Document of The World Bank Report No. 16536-HU STAFF APPRAISAL REPORT REPUBLIC OF HUNGARY HIGHER EDUCATION REFORM PROJECT January 30, 1998 Human Development Unit Europe and Central Asia Region CURRENCY EQUIVALENTS (JuLne 1997) Currency Unit = Forint (HUF) 1000 Forint = US$ 5.42 US$I = HUF I 84.67 US$1 = DEM 1.756 AVERAGE EXCHANGE RATES (US$1 = HUF) CY1993 CY1994 October, 1996- Jan, 1997 May, 1997 91.79 105.16 158.59 170.34 182.59 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS CAS - Country Assistance Strategy CIP - Capital Investment Plan ECTS - Europeanl Credit Transfer System ELTE - University of Eotvos L6rant of Budapest (Ebtv6s L6r6nt Tudonm,ny Egyetem) EU - European Uniion FEFA - Higher Education Development Fund (Felsooktatasi Fejlestesi Alap) FTT - Higher Education and Scientific Council (Felsooktatasi es Tucdomaznvos Testulet) FPI - Higlher Education Grants Office (Felsookatasi Palyazat Iroda) GDP - Gross Domestic Product HAC - Hungariani Accreditation Council HEA - Higher Educationi Association HEI - Higher Educationi Institution HUF - HuLngarian Forint IDP - Institution Development Plan LA - Loan Agreement MAB - Hungarian Accreditation Council (Magyar Akkrediacio Bizottsag) MOE - Ministry of Culture and Education MOF - Ministry of Finance NCC - National Credit Committee NCO - National Credit Office OECD - Organization for Economic Cooperation and Development PHRD Policy and Human Resources Development Grant PMU - Project Management Unit PPF - Project Preparation Facility QCBS - Quality and Cost-Based Selection SECIL - Sector Investment Loan SOE - Statement of Expenditure BORROWER'S FISCAL YEAR January I - December 31 Vice President: Jolhannes F. Linn, ECA| Sector Director: Chris Lovelace (Acting), ECSHDl Sector Leader James Socknat, ECSHD| _ Responsible Staff. Fredrick L. Golladay, Ilona E. Szemzo (ECSHD)l REPUBLIC OF HUNGARY HIGHER EDUCATION REFORM PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. Loan and Project Summary ....................................................................i 1. INTRODUCTION ....................................................................1 11. IMPLICATIONS OF ECONOMIC RESTRUCTURING FOR HIGHER EDUCATION ..............2 111. ISSUES IN HIGHER EDUCATION .................................. ..................................4 A. Lack of Responsiveniess ....................................................................5 B. Inefficient Use of Resources ................................................................... 7 C. Low Non-Public Resource Mobilization ................................................................... 11 IV. ROLE OF THE STATE, LEGAL FRAMEWORK AND THE REFORM PROGRAM ... 15 A. Role of tihe State in the Transitioni Process ................................................................... 1 5 B. Legal Framework ................................................................... 15 C. Government Policy on Higher Education Development .................................................... 1 8 D. Constrainits on Reform ................................................................... 19 V. THE PROJECT ................................................................... 20 A. Bank Country Objectives . .................................................................. 20 B. Project Objectives and Means . . ................................................................. 20 C. Detailed Description of Project Components . . ................................................................. 22 1. Policy and Institutional Development ................................................................... 22 2. Higher Education Institutions Investmenit Program ............................................... 26 3. Management Informationi Systems ................................................................... 28 4. Managemenit Capacity Development ................................................................... 28 5. Student Loan Program ................................................................... 29 6. Project Management and Project Preparation Facility ........................................... 30 This report is based on the findings of two World Bank missions which visited Hungary between December 1996 and May 1997. The missions were comprised of R. Johanson. (Mission Leader. Consultant. ECI/2HR), P. Kleysteuber (Operations Officer. EC1/2HR): F. Golladay. (Economist. EMTPH); G. Novotny. Implementation Specialist. EC2HU): A. Morgan, (Higher Education Policy, Consultant): F. Konigshofer (Information Technology, EMTPM); D. Levy (Private Education, Consultant); G. Brest van Kempen (Civil Works, Consultant), G. Preddy (Normative Financing, Consultant): R. Altman, (Monitoring and Evaluation, Consultant); Sector Director (Acting), Chris Lovelace; Sector Leader, James Socknat (ECSHD); Peer Reviewers: G. Psacharopoulos (HDDDR); B. Laporte (HDD); D. Steedman (ASTTP); W. Experton (LA IHR). VI. IMPLEMENTATION ................................................. 31 A. Lessons Learned and Reflected in the Project Design ................................................. 3 1 B. Approach ................................................. 32 C. Organization and Staffing of Project Implementation ................................................. 33 D. Procedures and Criteria for Investment Selection ................................................. 34 E. Schedule and Phasing ................................................. 