a result, tensions in the labor market are expected to remain high. Unemployment in May 1994 was 10.8 percent (1.4 million unemployed out of an active population of 13 million) and has disproportionately affected young people and people with no education. Fifty percent of the unemployed are less than 25 years old, and in October 1993 in Greater Buenos Aires the unemployment level was 9.7 percent, but 11.1 percent for people without instruction compared to 11.4 percent for those having completed the primary level, 8.1 percent secondary and 3.5 percent higher education.' Although the share of large companies in total employment remains significant (15.5 percent of those employed are in firms of over 100 employees, and 34 percent are in firms of between 6 and 100 employees) there is a steady trend toward rising employment in small-scale enterprises (50 percent), and self-employment in the informal sector. The manufacturing sectors are declining, while services are employing a growing share (presently 65 percent) of total employment. Finally, Argentinean industry is characterized by a steady growth of productivity and profound sectoral changes in which competitive industries are booming and those which were protected by trade barriers or were subsidized are declining. 1.3 As competition for jobs increases, the skill level and the mobility of the work force become even more important: (i) in a labor market which is becoming more flexible and competitive; (ii) for services which require a higher level of educational attainment (services employ 80 percent of those having a university diploma, and half of service sector employees have completed secondary education, compared with 27 percent in the 1. Encuesta de Hogares, INDEC, 1993.  manufacturing sector); and (iii) to increase productivity in the existing industries and to favor the growth of more technological industries so that Argentina may remain competitive by counterbalancing the effects of high labor costs. Compared with neighboring countries, Argentina has the highest labor taxes and non-wage labor costs (48 percent compared to 38 percent in Brazil and 25 percent in Chile). Education Sector 1.4 Until the mid-1970s, Argentina had one of Latin America's most developed educational systems in terms of enrollment rates. Since 1980, there has been a dramatic expansion in access to schooling. Argentina has nearly attained universal primary education (primary education net enrollment ratio was 90 percent in 1991); secondary school net enrollment rate is 56 percent and about 20 percent of the age group 20 to 25 is in higher education.2 As a result, the Argentinean work force compares favorably relative to other countries of the region. In 1993, 8.6 percent of the working-age population had a higher education level, 27.1 percent secondary education, 54.9 percent a primary level of education and 9.3 percent had no education. On the average, women have a higher educational level than men.3 1.5 Argentina's population is less schooled, however, than those of countries with similar income levels. For instance, in 1985, although the average schooling years of Argentines over 25 years old was 6.6 (exceeding the LAC average of 4.4 years), Korea and Taiwan averaged 7.9 and 7.0 years respectively.4 Moreover, as a consequence of years of neglect and low and misdirected investment, the quality of the system has deteriorated. In secondary education, students' lack of learning is particularly acute. A 1992 survey carried out in Buenos Aires shows that in mathematics, on a scale of 0 to 6, 80 percent of secondary students scored under 3, and 22 percent scored 0. In Spanish, these proportions were 49 percent and 15 percent respectively. A 1993 nationwide survey showed that 40 percent of the students who completed secondary education did not read and write correctly. Hgher education's quality is declining as well, hampering Argentina's ability to compete internationally. Compared to Korea, Argentina's higher education system produces one-fourth fewer graduates per million inhabitants. The number of graduates is stagnating (33,000), and in some disciplines the situation is catastrophic: in 1993 only 40 students received a Master's degree in mathematics, 75 in physics, 65 in biology and 193 in computer sciences. 2. Censo de Poblaci6n, 1991. 3. INDEC, Encuesta Permanente de Hogares, May 1993. 4. R. Barro and J. Lee, "International Comparisons of Educational Attainment." World Bank, Washington, DC, 1993.  -3 - Higher Education 1.6 From 1981 to 1991, enrollment in higher education grew at an average rate of 7.4 percent, particularly after the 1984 reform which provided open admission to all secondary school graduates and allowed some disciplines (mainly humanities), to reopen as a result of the democratization process (see Annex L Graph 1). More recently, there has been a decrease of new entrants into national universities due essentially to underinvestment and low quality at the secondary level. Argentina's higher education sector currently has about 1.1 million students. This number is an approximation because statistics on enrollment provided by higher education institutions do not distinguish between active and non-active students. As part of the Education Ministry's efforts to improve planning mechanisms, a census was undertaken in September 1994; first results revealed that 615,796 students are enrolled in national universities. 1.7 The higher education sector consists of 75 universities (33 national, 5 provincial and 37 private); about 1,000 teacher training institutes; and about 500 technical institutes. While non-university institutions have increased their combined share (from 19 percent to 24 percent), more than three-quarters of students are enrolled in universities. Enrollment in the private sector represents a small share (13 percent) compared to neighboring countries (Brazil 60 percent, Paraguay 40 percent, Chile 30 percent, Ecuador 26 percent). Enrollment in private universities has been increasing, from 81,000 in 1983 to 101,000 students in 1992, whereas at national universities it has more than doubled, from 338,000 to 699,000 students. Since the 1993 decree opening higher education to private initiatives, however, 15 new private institutions have been created and enrollment in public universities is stagnating. 1.8 During the past decade, the relative importance of academic disciplines in public universities has changed dramatically. Natural sciences and engineering declined significantly (in total enrollment from 46 percent in 1982 to 36 percent in 1992, and among new entrants from 49 to 33 percent), while the social sciences are increasing their share (in total enrollment from 31 to 36 percent, and among new entrants from 29 percent to 40 percent). The relative shares of medical sciences (14.6 percent of enrollment and 14.1 percent of new entrants) and humanities (respectively 12.9 percent and 13.1 percent) are more stable (see Annex I). 1.9 Among national universities, eight major universities account for 80 percent of total enrollment and 85 percent of graduates. While the average size of national universities is about 24,000 students, the number of students at each university varies considerably, from 869 at the UniversidadNacional de Quilmes to 169,540 at the Universidad Nacional de Buenos Aires which represents 24 percent of enrollment and 34 percent of graduates.' The disparities are even larger at the post-graduate level. This dispersion can be attributed to two factors: disparities between provinces and the concentration of population and economic activities in the metropolitan areas of Buenos  - 4 - Aires; and government policy to establish at least one national university in each province regardless of population size (see Annex I, Table 1). 1.10 There is little reliable information on the socioeconomic background of students. However, the fact that more than 45 percent of the students' parents have less than secondary education shows the intergenerational progress. The Argentine university system is fairly gender-neutral. In public universities there are significantly more women students, new entrants and graduates (about 56 percent). On the other hand, the system appears to be economically inequitable. According to the 1994 census, 22 percent of students come from private secondary schools. Tuition-free higher education does not provide needy students with financial assistance for living expenses or purchase of learning materials. As a result, a significant proportion of students are forced to take employment, and proceed with part-time enrollment. More than half of the students have a job, 24 percent depend fully on this job for their living expenses, 29 percent mix resources from their parents and from their job. Only 0.3 percent are fully supported by a scholarship and 1.6 percent benefit from scholarships and resources from their parents. 1.11 During the last decade, the number of teaching positions has almost paralleled enrollment growth, doubling during the past decade from a little less than 53,000 in 1982 to over 101,000 in 1992. This makes the student/teacher ratio less than 7. However, considering the high percentage of part-time (67.4 percent) and half-time (21.2 percent) positions, the full-time equivalent ratio is estimated to be in the neighborhood of 13, a number which is closer to international standards. There are disparities among universities: the students/full-time equivalent teaching staff ratio tends to exceed 25 in the largest and most attractive universities, and to be lower in smaller universities, 6-8 on the average. 1.12 While the administration of primary and secondary education has been transferred to the provinces (in 1978 and 1992, respectively), the Ministry of Culture and Education (MCE) now has more significant responsibilities in higher education. A Secretariat for University Policies (Secretaria de Politicas Universitarias - SUP) was created in March 1993 (Decree 506/93). The major functions of SUP are to: (i) prepare policies for the development of universities and ensure that laws, regulations and norms are applied; (ii) define policies to assess the creation or the structural modification of curricula, programs or status and to accredit new institutions in the public and private sector; and (iii) design policies and instruments to assess and oversee the university system. Universities are autonomous institutions run by an elected council (Consejo Superior de la Universidad - CSU) consisting of representatives from faculty, administrative staff and students. Rectors are elected by an assembly comprised of the deans and faculty council for a period of three or four years. A National University Council (Consejo Interuniversitario Nacional - CIN) consists of representatives from national universities, and has been advising the MCE on education policy. 5. Figures are as of 1992, except graduates that are as of 1991. Based on data provided by Ministry of Culture and Education.  1.13 The higher education system is almost entirely publicly financed. Students pay no tuition fees and external resources are limited (estimated to represent 8 percent of total resources on average). In 1994 consolidated public expenditure on higher education accounted for 0.91 percent of GDP and 22.8 percent of the consolidated budget for education. Higher education, like other sectors, was severely hit by the economic crisis and hyperinflation. The higher education budget in real terms peaked in 1987, and had been on the decline until 1992 (990 million pesos). As a consequence, per-student public expenditure dropped sharply from US$2,800 in 1983 to the very low level of US$1,450 per student in 1992 (in Brazil, Chile, and Mexico it ranges from US$1,600 to US$1,800). With the improvement of federal public finance this tendency has been reversed and per student public expenditure rose to 2.267 in 1994 (the budget was US$1,243 million in 1993, US$1,395 million in 1994 and US$1,501 million in 1995). However, this budget increase has been essentially absorbed by salary increases. At the university level this situation has led to budgets in which on the average 97 percent is absorbed by salaries and operating expenses, leaving only 3 percent available for investment and development. (Annex I, Graph 2). B. Main Issues in the Higher Education Sector Institutional Problems of Sector Management 1.14 The newly-created SUP does not yet have the full technical capacity to coordinate reform implementation, guide budget allocations, evaluate institutional performance and disseminate information for students and professors. Since its creation in March 1993, SUP has recruited 190 staff and filled all the positions in its organizational chart. However, the new staff needs training and technical assistance to acquire necessary planning and management tools. 1.15 Lack of reliable information hampers planning and management capacity. Until 1994, even basic information such as enrollment, number of entrants and graduates, composition of students by discipline and composition of staff was not available. Information is generally limited to that provided by national universities. As a result: (i) very little information is available on private universities and on non-university education; (ii) data are not collected regularly on a homogeneous basis; and (iii) the quality of data is not sufficient to be used for planning activities and more specifically, for allocation of resources or evaluation of output. For instance, no distinction between active and non-active students is made and no data are available on inputs such as teaching hours, student cost, social origin of the student population, or demand for higher education. 1.16 In the absence of accreditation and evaluation mechanisms there is little incentive for quality improvement. Before 1994, no programs or institutions (except on an experimental basis) were subject to any kind of formal evaluation. This does not allow for regular review and revision of existing curricula and methods of delivery, which consequently might remain unchanged for decades. In the future, this would limit the validity of any resource allocation system based on quality. Furthermore, there is no  accreditation system for creating a new program or institution. Recently, a number of new programs, particularly at graduate levels, have been created in almost all the national universities without adequate control, leading to duplication in some disciplines and shortages in others. In addition, some new programs have been created without the resources needed (qualified instructors, basic research equipment, or adequate budget) to ensure minimum standards of quality. At the same time, once a program is established, it is not uncommon for it to remain even if there are no students. There is also a vacuum in the legislation for the newly-created private higher education institutions. 1.17 The higher education budget is inefficiently allocated, and largely beyond the control of the MCE. Since the creation of SUP, about eight percent of the total budget has been allocated to implement policies at the national level. The remaining 92 percent is still distributed between national universities through Congressional debate, which typically does not take into account data reflecting the specific situation of each university. There are no instruments or criteria on which decision-makers could rely to reorient the system toward more effective training, correct disparities, sanction poor performers or take into account sector-specific objectives in research or pedagogic enhancement. Consequently, disparities among institutions for the same kind of training are substantial, which leads to waste and inadequate distribution of resources, undermines efforts for improved management, and creates a disincentive for professors and students to perform well. 1.18 In most universities, governance mechanisms and management systems lack flexibility and the capacity to be efficient and adapt to a changing environment. On the one hand, decision-making in the Superior Council of the University (Consejo Superior de Universidad) is highly politicized and key managerial decisions are frequently disrupted by interest groups or ideological positions. In this often confrontational atmosphere, students who can get the majority of votes are often the strongest. On the other hand, many universities lack sufficient administrative tools and qualified personnel to produce timely and adequate information to make the managerial process more transparent. In generaL there are no clear objectives, development plans, or analytical allocation of resources between the different departments and no measurement of quality or efficiency. In addition, very few universities are able to mobilize external resources through tuition, sale of technology or other services, or joint ventures with private firms. Furthermore, since autonomy is only partial and the salary scale is standardized across the system, before the 1995 budget law universities were unable to provide incentives to promote efficiency among their staffs. Efficiency Issues 1.19 The internal efficiency of national universities is low and is declining. Available data indicate that only 19 percent of entrants actually graduate. In recent years the graduate/enrollment ratio has been below five percent (compared to Brazil, Chile or Mexico where the graduate/enrollment ratio ranges from 12 to 15 percent). This  very low efficiency rate inflates the cost of producing a graduate to an estimated level of US$30,000. During the past decade the number of entrants and enrollment increased (at about 11 percent a year) while the increase in number of graduates nearly stagnated from 27,000 in 1981 to 32,000 in 1991; as a consequence the graduate enrollment ratio dropped from eight percent to five percent (see Annex I). About 55 percent of the students take less than 3 credits a year when they would need 4 or 5 for a normal duration of their study. The tendency to prolong the duration of study as well as to perpetuate low graduation rates is stronger among natural science and engineering disciplines and in smaller universities (see Annex 1, Table 4). 1.20 There are several causes of low internal efficiency. First, because of open access and low cost, a great proportion of secondary school graduates who are not motivated or well-prepared to enter higher education enroll in universities and drop out or repeat during the first year. Second, excessively rigid and uniform undergraduate course design, combined with inadequate curricula and teaching methods, do not meet the expectations of students. Third, teaching methods are further adversely affected by insufficient complementary resources including libraries, computers and technical equipment in laboratories or classrooms for practical work. Fourth, there are few financial or academic constraints to taking a light course load every year. Consequently, students tend to prolong their studies and a significant proportion of students have a full-time job during the day and take only night courses at the university. The last census revealed that about 54 percent of students have a job (30 percent having a full time job), and that 35 percent of students study less than 20 hours a week Quality Issues 1.21 In most universities the composition and qualification of faculty is insufflicient to ensure good quality teaching. During the past periods of dictatorship, Argentinean universities lost a number of scholars and have been unable to renew the pool of qualified professors. As a result, the qualifications of teaching staff are very low, only 15 percent of professors possessing a graduate degree. Poor compensation makes it extremely difficult to recruit and retain adequately qualified personnel in the system. Teaching staff, who are paid on a single public salary scale, are poorly compensated. Full- time professors on the average earn US$2,000 a month and teaching assistants, US$1,200. Furthermore, only 11 percent of the teaching staff consists of full-time professors, and the majority of teaching is carried out by teaching assistants or part-time professors. Because of low salaries, most staff undertake multiple jobs and often are not available to students outside the classroom, nor do they have time to undertake research. The lack of appropriate performance standards and evaluation methods does not provide incentives for quality improvement. 1.22 The present level of physical resources is insufficient to provide the university students with an adequate learning environment. The university system has been attempting to cope with decreasing financial resources from the government by cutting back on capital investment. Capital investment has been as low as 3 percent of total expenditures on education in recent years. As a result, learning and research  materials and equipment have deteriorated and are a major constraint on improvement. Open-access libraries are insufficient and the number of volumes per student is low. Most of the existing technical equipment in laboratories is obsolete and teaching equipment is insufficient. The situation is particularly severe in the natural science and engineering fields, in which maintenance and constant renovation of equipment are necessary to keep up with progress in these disciplines. In general, buildings and equipment are insufficiently maintained. In some universities, several construction projects have not been completed because of lack of funding, and buildings have been left half-finished for a number of years. 1.23 In an environment in which universities do not have to compete for external resources, there is little incentive for them to diversify or introduce new programs which meet the needs of the economy. Except in very specific or vocational- oriented programs such as health, most universities have little interaction with the labor market. In general, there is no involvement of employers in program design or university management, there is no career counseling within universities, and the level of contracted activities with industry, be it for research, problem solving, or training, is very low. Little information is available to assess external efficiency, because of the absence of labor market or tracer studies of university graduates. Limited data on the labor market suggest unemployment among university graduates is lower than the general population (3.7 percent compared to 10.8 percent for the total population in 1994), probably because of the small number graduating every year and the strong demand of the economy for qualified people. This does not necessarily mean that those graduates correspond to the expectations of enterprises or that higher education contributes sufficiently to the country's ability in the long run to compete in international markets. C. Government Strategy Education Sector Strategy 1.24 To address the above issues, the Government has assigned high priority to the education sector with the aim of improving the coverage, quality and efficiency as well as the equity of education. The transfer of responsibility for secondary education to the provinces in 1992 (Law 24.049, January 1992) has changed the roles of the federal and the provincial governments, and has further stimulated the initiation of educational reforms. The first step in this strategy for reforming the educational sector was the passage of the comprehensive Federal Education Law (FEL, Law 24.195, April 1993) which sets out the objectives, structure, administration and financing mechanisms of the education system. More specifically, the FEL: (i) guarantees the right of Argentines to have