35 F. Monitoring and Evaluation ................................................. 37 G. Status of Preparation ................................................. 38 H. Indicatioiis of Borrower Commitment ................................................. 39 VII. PROJECT COSTS. FINANCING AND PROCUREMENT . ................................ 40 A. Project Costs ................................................. 40 B. Project Financinig ................................................. 45 C. Disbursements ............................................................. 47 D. Project Accounts and Audits ................................................. 49 E. Procurement Arrangements ................................................. 50 VIIII. BENEFITS AND RISKS ................................................. 54 A. Project Costs and Benefits ................................................. 54 B. Distribution of Benefits ................................................. 56 C. Project Risks ................................................. 57 IX. AGREEMENTS TO BE REACHED AND RECOMMENDATION ...................................... 59 TABLES 6.1 Implementation Schedule ................................................. 35 7.1 Project Cost Summary by Component ................................................. 42 7.2 Project Cost Summary by Component and Expenditure Category .......................................... 43 7.3 Project Cost Summary by Expenditure Category ................................................. 44 7.4 Project Financing Arrangements ................................................. 46 7.5 Schedule of Disbursements ................................................. 47 7.6 Withdrawal of the Proceeds of the Loan ................................................. 48 7.7 Procurement Arrangements ................................................. 5 1 ANNEXES 1. Higher Education in Hungary 2. Letter of Sector Development Policy on Higher Education 3. Policy and Institutional Matrix 4. Design of the Lending Operation 5. A New Method of Student Allocation to Higher Education Institutions 6. Private Higher Education Policy Statement 7. Institution Development Plans (IDPs) 8. Management Informationi Systems Development 9. Management Development 10. Student Loan Scheme II. Technical Assistance 12. Project I-nplementationi Organizationi: Functions and Responsibilities 13. Procedures and Criteria for lnvestinenit Selection 14. Procedures and Criteria for Investmenlt Selection -- Subprojects 15. Summary Schedule 16. Conditions for Project Phases 17. Monitoring Indicators 18. Supervision Plan 19. Schedule of Procurement Arrangemenits 20. Economic Analysis 21. Documents in the Project File MAP: IBRD-26084-R I - i - REPUBLIC OF HUNGARY HIGHER EDUCATION REFORM PROJECT Loan and Project Summary Borrower: Republic of Hungary Guarantor: Not Applicable Implementing Agency: Ministry of Culture and Education Beneficiary: Institutions of higher education Poverty: Not Applicable Amount: Deutsch Mark 263.6 million Terms: Fifteen years, including five years of grace, at the Bank's LIBOR- based fixed interest rate for German Mark single currency loans. Commitment Fee: 0.75 percent, less any waivers Onlending Terms: N/A Financing Plan: See Table 7.4 Rate of Return: Greater than 25 percenit Staff Appraisal Report: 1 6536-HU Map: 26084-R Project ID Number: HU-PE-39449 1. INTRODUCTION 1.1 Following a serious financial crisis in 1995 the Finance Minister introduced a set of measures restricting financial outflows. devaluing the Hungarian currency, stimulating exports, limiting imports. and reducing sharply the state budget for certain public services, including higher education. Allocations for the salaries of higher education staff were cut by 20 percent. (Each higher education institution (HEI) was allowed to make its own decisions on how to implement the cuts.) Most HEIs were forced to cut staff positions. Many of these cuts were achieved by laying off staff who were beyond retirement age. but the shedding of staff was traumatizing to most institutions nonetheless. A second set of budget reductions was planned for 1996. However, higher education authorities were successful in arguing that across the board cuts did little to root out the fundamental causes of inefficiency and were granted postponement of a second round of cuts in anticipation of adoption of a basic reform program designed to achieve greater efficiencies in the use of resources. 1.2 The Government of Hungary asked the World Bank to assist in developing a higher education reform program and in financing its implementation. The Bank identified a possible project in February. 1996 and provided assistance in the preparation of the reform during missions in June and October 1996 and through a Policy and Human Resources Development (PHRD) grant approved in the fall of 1996. The Bank pre- appraised the project in December 1996 and appraised it in May/June, 1997. 1.3 The Government of Hungary is now requesting a US$150 million loan from the World Bank to support a US$250 million reform program which would be implemented in three phases over a six year period. World Bank support of this project is recommended because it will: -Address critical socio-economic needls (Chapter 2); -Attack the main weaknesses in the system of higlher education (Clhapter 3); - Support a comprehensive reform program by the Government (Clhapter 4); -Achieve botlh sector-wide reforms and reforms with in higher education institutions (Chtapter 5); -Employ effective implementation structures, procedures andphasing (Cltapter 5); -Reduce costs of providing higlher education (Clhapter 7); -Yield benefits tltatfar outweiglt the risks (Cliapter 8); and -Adopt thte conditions requiredfor success. (Chapter 9). 2 2. IMPLICATIONS OF ECONOMIC RESTRUCTURING ON HIGHER EDUCATION 2.1 The liberalization of Hungary's political and economic systems is greatly increasing the demand for higher education. The restoration of democratic government is making broad public participation in politics and government, and the exercise of political rights, important responsibilities of all citizens. To carry out these responsibilities well will require an informed public with skills in the analysis of complex social and economic issues. 2.2 The establishment of an open market economy is increasing the demand for a well-educated work force. The adoption of market principles of economic organization is creating a much greater need for the services of the managers, lawyers, accountants and auditors needed to operate the financial systems and modern business organizations characteristic of market economies. The acceleration of both technical and economic change is also creating demand for a workforce that has not only mastered specific skills. but also is able to acquire new skills and knowledge independently. In addition, the future labor force increasingly will need to renew continuously and further develop skills through life-long, independent, informal study. This will require competence in identifying relevant sources of information, evaluating the quality of that information and integrating the new information into structures that makes the knowledge useful. The development of these higher level skills will demand that HEIs, rather than focusing on the requirements of specific occupations, teach students as well how to organize learning tasks, evaluate sources of information, and apply this knowledge to new and novel situations. 2.3 Hungary's entry into the global economy is also imposing much more exacting economic discipline on its producers. In addition. foreign firms are entering the Hungarian market with high quality products and services, and competing with Hungary for customers in its formerly protected markets in Eastern Europe. Hungary is seeking economic integration with the European Union. This will not only create new opportunities to produce and market goods and services, but also force Hungary to raise the quality of its products and reduce its production costs and prices. These developments are greatly increasing the demand for a technical cadre with the ability to translate scientific findings and technical advances rapidly into competitive products and services. 2.4 The pace of change and the intensity of competition are both likely to increase as the economy continues to reform and globalization spreads. In order to profit fully from this globalization and integration, Hungary must further develop its human resources. A plausible case can be made that Hungary should ensure that by the turn of the century, or shortly thereafter, 25-30 percent of its work force has completed programs of tertiary education. 2.5 Fundamental changes are also required in the financing of the development of skills. Higher education currently consumes about one percent of Gross Domestic 3 Product (GDP). The Hungarian fiscal system relies on the personal and corporate income tax, value added tax and import duties as the major sources of public revenues. Tax administration and compliance are enormous problems in Hungary. Marginal tax rates on incomes of up to 60 percent for the personal income tax and 37 percent for social insurance contributions encourage both individuals and businesses to operate outside the formnal economy. The high cost of tax administration and the economic distortions induced by efforts to avoid taxation together impose a large dead weight burden on the economy; a unit of public expenditure must produce approximately 1.7 units of benefit in order to be economically justified. For these reasons, making more efficient use of public expenditures and transferring costs to private beneficiaries wherever possible have high priority, including in higher education. 2.6 In addition, concern for equity implies that a larger share of the burden of financing higher education should be imposed on the beneficiaries. The present system of finance relies on tax revenues collected from all Hungarians in order to pay for the provision of a valuable asset to less than fifth of the population. Moreover, the beneficiaries of public spending on higher education are drawn primarily from the relatively well to do. The issue of fairness has arisen with economic liberalization. During the period when workers were unable to change employers easily and most employment was in public sector organizations, the economic value to the worker of an education was very small; most training was in effect for the benefit of a particular employer and could not be marketed to other employers. However, the adoption of market principles of economic decision making has begun to enable workers to sell their labor services to the employer offering the most attractive pay and working conditions. The marketing of labor services allows skilled workers to capture, as increased wages and salaries, most of the gains due to their higher productivity. In order to make the distribution of benefits equitable, a system of finance needs to be put in place that reduces the implicit subsidies to students by collecting part of the costs of instruction from beneficiaries. A system of higher education finance that imposes part of the burden of costs on students might also be used to increase the funds available to the sector. 