access to education at all levels and establishes the principle of free basic education while allowing universities to supplement their publicly financed budget through other revenue sources; (ii) defines the responsibilities for providing educational services: provinces have the responsibility to finance and administer all pre-university education while the federal government provides policy guidance, establishes minimum curricular content at all levels and finances universities; (iii) defines the role of the private sector and its rights and obligations in providing educational services; (iv) establishes a new structure  -9- for the education system which increases compulsory education from seven to 10 years (one year of preschool and nine years of general basic education), reducing the secondary school cycle to three years and reorienting it to a new curriculum integrating knowledge in four cluster areas (humanistic, social, scientific and technical); (v) for higher education, defines the respective roles of teacher training and technical institutes and universities; and (vi) stresses the importance of public investment in education, requiring that education budgets be either doubled gradually with an annual increase of 20 percent starting in 1993, or be increased by 50 percent as a share of GDP - i.e., from four percent to six percent of GDP - whichever results in a larger increase in the education budget. Higher Education Strategy 1.25 In higher education the Government strategy is to: (i) improve the legal and regulatory environment specifically for the creation of new institutions and programs in the private and public sectors, for university management and for quality evaluation; (ii) create incentives and support the initiatives and investments which could increase the efficiency and quality of universities; and (iii) improve the allocation of resources within universities and support the initiatives to diversify resources. A Higher Education Policy Letter which the Bank has received summarizes this strategy. 1.26 As part of this strategy, SUP has presented to Congress a Higher Education Law which: (i) specifies the conditions for students to gain access to higher education; (ii) assigns to the provinces the responsibility for non-university education (teacher training and technical institutes) and to the federal level the responsibility for universities; (iii) defines the objectives of higher education and the respective roles of each kind of institution, establishing a common legal framework for private and public institutions, including evaluation and accreditation; (iv) provides universities with full autonomy for their administration, internal resource allocation (including the creation of new programs and curriculum design), staff management, and conditions of student access, thus opening up the possibility for universities to diversify their resources; (v) improves the governance of higher education institutions, allowing more participation (a minimum of 50 percent) by teaching staff in elected boards and limiting students' right to vote to active students; and (vi) defines the roles of the federal government (for planning, financing and monitoring) and of the various consultative agencies (CIN, Consejo Interuniversitario Nacional; CRUP, Consejo de Rectores de Universidades Privadas; and Regional Councils for University Planning, Consejos de Planificacion Universitaria Regional). This law was adopted by the Chamber of Deputies on June 7, 1995. and is expected to be approved in 1995. A final vote of the Senate is expected shortly, which will enact the law. 1.27 Since its creation in March 1993, SUP has carried out measures which facilitate implementation of the higher education law, once passed: (i) as a first step to test the evaluation and accreditation process, nine universities and five post-graduate programs have been evaluated; (ii) an incentive system for teaching staff to undertake research was implemented for the first time in FY94 (11,500 professors have benefited, with a budget of US$42 million) and is being pursued in FY95 (with a budget of US$70 million); (iii) in 1994 a new student loan scheme was put in place which is managed by a commercial Bank  - 10- instead of a Governmental institution, and the budget (US$10 million) was doubled in 1994; 1,300 students benefited from this program; (iv) most of the barriers to the creation of private higher education institutions were removed in 1993 by a decree (No. 2330), leading to the creation during the same year of 15 new institutions in addition to the existing 21; (v) initiatives have been taken in collaboration with the CIN to improve the curriculum (as a first step, a curriculum reform of engineering studies is under preparation which will reduce the duration of studies from six to five years and make the content more consistent from one university to another); (vi) the 1995 Budget law decentralizes to each university the decision of fixing the salary levels of their staff, (vii) a university management information system has been initiated by a May 1993 decree (Programa de Mejoramiento del Sistema de Informaci6n Universitaria - PMSlU), which has significantly expanded the availability of key sectoral information and includes a student census launched in September 1994, as well as a database on university personnel created in June 1994; and (viii) beginning in FY94 a share of the universities' budget is being allocated for investment through competitive mechanisms and through a formula which rationalizes allocations (equivalent to 1.57 percent of the total budget or about 40 percent of the universities' investment budget). D. Rationale for Bank Involvement and Lessons Learned from Previous Bank Experience Rationale for Bank Involvement 1.28 Bank involvement in the proposed project fully supports the overall country assistance strategy which was discussed at the Board on May 4, 1995: to sustain economic growth, to complete the reform of the state, enhance the competitiveness of the Argentine economy, reduce poverty, and improve the quality of human resource investment. The proposed project aims to: (i) improve the quality and efficiency of a sector which is key to maintaining competitiveness in an outward-oriented economy; (ii) complement the reform process of the education sector (supported for primary and secondary education by the Inter-American Development Bank (IDB) and the Bank, respectively) by rationalizing higher education spending and helping to channel more resources to basic and secondary education; and (iii) strengthen the greatly weakened institutional base and helping the government to overcome difficulties of introducing reforms in a highly complex sector. This project will assure the continuation and consolidation of initiatives and reforms already undertaken by the Argentinean Government. Furthermore, the project will establish permanent mechanisms which will ensure sustainable improvement of the higher education system. Lessons Learned 1.29 The project incorporates lessons learned in recent lending operations in Argentina's social sectors, including the Social Sector Management Technical Assistance Loan (Ln. 2985-AR, approved in 1989) the Maternal and Child Health and Nutrition Project (Ln. 3643-AR, approved in 1993), and Decentralization and Improvement of Secondary Education Project (Ln. 3794-AR, approved in 1994). The  - 11 - factors affecting projects in Argentina are essentially: (i) institutional weaknesses; (ii) lack of political commitment to fulfill the objectives of the project; and (iii) implementation delays caused by unfamiliarity with Bank procedures, common in social sectors in which investment projects are relatively new. The case of Argentina confirms lessons learned from Bank projects in the education sector: (i) institution - building should remain a central goal of Bank assistance; (ii) success depends on effective policy dialogue and sound implementation procedures; (iii) experience with project implementation confirms the advantage of simple projects with realistic time schedules and appropriate covenants; and (iv) the project should include appropriate monitoring and evaluation, so that progress toward goals can be assessed. 1.30 Other lessons of experience have been identified in higher education projects. More specifically: (i) the failure to understand the complex, unique and autonomous nature of universities and the potential impact of their internal politics on the project; (ii) the need to implement changes gradually by reaching consensus on reforms, creating a more competitive environment at the same time by providing incentives for improvement; and (iii) an insufficient assessment of the links with the labor market due to the absence of comprehensive labor market data. The Argentinean higher education reforms are in line with the sector policy reforms as recommended in the Bank's policy paper on Higher Education: The Lessons of Experience (Development in Practice, World Bank, May 1994) and include measures to: (i) allocate public resources to higher education transparently and in ways that strengthen quality and increase efficiency; (ii) introduce cost-sharing and other financial diversification measures; (iii) establish a positive environment for private institutions; (iv) provide autonomy for higher education institutions in how they raise and use resources and determine student intake; and (v) increase the quality of training and research by increased teaching inputs, teacher training, and mechanisms to evaluate and monitor the quality of training and research outputs. In addition, the design of the project takes account of the experience of similar higher education projects in Indonesia, Romania, and Tunisia, as well as the implementation of the Second Science Research and Training Project (Ln. 3269-BR) in Brazil. 1.31 The following lessons have been incorporated into the proposed project at the initial phase of its design: (i) Project Ownership: The sense of project ownership in SUP is strong because the scope and content of the proposed project fully support its policy orientations and reflect its initial proposal. Considerable attention was paid during the preparation process to extending this sense of ownership to universities and the academic community: (a) there has been a strong participation of professors and deans in the various studies and consultative committees; (b) universities have volunteered to participate in the evaluation process; and (c) each component of the project was agreed with the CIN and at appraisal the final project was discussed with all the rectors; (ii) Project Design: Project design emphasizes a greater reliance on incentive instruments to implement policies. The experience of OECD countries shows that the behavior of autonomous universities can be influenced most effectively by improving the availability of information and modifying the way resources are allocated. Therefore, the proposed project relies heavily on two instruments: (a) an information and evaluation system that provides transparent and objective information to the different actors - students, managers and teachers; and (b) an  - 12 - allocation system which provides incentives for efficiency, thus creating a more competitive environment; (iii) Institutional Weakness and Project Implementation: From the earliest stage, the preparation process has aimed for the creation of a strong institutional base backed by the borrower's full cooperation and involvement. The PPF approved for project preparation (see also para 3.7) has largely contributed to the strengthening of SUP technical capacities, helping it to bridge the time necessary for SUP to recruit staff. In implementing the PPF the staff of the PPU has gained considerable experience in Bank procedures (especially procurement, disbursements, and the management of a Special Account). To ensure continuity the same PPU will be transformed into a Project Implementation Unit located within SUP. In addition, most of the tasks included in the first component aimed at institutional strengthening have been initiated during the preparation process. Finally, to facilitate project implementation and disbursement, much attention was given to the simplification of project design.  - 13 - II. THE PROJECT A. Project Objectives 2.1 The principal objective of the project is to establish a competitive environment for the improvement of higher education and to provide, through a transparent funding mechanism, the appropriate incentives for continuous educational efficiency gains and quality enhancement. The project would support the implementation of legal, management and administrative reforms that SUP has recently initiated in the university system. B. Project Description 2.2 To achieve the above objectives, the project would have two components: (a) the institutional strengthening of SUP in the areas of planning and management, information systems and budgetary resource allocation, as well as the creation and support of a national evaluation and accreditation mechanism (Comisi6n Nacional de Evaluaci6n y Acreditaci6n Universitaria - CONFlAu). (b) the Fund for Enhancement of Educational Quality (Fondo de Mejoramiento de la Calidad, FOMEC) which would provide incentives to universities, through a competitive and transparent process, to promote: (a) in basic sciences and engineering, quality and efficiency improvements at the graduate and undergraduate levels, through technical assistance for curriculum and program changes, the support of visiting professors, the provision of scholarships and the financing of laboratories, teaching equipment and libraries; and (b) in all disciplines, quality improvement at the graduate level through the provision of scholarships for teaching staff and students at the graduate level, visiting professors and the renovation of libraries. Institutional Strengthening Component 2.3 The Improvement of the Planning and Management Capacity of SUP (US$2.2 million). This component would finance the following base cost measures: (i) the training of 50 staff members each year locally and overseas study tours for a total of 50 persons for the duration of the project have been programmed; (ii) four studies to diagnose, design and reorganize the private sector monitoring system, the filing system, the accountancy system, and the legal services; (iii) the technical assistance (50 specialist months for the duration of the project) to prepare and supervise the training program and to provide expertise in university planning; (iv) a documentation center including the rehabilitation of space, books and periodicals on higher education, and office equipment; (v) the rehabilitation of 50 offices including  - 14 - furniture and office technology; and (vi) the organization of seminars on university management. 2.4 National Commission for University Evaluation and Accreditation - CONFAV)(base cost US$10.2 million). The project would support the establishment and the operating cost of CONEAU to: (i) promote the process of self-evaluation by public and private universities; (ii) consolidate and extend the external evaluation of the universities; and (iii) accredit the undergraduate programs of public interest (such as medicine and law), and graduate studies in all disciplines. This accreditation is necessary for accessing the funds provided through FOMEC (see para. 2.12 below). CONEAU expects to process about 950 demands for accreditation of graduate programs, to evaluate externally 75 university programs, to train 130 evaluators, to prepare and publish 16 manuals for evaluation for the duration of the project, and to organize one seminar each year. The CONEAU would be established by decree as a condition of effectiveness. The CNA (Commission for Accreditation of Graduate Programs) was established as a temporary institution for the time necessary to pass the Decree in order to start up the accreditation process. 2.5 The institutional structure of CONEAU is composed of: (i) a National Commission for Evaluation and Accreditation, composed of 13 members of different origins to guarantee its independence (five will be designated by the CIN, three by the Council of Private University Rectors, three by the Congress, one by the National Academy of Education and one by the Ministry of Culture and Education); (ii) peer review committees made up of six Argentines and two foreigners for each of the eleven disciplines;' (iii) an executive director supported by three departments of Evaluation and Accreditation, Institutional Development, and Administration. The staff will consist of 24 people, of which five would be transferred from SUP. The salaries of the permanent staff will be supported by counterpart funding. 2.6 The methodologies for self- and external evaluations of the universities, and the framework for accreditation of the postgraduate courses are already developed. These methodologies are based on the experience of the evaluation of nine universities as well as the accreditation of four graduate programs. Further steps include: (i) the formal establishment of CONEAU by enabling decrees; (ii) the appointment of the Executive-Director and the designation of the members of CONEAU; (iii) the establishment of a committee in each of the 11 disciplines; (iv) the publication and dissemination of CONEAU procedures to universities and professors; and (v) the evaluation 1. Agriculture, veterinary medicine, and forestry; azhitectue, environment, and urban and regional development; basic sciences; philosophy, litenture and art; engineering, tochnolgy and informatics; law and international relations; health; social ciences; education and psychology; land, watr and atmosphere; and economics and public and privat sdministmtion.  - 15 - in 1995 of 20 graduate programs. (For a more detailed description of CONEAU, see Annex 2). 2.7 Information and University Budget Allocation System for SUP Sistema de Iqfonnacion y Asignacion de Recursos (SLAR) (base cost US$7 million). The project would support the design and use of a system-wide technologically modem management information and statistical data system that would integrate the various modules (such as educational statistics, financial information, physical inventory, and human resource management) needed in decision-making by SUP management. SIAR would also provide adequate data and system compatibility to link up with the statistical systems of different universities. The statistical data provided by universities is processed in SUP by the Directorate for Information and Statistics, which would include 20 staff. This component would finance for SUP and the universities the following: (i) computer equipment, printers and software (50 servers and 635 workstations); and (ii) training for SUP and university staff (1200 hours of training for the duration of the project). 2.8 A new objective method of allocating budgets between universities is being developed and would be adopted during the implementation period of the project. The formula would take into account the unit cost per student in each discipline as well as efficiency and equity considerations, in addition to university size. As a first test, a formula based on active students and efficiency indicators has been applied to 1.57 percent of the FY94 university budget. During project implementation, the allocation system will be improved and gradually applied to the incremental part of the budget, with the objective of reaching 50 percent of the budget by 1999. 2.9 A methodology is being developed to measure the economic cost of university operations, which would be necessary to finalize the proposed allocation formula. An operational manual would be developed that would elaborate on the definition and classification of the variables of cost and would describe institutional mechanisms for implementing the methodology. Technical assistance would be provided by SUP to universities for determination of their costs. The project would essentially finance technical assistance and studies to conduct simulations to test the distributive effects -among universities-- of the adoption of altemative allocation formulas, measure cost in each discipline, and assess the impact of the new allocation system on efficiency. In addition the studies in 1997 and at the end of the project will be financed to measure the impact of the project on quality. 2.10 Inter-university Network Red de Informacion Universitaria (RIU) (base cost US$1.8 million). The project would finance the development of a network system for establishing scientific communication and technical data links with accepted international standards, and for exchanging library information between the departments and libraries of different  - 16 - universities. SUP has already invested US$2.95 million to create this network. An agreement has been signed between SUP and the participating universities which specifies that they will provide the staff to operate and maintain the system, and that they will support its operating costs during at least three years except for the six first months of operation. The universities of Buenos Aires, La Plata, Cordoba and Cuyo would constitute the high-speed central network on which SUP would gradually be connected to the 29 other universities. The network is expected to be fully operational by the end of 1995. The project would finance: (i) the equipment and connections for the universities of the central network as well as for the other users; (ii) the training of the staff in charge of operating and maintaining the network; and (iii) the operating cost of the network during the first six months. FOMEC 2.11 FOMEC is a policy instrument of SUP to finance quality and efficiency improvement in universities through competitive and transparent selection procedures. FOMEC was established on March 23, 1995, by decree No. 408, as a permanent instrument. Its resources, originally supported through Bank financing, would be gradually replaced by federal, provincial or other resources. SUP will allocate to FOMEC US$70 million, representing the share of the FY95 budget devoted to the incentive program for teaching staff to undertake research. The objective is to gradually increase this base of annual national funding by US$60 million at the end of the project in 2001. All grants which would be provided for the costs of fellowships, visiting professors, laboratory or teaching equipment, rehabilitation of libraries or books would be awarded on a competitive basis through proposals submitted by universities to FOMEC and evaluated and selected by Committees. FOMEC would allocate grants to public universities. A standard subproject agreement will be signed before loan effectiveness between SUP and the universities which would be funded by FOMEC Operating procedures for FOMEC, together with eligibility and selection criteria, are summarized in Annex 3. 2.12 Within the project, FOMEC would increase quality and efficiency in three major respects: (i) at undergraduate and graduate levels in basic sciences and engineering; and (ii) at graduate level in all other disciplines. The size of FOMEC has been determined through an assessment of the needs in each discipline.2 FOMEC would finance only 40 percent of the potential needs in order to ensure a satisfactory level of competition among 2. During the preparation process seven studies in basic sciences and engineering were financed by the PPF to identify, in each discipline, the potential for development, the quality issues and the needs for training and equipment. In addition a specific study on graduates progmams has been realized in all disciplines. The conclusions of those studies have been assessed by scientific committees in all disciplines.  - 17 - universities as well as a sufficient impact; and (iii) the capacity of universities to provide counterpart funding (universities are investing about US$75 million a year from government budget allocations). In coordination with CONEAU, FOMEC would progressively contribute to restructuring and increasing the efficiency of the graduate level in the Argentinean higher education system, creating in each discipline a limited number of high quality programs supported by a critical mass of well-trained staff with state of the art equipment. These units would serve as models and centers of excellence in the higher education system. On the whole, about 200 are expected to be selected out of a total of 767 existing graduate programs (in all disciplines) and would be distributed among institutions. Undergraduate programs in science and engineering would be financed only when the necessary faculty upgrading and curriculum changes have taken place. The centers of excellence would serve as resource centers for faculty training and curriculum development. A total of 19,700 students are studying in graduate programs, of which about one-third are part-time assistant professors in public universities. The potential demand for graduate courses is estimated to be about 10,000, of which 4,700 are in basic sciences and engineering and 5,300 in other disciplines. 2.13 FOMEC organizational structure and management (base cost US$5.4 million). FOMEC is a semi-autonomous body within SUP. It is principally composed of: (a) an Executive Council of five members; (b) an Executive Directorate (ED) supervising three Departments in academic, administrative and programming areas; (c) two Advisory Committees (AC) for each main orientation of FOMEC; (d) Peer Review Committees constituted on an ad hoc basis in six major disciplines; and (e) an International Supervision Committee (Comite Internacional de Seguimiento - CIS). The organizational structure and functions of FOMEC are set forth in the Operation Manual of FOMEC, which was agreed during negotiations. The executive structure would employ 18 staff (of which eight are support staff) who will be assigned to SUP. Advisory committees, Peer Review Committees and the Intemational Supervision Committee consist of consultants paid on a day to day basis. FOMEC allocation process has three stages: (i) the Academic and Administrative Coordination Departments verify that subprojects meet the eligibility criteria; (ii) subprojects are ranked by the Advisory Committees, based on priority criteria with the assistance of the peer review committees for the academic assessment; and (iii) the Executive Council makes a decision on financing. The project would finance all the recurrent costs (including salaries of permanent staff) during the first year of implementation, and afterward only the salaries of consultants participating in the Committees, plus incremental operating expenditures and office technology. (see Annex 3 for a more detailed description of FOMEC). 2.14 Basic Sciences and Engineering program (base cost US$164.5 million). In basic sciences (biology, physics, computer sciences, mathematics and chemistry) and engineering FOMEC would provide resources to improve  - 18 - the quality of the academic program as a whole, linldng the provision of inputs such as visiting professors, scholarships and training, laboratory and teaching equipments or rehabilitation of libraies to curriculum changes and efficiency improvements (for instance, engineering studies will be reduced from six to five years and the curriculum redesigned to take into account the evolution of labor market and technological changes). While universities may present subprojects that involve only one aspect of quality improvement, priority would be accorded to the more integrated subprojects encompassing all aspects of the quality improvement in a particular discipline. The average size of a university proposal would be between US$100,000 and US$1 million. 2.15 The distribution among various disciplines has been estimated to be approximately 12 percent for biology, 15 percent for physics, 9 percent for computer sciences, 6 percent for mathematics, 12 percent for chemistry, 36 percent for engineering and 10 percent for agricultural engineering. This program would finance about: (i) 1,200 scholarships, of which 32 percent would be at the doctorate level and 68 percent at the graduate level (in addition, in mathematics about 100 undergraduate scholarships will be provided); 87 percent to study in Argentina and 13 percent in a foreign country through twinning arrangements between universities; 31 percent for students; and 69 percent for professors (under the age of 35); (ii) 376 months of foreign visiting professors; (iii) 950 standard laboratory equipment packages at the undergraduate level and 150 at the graduate level; and (iv) 2,500 months for trainees in Argentina and 300 in foreign countries. 2.16 Humanities, Social Sciences, and Health Sciences graduate education programs (base cost US$73.9 million). In these disciplines, the objectives of FOMEC would be to improve the quality of the teaching staff by consolidating graduate programs and creating an environment conducive to research essentially through the provision of scholarships, the rehabilitation of libraries and visiting professors. As in the programs for basic sciences and engineering, only graduate programs which have been accredited by CONEAU can gain access to FOMEC. The extent of the support available through the project would depend on the classification that is received. 2.17 Out of a potential of 5,300 students at the graduate level in these disciplines, this program would support 2,420 scholarships during the project. Eighty percent of these scholarships would be for local study and 20 percent for study abroad. A total of 275 months of visiting professors would be financed, and 60 libraries would be rehabilitated. C. Project Management and Implementation 2.18 Project Implementation Unit (PIU)(base cost US$4.1 million). The project would be carried out by a PIU within the newly established organizational structure of SUP. The PIU is under the direct responsibility of  - 19 - the National Directorate of Finance and University Information which was established in September 1994 for a minimum of five years. A qualified Project Coordinator was selected in consultation with the Bank prior to negotiations, and will report to the Secretary for University Pblicy through the National Director of Finance and University Information. The PIU would be structured around three major responsibilities: (i) procurement; (ii) monitoring and supervision; and (iii) administration and financing. Each of the universities selected for participation in the FOMEC program would correspondingly designate a formal counterpart to oversee project execution and administration, and liaise with the PIU The PIU would consist of 15 staff (of which seven would be support staff) supported by the project. Most of this staff comes directly from the PPU (Project Preparation Unit) set in place in March 1994. In addition, the following activities would be financed under the project: (i) regular visits to universities; (ii) training related to project administrative and technical assistance specifically for the impact analysis included in project supervision and monitoring; (iii) office technology; and (iv) operating costs. 2.19 The PIU would ensure coordination with the Bank and with other agencies and universities, and would be responsible for (i) directing, coordinating, and supervising overall project implementation; (ii) monitoring project execution according to the implementation schedule and project monitoring and evaluation indicators; (iii) implementing procurement-related activities according to procedures acceptable to the Bank; (iv) timely submission to the Bank of disbursement-related administrative requirements; (e) preparing semi-annual Progress Reports in a format acceptable to the Bank to assist in project supervision; and (v) preparing and furnishing to the Bank, not later than six months after the closing date, an evaluation report describing in detail the implementation experience of the project, in a format acceptable to the Bank (See flow chart in Annex 4 describing the position of the PIU in the organizational structure of SUP). D. Monitoring and Evaluation 2.20 Monitoring and evaluation activities would be carried out for the: (i) project as a whole, to evaluate the effectiveness of each of its components with respect to their individual objectives, to monitor its overall impact on quality and efficiency in higher education in line with progress in implementation of the reform and to assess the performance of the PIU in managing the project; (ii) FOMEC, to verify the transparency and objectivity of its evaluation and selection procedure and assess the impact of FOMEC sub-projects on improving quality and efficiency in universities; and (iii) individual FOMEC subprojects in each beneficiary university. At these three levels specific input, process and outcome indicators would be used. (See the list of indicators in Annex 5). The key indicators for project monitoring evaluation and performance were finalized at negotiations.  - 20 - 2.21 Monitoring and supervision activities would consist of: semi- annual supervision missions, an annual progress review, a Mid-Term Project Implementation Review, and an implementation completion review, as outlined below: (a) Bank supervision missions would be conducted at least twice a year and are expected to: (i) review financial and contracting processes; (ii) assess the progress made in implementing each component; (iii) address specific implementation issues; and (iv) visit some participating universities. (b) An annual progress review would be conducted jointly by the PIU and the Bank no later than June of each year. This review would analyze the previous year's performance and budget execution, propose a work plan for the following year and discuss any adjustments to be made in the project's implementation schedule. The annual progress report consolidated by the PIU and sent to the Bank no later than May of each year would include: (i) a summary of project activities including input and process indicators; (ii) a summary of financial and physical commitments for each component and program as compared with the original plan; (iii) a summary of the implementation issues; (iv) an updated and reviewed project implementation schedule together with action plans for the implementation of project components during the subsequent year; and (v) the expected budget contribution to cover the investment and recurrent costs of the project for the next fiscal year. (c) A Mid-Term Review would be held no later than 30 months after the date of effectiveness of the proposed Loan. This review would focus on, inter alia: (i) project activities in terms of outcome indicators and the progress in reaching project objectives; (ii) an assessment of the compliance with the Loan Agreement's legal covenants and adequacy of counterpart financing; (iii) an assessment of FOMEC and its procedures, including an evaluation of a sample of grants awarded; and (iv) compliance with procurement and disbursement arrangements specifically at the university level. (d) An Implementation Completion Report would be compiled by the PIU within 6 months of the closing date of the loan, and would summarize, inter alia: (i) project components and programs in terms of input, process and outcome indicators; (ii) assessment of FOMEC effectiveness; (iii) sectoral overview of higher education and impact analysis of the project; (iv) the project's financial status; and (v) implementation issues and recommendations.  - 21 - 2.22 Supervision of FOMEC. The CIS will be made up of seven members and will supervise and evaluate the status of FOMEC subprojects and programs once a year. Specifically, the CIS would: (i) evaluate the results achieved by FOMEC and their impact on quality and efficiency improvement in universities; (ii); review the institutional performance of FOMEC, including the verification of the transparency and objectivity of its evaluation and selection procedures; and (iii) formulate concrete recommendations to improve the selection procedure and criteria, and even redirect FOMEC or certain categories of its funding. In addition, FOMEC will be externally audited by auditors satisfactory to the Bank. These reports would serve as a basis for joint decisions by SUP and the Bank on further courses of action during implementation of the project.  - 22 - 1mI. PROJECT COSIS AND FINANCING A. Project Costs 3.1 The total cost of the proposed project is estimated at US$273 million equivalent, including contingencies. Project costs include the refinancing of amounts disbursed under the US$1,262,000 Project Preparation Facility advance (P233-0-AR) and any accrued interest thereon. Thble 3.1 summarizes the estimated costs by project component and category of expenditure. Detailed costs by year, purpose and component are given in Annex 6. 3.2 Base Costs. Baseline costs have been estimated in November 1994 prices. Costs for international and domestic consultants are in line with recent education projects for appropriately qualified experts. The unit cost for visiting foreign professors has been estimated to be, on average, US$5,000 per month, and US$3,000 in the case of exchanges of professors. Annual scholarships including tuition fees in local universities have been estimated to be US$6,000 at the undergraduate level, US$13,500 at the graduate level, and US$15,000 at the post-graduate level and for overseas studies on average, from US$20,000 at the undergraduate level to US$23,000 at the post-graduate level. The unit cost for trainees has been estimated to be US$1,000 a month. Equipment packages for laboratories in Basic Sciences and Engineering are estimated to range between US$30,000 and US$100,000, according to the discipline and the complexity at the undergraduate level, and between US$20,000 and US$200,000 at the graduate level. Computer equipment for libraries has been estimated between US$12,000 to US$25,000 according to their size, and grants for books and publications have been estimated at US$13,000. 3.3 Contingency Allowances. Provision for price and physical contingencies has been limited to institutional components. No contingencies were used for the FOMEC fund. Physical contingencies (US$0.5 million) represent 0.2 percent and price contingencies (US$3.2 million) 1.2 percent of base costs. Physical contingencies amount to 5 percent of base costs for minor rehabilitation works, goods, equipment, and materials, and 3 percent for fares and per diem. No physical contingencies were considered for consultant services/studies, training, scholarships, and incremental salaries and other operating costs. In accordance with recent estimates, foreign price contingencies were assumed to be 1.5 percent for 1995, 1.8 percent for 1996, 2.6 percent for 1997, and 2.5 percent for 1998 and later years. 3.4 Foreign Exchange. Foreign exchange costs are estimated at US$97.3 million, or about 36 percent of total project cost, based on the following assumed percentages: (i) international consultants and visiting professors, overseas training and scholarships, and international travel -- 100 percent; (ii) goods, laboratory and technical equipment, materials, computer hardware and software -- 75 percent; (iii) local consultants and exchange  - 23 - scholars, local fellowships, local training, minor rehabilitation works, and PIU management and recurrent costs -- 0 percent. 3.5 lTxes and Duties. Locally procured and imported goods necessary for the project are subject to the 18 percent value-added tax. Imported goods will be exempt from customs tax. Therefore, taxes are included in the local currency portion of project costs. Table 3.1 SUMMARY COST TABLEa (US$ '000) Local Foreign Total %Total % Foreign COMPONENT Base Cost Exchange A) INST=TUTIONAL STRENGTHIENING 1) Planning & Management 1,243 974 2,216 0.8 44 Capacity of SUP 2) National Commission for 8,743 1,531 10,274 3.8 15 University Evaluation and Accreditation 3) Information & University 2,214 4,777 6,991 2.6 68 Budget Allocation System 4) Interuniversity Network (RIU) 492 1,313 1,804 0.7 73 5) FOMEC Management 5,310 135 5,445 2.0 2 6) Project Management (PIU) 4,049 70 4,119 1.5 2 Sub-total 22,050 8,799 30,849 11.5 29 B) FOMEC 1) Basic Sciences and 85,027 79,473 164,500 61.1 48 Engineering 2) Humanities, Social and Health 65,677 8,250 73,927 27.5 11 Sciences, Graduate Education Sub-total 150,704 87,723 238,427 88.5 37 Total BASE COss 172,755 96,522 269,276 100.0 36 Physical Contugencies 171 348 519 0.2 Price Contingencies 2,820 386 3,205 1.2 Total PROJECT COSTS 175,745 97,256 273,000 100.0 a/ Totals may not add due to rounding  - 24 - B. Financing Plan 3.6 The proposed project would be financed by a Bank loan of US$165 million equivalent, or about 60 percent of total project cost. The loan would finance 80 percent of the costs of about 3,800 months of consultants' services, including training, visiting professors, peer reviewers, and studies, of which 260 months are expected to be internationally recruited. Of this technical assistance, (excluding scholarships), 85 percent would be for capacity building, ten percent for implementation support, and five percent for policy support. The salaries of Govemment counterparts have not been included in the financing plan since they are permanent employees of the Govemment institutions performing project-related activities within their official functions. For Component A (Institutional Strengthening), counterpart funding will come from SUP's budget; for Component B (FOMEC), it will come from the budgets of participating universities set aside on a monthly basis before transferring to the universities, upon the direction of SUP. The financing rule for FOMEC will be as follows: 20 percent of counterpart funds for consultant services and visiting professors; 40 percent for scholarships and training; 30 percent for equipment, furniture, laboratories, libraries, and materials; and 50 percent for minor rehabilitation works. Assurances were obtained during negotiations that counterpart funding in an amount equivalent to US$108 illion would be made available over the life of the project. Thble 3.3 shows the proposed financing plan for the project. Table 3.2 PROJECT COST BY CATEGORY (US$ Million) Category Local Foreign Total % of Total % of Cost Foreign Exchange Consultant Services v Technical Assistance & Studies 16.6 2.1 18.7 6.9 11.4 Visiting Professors, Peer 13.3 0.8 14.1 5.2 6.0 Reviewers, & Training Consultants Scholarships and Training 105.8 14.7 120.5 44.1 12.2 Equipment and Furniture 1.7 14.4 16.1 5.9 89.7 Libraries, Laboratories and 13.2 64.7 77.8 28.5 83.1 Materials Small Infrastructure 0.7 0.0 0.7 0.2 0.0 Rehabilitation Incremental RecurTent 11.6 0.6 12.2 4.5 4.4 Expenditures Project Operating Expenditures 12.9 0.0 12.9 4.7 0.0 Total lb 175.8 97.2 273.0 100.0 35.6 a/ Includes travel and per diem. b/ Totals may not add due to rounding. Figures include contingencies.  - 25 - Table 3.3 FINANCING PLAN/8 (US$nillion) % Financing Govt (SUP) Govt(SUP) CATEGORY TOTAL Universities Bank Loan Univers. IBRD Loan Consultant Services and Studies' 18.7 3.7 15.0 20 80 Visiting Professors 14.1 2.8 11.3 20 80 Scholarship / Training 120.5 48.0 72.5 40 60 Equipment and Furniture 16.1 4.8 11.3 30 70 Libraries, Laboratories, and 77.8 23.2 54.6 30 70 Materials Small Infrastructure Rehabilitation 0.7 0.3 0.3 50 50 Incremental Recurrent 12.2 12.2 0.0 100 0 Expenditures Project Operating Expenditures 12.9 12.9 0.0 100 0 Total 273,0 108.0 165.0 40 60 /a Figures include contingencies. /b Includes travel and per diem. C. Status of Preparation 3.7 Project preparation was supported by an advance of US$862,000 from PPF 233-0-AR. An extension of this PPF by US$400,000 to cover preparation costs until effectiveness was agreed during negotiations and was signed on May 11, 1995. Action plans for each of the 13 activities financed under the PPF, terms of reference, and implementation schedule were prepared, discussed and agreed with the Bank during a preparation mission which took place in May 1994. The Project Preparation Unit was established under SUP through a presidential decree issued in April 1994. By the time of the appraisal mission most of the activities had been completed and about US$375,000 from the PPF had been disbursed. Some savings have been realized because a number of consultants hired to carry out those activities became permanent staff in the new organization of SUP. In April 1995, the PPU became the PIU. From January to April 1995 the remaining PPF funds financed the following start-up activities: (i) finalization of the methodology to evaluate and accredit post-graduate studies and distribution of the documentation to universities; (ii) final design of the information system and preparation of the bidding documents for equipment and software; (iii) preparation and launching of the bidding process for PIU equipment; (iv)  - 26 - studies to select the final parameters to be used in the formula to allocate resources between universities; (v) finalization of the operational manual of FOMEC and selection and designation of the members of its organizational structure; (vi) design of the administrative organization of the PIU, bookkeeping and monitoring of the project, and selection and designation of PIU members; and (vii) preparation of the program to improve libraries. D Implementation Schedule 3.8 The project is expected to be implemented over a five-year period, from late 1995 to 2000. The PIU and the Bank would update and review the implementation schedule during the annual reviews (see para. 2.21). The completion date would be December 31, 2000 and the project closing date would be June 30, 2001. E. Procurement 3.9 Procurement of services, goods, and works, subject to Bank financing, would be carried out by the PIU and by the participating universities, in accordance with Bank guidelines. In the PIU, a specific unit of three staff would be in charge of implementing procurement activities. No recent assessment of Argentinean procurement procedures has been carried out. However, there is no significant inconsistency between Federal procurement procedures that applies to public national universities and Bank guidelines. Procurement methods would require documents and procedures as follows: (a) International competitive bidding (ICB) would require the use of Bank-issued standard bidding documents, which are mandatory. Under ICB, domestic preference may be applied in accordance with the Bank guidelines. (b) National competitive bidding (NCB) would require the use of standard bidding documents previously agreed with the Bank during negotiations. (c) Iocal shopping will be carried out according to Bank guidelines and will require a minimum of three price quotations. (d) Consultants would be selected in accordance with principles and procedures satisfactory to IBRD and on the basis of the Bank guidelines. The Bank standard form of contract is mandatory for time-based consulting services. A contract needed for individual consulting services has been agreed for PPF  - 27 - implementation and will be used for the project. A standard letter of invitation is to be agreed during negotiations. 3.10 Thble 3.4 summarizes procurement arrangements for the proposed project. Procurement for the different categories to be financed with the Bank loan would comply with the procedures stated in the paragraphs below. 