4 3. ISSUES IN HIGHER EDUCATION 3.1 Introduction. The Hungarian higher education system underwent major changes between 1948 and 1989. At the conclusion of WW II, Hungary had 42 HEIs, 26 of which were devoted to training in theology. The proportion of the population enrolled in higher education was among the lowest in Europe. Following the Communist takeover, the colleges and universities were expanded rapidly, doubling the number of students admitted to the first year class between 1949 and 1952. The contents of higher education were also radically changed. Students were channeled into engineering. natural sciences and the economics of central planning, and away from law. theology and social sciences. Responsibility for research and for the training of researchers was transferred from the universities to the Hungarian Academy of Sciences. Classical multi-faculty universities were split into smaller single-purpose institutions. By the end of the 1 980s, 90 HEIs were operating. More than half of these institutions enrolled fewer than 500 students and nearly a third enrolled fewer than 300. Only 3 HEIs enrolled more than 2500 students. These small, higher education institutions were both highly specialized and isolated from one another. Because of their small size, most were unable to provide serious libraries or laboratory facilities. In addition, because of their isolation from one another, they were unable to share these facilities or to provide student services such as canteens and dornmitories economically. Registration of students across disciplines was generally not possible. About half of all students were enrolled in programs that required 5 or 6 years of fcormal study; the remaining half were enrolled in programs of 3 or 4 years duration. Interdisciplinary research and teaching were virtually unknown. Class size was small and unit costs were high. 3.2 Responding to the demands of a pluralistic democracy and modern market economy will require that the proportion of the population that has received a higher education increase by at least half to more than 25 percent. The education provided to these students will need to stress skills in the application of knowledge to novel situations and in life long learning, in addition to the skills necessary to obtain a first job. In order to produce these broader skills, students will need to acquire a basic appreciation for several fields of study in addition to their principal field of expertise. In order to achiieve these goals at reasonable cost, the higher education system must join smaller faculties and departments into multi- faculty universities in which resources and course offerings can be shared among much larger numbers of students. 3.3 Hungarian higher education achieved a very high standard of excellence in the past and as a result enjoyed an excellent reputation throughout the region and the entire world. The system at one point produced the highest per capita rate of Nobel prize winners in the world. However, the Hungarian higher education system is not well prepared to meet the challenges that are emerging at the end of the 20th century. Three overriding problems exist in the present system of higher education. First, the system is rigid and unresponsive to the demands of a market economy (Section A, below). Second, the system is inefficient and wastes enormous resources (Section B). Third. the system is inequitable with the public sector financing virtually all the costs of the system and private beneficiaries paying few of its costs (Section C). Each of the problems is discussed in detail below. (A more detailed description of Hungary's system of higher education and its evolution is provided in Annex I). 5 A. LACK OF RESPONSIVENESS 3.4 Hungary's higher education system is unresponsive to the demands created by a market economy. Its lack of responsiveness is due to its being: a) relatively inaccessible to all but an elite group, b) rigid and overspecialized in structure and in content, and c) disconnected from the external economic and social environment. Each of these topics is discussed in sequence below. 3.5 Inaccessibility. Basic education has been universally accessible in Hungary for several decades; around 90 percent of the relevant age group successfully completes the basic 8 year primary cycle. In addition, the majority of Hungarian children attend pre- school. Participation in secondary education is also high: about 80 percent of those completing the primary cycle go on to some form of secondary education. 3.6 In contrast to broad participation in primary and secondary education, Hungary's higher education system has been small and elitist. In 1991. higher education enrolled just 12 percent of the population age 18-22.' Liberalization of the economic and political systems has produced a sharp increase in demand for access to higher education. Since the start of the transition, enrollment of full-time students in higher education has risen rapidly from around 83,000 in 1991 to 146,000 in 1996. As a result of this expansion. the participation rate of the relevant age group has increased to around 17 percent. Despite the increases, Hungary still falls short of the participation rate found in most Western European countries (typically between 25-30 3.7 Structural Rigidities and Overspecialization. Half the students are enrolled in 5-6 year degree programs (roughly equivalent to a master's degree in the western sense). Students are admitted by faculties into over 350 specializations. Specialization starts in the first year of study2. Little or no possibility exists for transfer from one specialization to another. The sequence of courses was specified and few electives were permitted until recently. The budget for a department was determined on the basis of the number of classes, rather than the number of students taught, and thus inter-disciplinary study and cross-registration among departments was difficult. The preponderance of small, specialized institutions also limited the breadth and variety of subjects that could be offered. Finally, there was lack of articulation among the levels of the system. Students could not transfer from one program to another program or from one level to another without starting their studies over from the beginning. Graduates of colleges are not permitted to pursue post-graduate studies without first completing a university degree. 3.8 Programs of study stress mastery of a body of knowledge. rather than skills in solving problems, thinking independently or keeping pace with developments in a field. Students are allowed little opportunity to develop and test their creativity or to acquire problem solving skills. As stated in a Hungarian document: I One of the strengths of the elitist system has been a record of exceptional throughput rates. Reportedly 90% of entering students eventually complete their programs and obtain the relevant credentials. 2The choice of specialization occurs at about age 14 when the student must begin to prepare to entry to higher education. 6 Students who complete higher education in Hungary are, by international comparison, well-prepared and knowledgeable in a broad range of subjects, but generally they are less independent. The reasons fbr this are probably the teaching philo,sophy and method.s found in Hungary, characterized by many in-class hours, a lack of continual evaluation and the concentration of many examinations during the final exam period. Students are left with little time to develop and test their creativity and problem-solving skills. Under the current, rapidly changing circumstances, there is a great need for graduates of higher education to be more independent, and for their ability to recognize problems as well as address them to increase. The natural way to achieve this is by reorganizing education, reducing contact hours and increasing the importance of independent study and problem- solving. 3 3.9 Unresponsiveness. The higher education system has not been fully responsive to the needs of the economy. Enrollments in both colleges and universities increased by half during the first four years of the transition. Important changes occurred in the proportion of students enrolled by field of study. Enrollments in engineering programs decreased from about 30 percent of the total to just under 15 percent between 1989 and 1994; over the same period enrollments in the social sciences increased from less than 5 percent of the total to about 25 percent.4 Nonetheless, much of the absolute growth has been in fields with limited employment prospects, and little or no demand from students. No field of study has contracted. For example, enrollments in medicine, agriculture and technical fields have increased by 13 percent, 20 percent and 27 percent, respectively. even though both job prospects for graduates and demand from students, are poor. The system has a self-sustaining character that does not facilitate the reduction of installed capacities. 3.10 The unresponsiveness of enrollments to market prospects has resulted from centralized control of enrollments in which student choice plays little role, a financial allocation system that pays little attention to actual enrollments, and a public sector monopoly of educational opportunities. In 1996 the state allocated enrollment places among institutions in 64 institution-specific fields. It assembled proposals prepared by the HEls themselves and resolved conflicts according to the political influence of each institution. Student demand has played a minor part in determining allocation of state- financed student places among institutions or fields of study. Student choice has tended to mirror labor market demand for skills in such areas as economics, management, law and foreign languages The supply of places has reflected the capacity of training programs. In view of the excess total demand for places, students with weaker scores often have been admitted to particular programs of study that have insufficient numbers of applications. In several institutions more students have been accepted for admission in 'unpopular' fields than had applied for admission. This practice has tended to perpetuate out-of-date programs for which there is insufficient demand. Allocation of government support has been based on historical budget levels and the political influence of the HEI administrations, not by the number of students enrolled. In contrast, commercially- 3 Szeged Group Reform Proposals, August, 1995, p.7. 