3.11 FOMEC Component. Under the second component (US$238.4 million equivalent), a separate subproject agreement would be signed between SUP and each participating university describing in full the legal and financial obligations of the university in the execution of the fund. The agreement would include the financing of overseas and domestic fellowships and training, overseas visiting professors, consultant services, equipment, books and joumals, minor rehabilitation works, consumables and incremental operating costs. Procurement arrangements would be specified in the subproject agreements, and each university would be responsible for procurement of all goods and services included in its agreement. Aggregation of the procurement activities in various subproject agreements signed separately is not feasible given the different needs, locations, and procurement time schedules of participating universities. For the integrated subproject grant proposal, the scholarships and overseas visiting professors to be employed under subproject agreements would be proposed and approved as part of the subproject applications. However, individual scholarships and visiting professors costing less than US$50,000 for individuals or US$100,000 for firms or contract arrangements for universities, up to an aggregate of US$113.3 million for scholarships and US$14.1 million for visiting professorships and training consultants, would require only random post-review by the Bank's supervision missions. 3.12 Goods and Works. For equipment to be purchased, the procurement plans submitted by concerned universities as part of their subproject proposals would be reviewed by relevant specialists through peer reviews and site visits. Within FOMEC, an estimated total of US$86 million equivalent (before contingencies) is expected to be used for purchases of equipment, materials, books and computers. Works contracts are expected to be of small amounts and widely scattered; local shopping procedures would consequently be used for contracted amounts of US$300,000 or less (an estimated 95 percent of the cases). Most acquisition programs for goods are expected to range in cost from US$50,000 to US$250,000, and are estimated to cost below US$100,000 equivalent per contract, but would not exceed in the aggregate US$1 million equivalent in most universities. Whenever possible, similar goods would be grouped into packages costing US$350,000 or more and would be procured under International Competitive Bidding. Those packages estimated to cost less than US$350,000 but more than US$100,000 would be procured through Limited International Bidding (LIB) in the case of computers, office  - 28 - equipment, laboratory and pedagogic equipment and materials and through NCB in the case of furniture and library items. Packages estimated to cost less than US$100,000 would be procured following local or international shopping procedures in line with the Bank's requirements. Participating universities would follow the above-mentioned procurement procedures which would be stipulated in subproject agreements and as summarized in Tables 3.4 and 3.5 below. The PIU would provide guidance and monitor the procurement activities at participating universities. 3.13 Technical Assistance. The project would finance: (a) US$18.7 million equivalent for various consultants, including peer reviewers; (b) US$14.1 million equivalent for training and visiting professors; and (c) US$113.3 million equivalent for scholarships. Scholarships would be awarded to candidates on the basis of programs as evaluated by FOMEC in accordance with criteria and procedures agreed with the Bank. TYaining contracts would be awarded to local training providers in accordance with Government administrative procedures acceptable to the Bank. Consultant contracts estimated to cost below US$100,000 equivalent for firms and US$50,000 equivalent for individuals, up to an aggregate of US$12 million and US$20.9 million, respectively, would require only the review of the terms of reference on an ex-ante basis. However, this would not apply to single-source selection of firms, or to assignments of a critical nature as reasonably determined by the Bank, or to contract extensions which would raise the total contract amount above the specified thresholds. 3.14 Project implementation expenditures such as incremental salaries, fares and per diems, office materials, and incremental recurrent expenditures introduced by the proposed project, will be financed entirely with Government counterpart funds. 3.15 Review by the Bank. Thble 3.5 below summarizes the proposed Bank review thresholds. Prior review by the Bank would be required for all ICB and LIB documentation contracts and for the first two NCB packages of each calendar year for goods and works. In addition: (a) Individual scholarships and visiting professors for less than US$50,000 would be subject to random post-review by the Bank; (b) Annual training plans for each year under the institutional strengthening component would be submitted as part of the annual report for discussion with the Bank; (c) All individual consultant contracts costing more than US$50,000 and contracts for consulting firms costing more than  - 29 - US$100,000 would be subject to the Bank's prior review. All other contracts would be reviewed in the field by sampling on an ex-post basis by Bank supervision missions. (d) The list of ranked subprojects approved by FOMEC will be sent to the Bank and from this list the Bank would select those for which the Bank would give its commentaries. The above-mentioned review procedures are expected to result in a prior review coverage of 43 percent of Bank-financed contracts. lTble 3.4 SUMMARY OF PROPOSED PROCUREMENT ARRANGEMENTS" (in US$ million equivalent) Procurement Method Total Project Element ICB NCB Other N.B.F. Cost 1. Technical Assistance Consultant Services and Studies' 18.7 18.7 (15.0) (15.0) Taining and Visiting Professors 14.1 14.1 (11.3) (11.3) 2. Scholarship and Teachers Training 120.5 120.5 (72.5) (72.5) 3. Goods Computers and Office Equipment' 11.0 11.0 (7.7) (7.7) Furniture 3.6 1.5 5.1 (2.5) (1.1) (3.6) Libraries 3.1 7.2 10.3 (2.2) (5.1) (7.2) Laboratories, Pedagogic Equipment and 8.1 59.4 67.5 Materials'd (5.7) (41.7) (47.4) 4. Works: Minor Rehabilitatione 0.7 0.7 (0.3) (0.3) TOTAL 8.1 6.7 233.1 247.9 (5.7) (4.7) (154.7) (165.0) ICB = International Competitive Bidding NCB = National Competitive Bidding N.B.F. = Amounts not financed by the Bank /a Total includes taxes and contingencies. Amounts in parentheses represent Bank financing. Totals may not add due to rounding. /b Includes travel and per diem. /c Computers and office equipment fbr a total amount of US$4.4 million would be procured through Limited International Bidding (LIB) and US$6.6 million through local or international shopping. /d Laboratories and materials for a total amount of US$32.4 million would be procured through Limited International Bidding (LIB) and for a total amount of US$27 million through local or international shopping. /e Minor rehabilitation works would be procured through local shopping.  - 30 - Table 3.5 SUtMMARY OF PROCUREMENT REVIEW PROCEDURES Category Procedure Prior Bank Review Technical Assistance Consultant Services and Training Contracts with firms for Othere All US$100,000 or more Contracts with individuals for Other' All US$50,000 or more Individual scholarship and contracts Other Post review with visiting professor below US$ 50,000 Goods Computers; office, laboratory, pedagogic and communication equipment; and materials More than US$350,000 ICB All US$100,000 to US$350,000 LIB All Less than US$100,000 Shopping Post review Furniture and LibrarEy Items More than USS350,000 ICB All US$100,000 to US$350,000 NCB First two contracts each year Less than US$100,000 Shopping Post review Works: Minor rehabilitation More than US$350,000 NCB First two contracts of each year. US$350,000 or less Shopping /a Hiring of consultants in accordance with Bank guidelines. F. Disbursements and Accounts 3.16 The proposed loan of US$165 million equivalent would be disbursed over a period of five years. The disbursement schedule is based on the implementation schedule and the disbursement profile for education projects in the LAC Region. It is shorter than the Regional profile of 7.5 years, reflecting in part: (a) the readiness of project preparation resulting from timely PPF execution; and (b) the Borrower's strong commitment to the project. The allocation of loan proceeds and estimated disbursement schedule are summarized in Thbles 3.6 and 3.7 below, respectively. 3.17 Disbursements from the loan proceeds for the following contracts and agreements would be made against full documentation: (a) consultant services with individual consultants costing more than US$50,000 and consulting firm  - 31 - contracts costing more than US$100,000; and (b) all ICB and LIB, and the first two NCB contracts each year. All other disbursements would be made against statement of expenditures (SOEs) for which relevant documents would be retained by the PIU and the concerned universities, respectively, and made available for review as requested by visiting Bank missions. When expenditures are incurred by universities, copies of such documents would be supplied to the PIU for verification and record-keeping. The Bank would finance up to US$5 million (approximately 3 percent of the proposed loan) retroactively for expenditures incurred after March 1, 1995 and in accordance with Bank procurement guidelines. Retroactive financing is needed essentially to finance the interuniversity network and the information system. Table 3.6 ALLOCATION AND DISBURSEMENT OF IBRD LOAN Amount of the Loan Percent of Category Allocated (US Dollar Expenditures Equivalent) to be Financed Consultant Services (Tech. Assistance, Studies, 23,000,000 80 Training and Visiting Professors)' Scholarships and Training Expenditures 67,500,000 60 Office Equipment and Furniture 9,000,000 70 Libraries, Laboratories, and Materials 49,500,000 70 Minor Works 300,000 50 Refinancing of PPF 1,262,000 100 Unallocated 14,438,000 Total 165,000,000 /a Includes travel and per diem. Table 3.7: ESTIMATED IBRD LOAN DISBURSEMENTS (US$ million) FY96 FY97 FY98 FY99 FY00 Annual 28 42 44 35 16 Cumulative 28 70 114 149 165  - 32 - 3.18 Special Account. To facilitate timely project implementation, the Government would establish, maintain and operate, under terms and conditions satisfactory to the Bank, a Special Account in the Central Bank of Argentina or a commercial bank. The Special Account would be established within an authorized allocation of US$10 million, equivalent to the average four-month project financing requirement. An initial deposit of up to US$5.0 million will be made, and the full amount of the authorized allocation will be released when disbursements reach a level of US$30 million. Disbursements will be made under authorized signatures from a designated representative of the Borrower. During negotiations, the Government gave assurances that withdrawal applications for replenishment of the Special Account will be prepared by the PIU in accordance with Bank policies and procedures. G. Audits 3.19 The project's accounts would be available for inspection by the Bank. Annually audited accounts would be submitted to the Bank no later than six months following the end of the Government's fiscal year. The annual audit reports would include: (a) an audit of the project, including (i) a statement of sources and applications of funds; (ii) a statement of assets and liabilities; and (iii) supplementary financial information showing cumulative project performance; (b) an auditor's opinion on the eligibility of expenses submitted through the Statement of Expenditures (SOEs); (c) an opinion regarding the compliance with the procurement procedures specified in the Loan Agreement and in the relevant FOMEC subproject agreements; (d) compliance opinions of the financial and managerial covenants in the Loan Agreement; (e) an audit of the Special Account; (f) a management letter; (g) a disclosure of the audit procedures utilized; and (h) conforming to generally accepted auditing practices, a financial audit of FOMEC accounts and a physical audit of the subprojects financed through FOMEC. Annual audits would be performed by an independent auditor acceptable to the Bank. The Auditorfa General de la Naci6n (AGN) would be responsible for reviewing the audit plan, supervising the audit, and reporting.  - 33 - IV. BENEFITS AND RISKS A. Benefits 4.1 The project would consolidate difficult sector reforms and provide incentives for universities to increase their investment in graduate education. In addition, the efficiency gains in higher education will facilitate a greater concentration of resources on basic and secondary education. More specifically, the project would improve the efficiency and quality of the university system by: (i) increasing the transparency and accountability of resource allocation and use; (ii) introducing competition among universities in gaining access to funding for research and teaching activities; (iii) revising curricula; (iv) promoting the restructuring of graduate education by strengthening, in each discipline, only a limited number of centers of excellence with a critical mass (about 200 out of 767 graduate programs); (v) training about 3000 professors (an increase of more than 50 percent of the current potential with Ph.D degrees) as well as increasing teaching staff mobility; and (vi) providing laboratory and teaching equipment, corresponding to 40 percent of potential needs in order to increase the quality of experimental teaching. B. Risks 4.2 The first risk concems the implementation of the legal framework for reforms which supports the project. Political tensions are traditionally high in the university sector and universities are autonomous institutions that usually resist change. This risk has been minimized recently and should not directly affect the implementation of the project. First, the legal framework as well as the project content has been largely discussed by the Govemment through an intense public debate. Since 1994, the Govemment has shown a strong and constant commitment to the reform process, demonstrated by the adoption of the Higher Education Law by the Chamber of Deputies on June 7, 1995. There is also a consensus among rectors on the objectives and major components of the project, and CIN and CRUP, which have been fully involved during the preparation process, will be represented in the institutional structure of CONEAU and FOMEC. Second, this new legal framework confirms and fosters changes which have already taken place in the higher education policy and in some universities: (i) the autonomy of universities was confirmed in the Constitution adopted in August 1994 and the 1995 budget law; (ii) private university development was liberalized by a decree in 1993; (iii) the 1992 financial administration law authorizes universities to diversify resources; (iv) some universities, through foundations or "cooperadoras," are already collecting student fees and contracting with enterprises; these resources represent US$100 million or 6.6 percent of their total income; (v) the evaluation and accreditation system is already being implemented by the CNA; and (vi) about 25 percent of public universities are currently implementing an admissions procedure for entry into undergraduate programs.  - 34 - 4.3 The second risk concerns the fact that FOMEC is a new institution. In order to minimize the risk of irregularities in the selection of sub-projects and funding procedures of FOMEC: (i) an annual physical and financial external audit would be undertaken; (ii) once a year, CIS would evaluate the results of FOMEC operations and their impact on quality and efficiency improvement in universities; review the institutional performance of FOMEC; verify the transparency and objectivity of the selection procedure; and formulate concrete recommendations; and (iii) a Mid-Term Review would define, if necessary, any changes in financial and institutional arrangements. C. Sustainability 4.4 Operating costs, which represent only 4.7 percent of total project cost, are supported by the Government. Most of the permanent staff who will be involved in the management of the project are part of the new organizational structure of SUP (which includes 192 staff) determined by law. The institutional development of CONEAU and FOMEC would play a critical role in ensuring continuity of quality control and competitive funding in support of university education. The institutional stability of the project will be assured by the formal establishment (by enabling decrees) of CONEAU and FOMEC prior to negotiations. In addition, to ensure the financial sustainability of FOMEC, SUP will allocate to FOMEC US$70 million, representing the share of the FY95 university budget devoted to the incentive program for teaching staff to undertake research. The objective is to make FOMEC a permanent funding mechanism by progressively increasing the annual national funding by US$30 million by the end of the project in 2001. In addition, the budgetary process itself ensures that the universities' counterpart funding for FOMEC will be available. In fact, by allocating the federal budget to each university on a monthly basis, SUP can link FOMEC financing to the availability of counterpart funding. D. Poverty Category 4.5 The project has no direct impact on poverty alleviation. However, the resulting efficiency gains from the reform of the financing system could reduce the growth of public higher education expenditures, and therefore contribute to an overall environment in which more resources are available for secondary education, a major source of inequity. E. Environmental Impact 4.6 The project does not present environmental risks and has an environmental rating of "C." Increased capacity in basic sciences and engineering disciplines might impact favorably on the development of environmental teaching and research. The operating guidelines of FOMEC will stipulate that all activities to be funded must comply with prevailing rules for environmental preservation.  - 35 - V. AGREEMENTS REACHED AND RECOMMENDATION A. Agreements Reached 5.1 During project appraisal, agreement was reached that the following actions would be carried out prior to negotiations. All actions were in fact completed prior to negotiations: (a) submission of the proposed methodology and criteria to be used in the accreditation process to classify graduate studies; (b) publication of the final decree establishing FOMEC (para. 2.11); (c) dispatch to the Bank of the final version of the Operational Manual of FOMEC (para. 2.13); (d) finalization of the Policy Letter on Higher Education to be sent to the Bank (para 1.25); and (e) appointment, within SUP, of a full-time project coordinator in charge of the PIU (para. 2.18). 5.2 In addition, during the appraisal mission, agreements were reached on the following activities to be carried out (most being financed by the PPF) in order to facilitate the start-up of the project: (i) the launching by the CNA of the accreditation process; (ii) for the SUAR, an assessment of the needs of universities and preparation of the bidding documents for the procurement of equipment; (iii) tests of various formulas to allocate budgetary resources among universities; (iv) design of an accounting and monitoring system for the project; v) preparation of the bidding documents for equipment and materials for the RIU; (vi) preparation of terms of reference of the studies and training to be implemented in the component Improvement of the Planning and Management Capacity of SUP; (vii) preparation of the program to improve libraries; (viii) finalization of the regulatory framework for scholarships; and (ix) preparation of the initial baseline report for project monitoring. A timetable for the completion of these activities would be agreed during negotiations. 5.3 During negotiations, assurances on agreement were reached from the Government on the following: a) NCB bidding procedures would be carried out using bidding documents agreed with the Bank and that consultant's proposals would be requested using a letter of invitation format agreed with the Bank (para. 3.9); b) a monitoring and evaluation process acceptable to the Bank, including the scope  - 36 - and content of the baseline report, annual progress review, Mid-Term Review and selected key indicators for project monitoring evaluation and performance would be implemented (paras. 2.20 and 2.21); c) the organizational structure of PIU and FOMEC will be maintained within the SUP in accordance with terms of reference, staffing, and other resources such as office space and operational resources satisfactory to the Bank (para. 2.18); d) CONEAU and CNA will follow a methodology acceptable to the Bank (para. 2.6); e) FOMEC will function in accordance with the Operational Manual approved by the Bank, and the Manual will not be changed without prior Bank approval (para. 2.13); f) FOMEC will be supervised by the CIS, and the CIS will operate on the basis of terms of reference acceptable to the Bank (para. 2.22); g) in addition to the annual audit of the project account, a financial audit of FOMEC accounts and a physical audit of the subprojects financed through FOMEC will be performed (para. 3.19); h) counterpart funding in the amount of US$108 million would be made available over the life of the project (para. 3.6). 5.4 The following are conditions of loan effectiveness: (a) establishment and staffing of PIU under terms of reference and procedures satisfactory to the Bank (para 2.18); (b) establishment of CONEAU and nomination of the members of the Executive Council with qualifications and experience satisfactory to the Bank (paras. 2.4, 2.6); (c) establishment of FOMEC and nomination of the members of the Executive Council with qualifications and experience satisfactory to the Bank (para. 2.11); and (d) submission of a subproject agreement satisfactory to the Bank to be signed between SUP and the universities which would be funded by FOMEC (para. 2.11). (e) adoption of a formula, satisfactory to the Bank, for the allocation of budgetary resources among the national universities and of a plan, also satisfactory to the Bank, for the implementation of such allocation.  - 37 - Recommendation 5.5 Subject to the above assurances and conditions, the proposed project would constitute a suitable basis for a Bank loan of US$165 million for the Argentine Republic, repayable in 15 years including a five-year grace period, with loan amortization based on level repayments of principal.  -38- ANNEXES  TABLE 1: , .:.:.:.:.:.:.:.. ~.*..*..*.*.......**.*..*..*..... M ,, : ; : i..*..*..... ; i .............. Enrollment by University; Growth Rate, Composition Percentage 1982/1992 ANNUAL GROWTH COMPOSITION UNIVERSITY 1982 1985 1992 RATE PERCENTAGE 82/92 82/85 85/92 1982 1992 TOTAL 3T72W99 574,5su 6979773 87. 18. 4.Z 31,7299 72 Grandes 260,429 426,464 567,505 8.1 17.9 4.2 81.8 81.2 Bienos Aires 102,941 143,887 169,540 5.1 11.8 2.4 32.3 24. Cordoba 34,060 59,173 81,233 9.1 20.2 4.6 10.7 11.6 La Plata 33,187 52,215 92,632 10.8 16.3 8.5 10.4 13.2 Tecnotggica Nacional 25,673 47,689 71,831 10.8 22.9 6.0 8.1 10.3 Rosario 17,984 35,488 48,948 10.5 25.4 4.7 751 7.0 Nordeste 16,356 28,919 29,046 5.9 20.9 0.1 5. 4.2 Tucuman 16,140 28,7 9 34,885 8.0 21.2 2.8 5 . Lomas de Zamora 4,615 13,669 21,980 16.9 43.6 7 0 1.4 3.1 Cuyo 9,473 16,695 17,410 6.3 20.8 0.6 3.0 2.5 Medianas 39,479 70,604 94,651 9.1 21.4 4.3 12.4 13.5 La Matanza ... ... 7,034 3. 6.3 ..1.0 Comahue 3,655 6,199 9