4Bruno Laporte and Dena Ringold, "Trends in Education Access and Financing During the Transition in Central and Eastern Europe," Social challenges of Transition Series, Technical Paper No. 361, World Bank, 1997. pp. 15-16. 7 oriented private higher education has been more responsive to both to student and economic demands. It has offered. instruction in fields with strong economic prospects for employment such as informatics and computer science. However, low public sector tuition has discouraged the growth of private education. 3.11 Improving the relevance and increasing the flexibility of higher education require that the proportion of youth enrolled in higher education institutions be increased; that the objectives of higher education be redirected, away from finished occupational skills and towards the capacity to learn and master new concepts; and that greater flexibility be ensured through measures such as establishment of foundation courses, deferral of specialization and promotion of ability to transfer out of fields less in demand towards those in greater demand. B. INEFFICIENT USE OF RESOURCES 3.12 Before the transition period began, Hungary had one of the highest recurrent costs per student in all of Europe including Western Europe. In 1993 Hungary's public expenditure on higher education per student was 86 percent of per capita GDP, compared with an average of 45 percent for OECD countries and 30 percent for Germany. Moreover, Hungary spent about 3.3 times as much per student on higher education as it did in primary education, while OECD countries spend on average about 2.5 times as much. 3.13 Spending also varied enormously from institution to institution. The system concentrated about 40 percent of the students in Budapest (where 25 percent of the population resides and costs are relatively high.5 3.14 Reductions in unit costs have occurred over the past five years as enrollments have increased by half and budgets have remained frozen. However, the reduction in unit costs has been achieved primarily by permitting faculty salaries to decline sharply rather than increasing efficiency. In 1996, the average salary for professors was US$6650. The reduction in funding has also been absorbed in part by neglecting maintenance and failing to maintain library collections. 3.15 Several interrelated factors explain the relatively high unit costs: a) high non- teaching costs; b) fragmentation in the system; c) emphasis on high cost programs; d) low ratio of students to staff; e) rigid state budgeting procedures; and f) inappropriate governance and management practices. These are explained sequentially below. 3.16 High Non-Teaching Costs. Hungarian higher education is characterized by generous support to students from the state. Students in higher education receive stipends equivalent to about 10 percent of the cost of higher education (HUF 65.000 or US$480 equivalent per student in 1996). In addition, Hungary has approximately twice as many non-teaching staff per teaching staff member as countries in Western Europe. In contrast, 5In the field of law, for example. the cost per student ranged from 146 units at ELTE in Budapest. to 89 in Miskolc, to 80 in Szeged and to 73 in Pecs. 8 private colleges have much smaller administrative staff per student than public institutions. Administrative offices in particular tend to employ many more people than actually needed, a carry-over from the previous era when full employment was a goal and many jobs were created artificially. 3.117 Fragmentation. The fragmented institutional network is a significant part of the system's socialist heritage under which institutions were divided and kept small. Today, Htmgary -- with a population of about 10 million -- has 90 HEIs, including 57 state and 33 private, in 31 different locations. The average size is 2600 students per university and 16,00 students per college. These enrollment levels are only one fifth the average per institution in other European countries of comparable size--Austria, Finland, the Netherlands and Sweden. These relatively small sizes do not permit institutions to realize economies of scale. 3.18 Fragmentation is also traceable to a proliferation of departments and majors within institutions. In 1995 over 350 different "majors" were offered. This situation is a consequence of the socialist emphasis on manpower planning under which students were trained for specific occupations projected to be needed in the command economy. The higher education budgeting system has encouraged faculties to split into smaller units in order to secure authority to appoint additional senior faculty. The HEIs can establish new teaching positions independently, so long as the institution stays within the existing teaching budget. The career path for outstanding staff may be blocked by incumbent professors; hence a way around this system is to create a new department which automatically establishes a new professor position, and related teaching and adnministrative posts. In short, incentives built into the system tend to proliferate teaching positions. 3.19 Emphasis on High-cost Disciplines. Bv comparison to OECD countries, a vely large proportion of students have been enrolled in programs in medicine, the laboratory sciences and engineering which are relatively costly to provide. In addition, most programs of study require unusually long periods of time--including extensive practical instruction--in order for a student to obtain a formal credential. Just over half the students are studying for university degrees which take 5 or 6 years. The remaining study in colleges for 3 to 4 years. Shorter programs of study are not provided. Thus, the average length of study is over four years, exceeding the average in most other European countries. 3.20 Low Student: Faculty Ratios. The expansion of enrollments in the 1990s, coupled with budget cuts in 1995 (which led to elimination of 10 percent of the existing teaching posts), increased the average ratio of student to staff from 5 in 1989 to 8 in 1996. However, this ratio is still low in comparison to OECD countries, which range from II in Germany to 29 in Denmark and with average ratios in the Netherlands (14), USA (16) and (France 18). Recent shifts in enrollments by field of study have also resulted in major disparities within higher education institutions (HEIs) in student-staff ratios. For exarnple, in one university the expanding enrollments of 450 computer science students are taught by 30 teaching staff, a ratio of 15 students per instructor while a field with the declining enrollments --chemistry-- 250 students are taught by 75 teaching staff, a ratio of only about 3 to 1. 9 3.21 Low ratios of students to staff are the product of three factors: (a) large requirements for in-class instruction (b) low average class sizes; and (c) a relatively low number of teaching hours by the teaching staff. (a) Large requirements for in-class instruction. Students are taught mainly through classroom or laboratory instruction, i.e. knowledge is directly imparted by instructors. The system requires students to spend a large amount of time in class (averaging 28 hours per week and up to 45 hours for medical colleges). Oral examinations are required at the end of the term in most subjects. Little independent study is expected. (b) Low average class sizes. Average class size tends to be small due to several factors: First, specialization starts immediately upon entry into higher education and this results in small class groups. Second, there is little consolidation of courses. There is no tradition of service courses in the initial years of higher education, in which students from different faculties take basic courses together in fields such as mathematics, foreign languages or basic sciences. Third. most teaching is carried out in seminars and small groups. The College of Economics. for example, gives over 60 percent of its classes in either seminars or small groups. (c) Relatively low weekly teaching loads. There is no central regulation or definition of required teaching hours per week for staff. Laws do not define a unified system of requirements for teachers. The public employee law sets salaries on the basis of age, seniority and foreign language proficiency rather tllan workload. Moreover, recent declines in relative wages have forced teaching staff to seek second jobs, making staff less likely to be able to meet teaching obligations at the base institution. Some institutions, such as Szeged University, have adopted minimum teaching requirements. In general, teaching loads vary widely, but are approximately as follows: 6 hours a week for professors and adjunct professors, and 12 hours a week for docents and teaching assistants. 3.22 Rigid State Budgeting Procedures. The rules governing state financing also contribute to low efficiency. Resources cannot be moved around the sector in order to maximize their effects. In addition, institutions typically lack internal mechanisms to reallocate teaching positions and other resources in accordance with shifts in student enrollments. (a) Lack of transparency. The basis for financial allocations in higher education has been opaque. Budget allocations have been made to institutions based on historical spending and bargaining. Under the socialist system in the later years only a fraction of the total eventual expenditures had been even shown in the budget. The rest had been obtained through a process of individual bargaining between HEls and authorities in power. This bred corruption and tended to perpetuate the system in place. Historical costs and the relative influence of the HEI management in bargaining with central authorities became the determining factors in the budget process. This process tended to favor traditional, prestigious universities in Budapest. 10 (b) Lack of institutional control over their own resources. State money has been distributed under five (an unnecessarily large number) budget headings, between which institutions may not transfer funds without prior approval from the Ministry of Education (MOE). The MOE has frequently made cuts in budgets after the start of the year, usually to meet targeted cuts imposed by the Ministry of Finance. This has played havoc with the budgets of the institutions. A university in Pecs had 57 budget changes imposed on it by central authorities during the year. (c) Lack of incentives to save. Traditionally, the HEIs have not been allowed to retain savings or to carry over funds from one year to the next, thus undermining incentives to economize. Instead, institutions have been encouraged to spend the funds by the end of the year, even in irrational ways. in order not to give the funds back to the central authorities. Recently, carry- overs have been permitted, but authority to spend these has not been granted until about half-way through the budget year, by which time much of the value had vanished due to high rates of inflation. (d) Lack of fiscal discipline. Cost overruns have not been penalized, particularlv for large, influential universities. Several universities in Budapest, including the Medical University and ELTE, have routinely overspent their budgets and successfully appealed for additional funds. This lack of financial discipline has had a corrosive effect on the entire system. Imposing sanctions on institutions which incur deficits would have a positive effect on efficiency. (e) Lack of accountability. There has been little accountability for use of the funds received. Budgets have not been based on an analysis of the performance of the institutions in fulfilling their responsibilities. Moreover. formal audits have been conducted only every two or three years. 3.23 Ineffective Governance and Inadequate Management Practices. The governance and management of higher education institutions have provided few incentives for efficiency and saving costs. Governance. Higher education is managed by people with academic and scientific skills rather than management experience. Rectors are elected by academic staff (60 percent of the vote) and students (25-33 percent of the vote.) These posts are of a short term nature after which the rector resumes his or her academic career. Because rectors are elected for short terms, they have little incentive to undertake difficult decisions or to rationalize spernding since such initiatives would lower the chances for re-election or would engender resentment among future academic colleagues. Formal management training is not available for rectors at present. Management Practices. Management practices tend to be outdated and ineffective. Little effort goes into establishing mission statements, objectives, alternative scenarios., target setting and planning means to achieve them. I1 3.24 In sum, priorities for improvements in efficiency are: (a) consolidating institutions, and departments within institutions, to realize economies of scale, (b) increasing the average number of students taught per faculty member; (c) financing on the basis of actual enrollments and average unit costs rather than historical levels; (d) granting greater financial authority for HEIs; and (e) professionalizing HEI management. C. Low NON-PUBLIC RESOURCE MOBILIZATION 3.25 Hungarian higher education is the heavily dependent on the state for its funding. About 85 percent of total education costs are financed by the state.6 Higher education's heavy reliance on state funding is undesirable for three reasons. First, use of public revenues to finance tertiary education for a small fraction of the population redistributes wealth from the tax-paying public to students. The Hungarian tax system is afflicted with serious problems of tax compliance which result in the burden of taxation falling disproportionately on those who are less well off. The select few who receive a free. public higher education may look forward, as a result, to a lifetime income that is more than twice that of the average citizen. A system of higher education finance that places a greater share of the cost of instruction on the beneficiary would be desirable. Second, over-reliance on a single source of revenues - the state budget - makes higher education vulnerable to political events. If higher education institutions were able to diversify their sources of funding and to exercise greater control over the mobilization of funds, they would become significantly more autonomous. Third, the present system of higher education finance does not link directly the performance of an institution and the resources available to it. The budgets provided by the state to similar faculties for each student enrolled vary by a factor of two. Introduction of a system of user charges would ensure that part of an institution's income would be related to the number of students enrolled in it. 3.26 The main factors contributing to low levels of non-state resource mobilization are (a) low levels of cost recovery from students; (b) lack of a loan system for students; (c) lack of incentives to generate income from other sources; and (d) constraints on the development of private higher education. Each factor is discussed in sequence below. 6The proportion of the higher education budget financed by the state is somewhat lower in higher education because of the sale of services. Hungarian higher education presently derives about 15 percent of its revenues from the sale of goods and services. The largest component of earned income is obtained from the sale by medical faculties of hospital services. In 1996. 7 percent of the consolidated higher education budget was derived from the provision of health services financed through the social insurance system. 12 3.27 Low Cost Recovery from Students. There is little private resource mobilization at public HEIs. Tuition fees at public HEIs were introduced in 1995 at a monthly tuition of HUF 2000 per month (US$18 in 1995 and currently US$11 equivalent) for ten months or HUF 20,000 per year. In addition, institutions were authorized to charge a higher supplemental fee, but they chose not to introduce the supplemental fee following protests by students. The tuition applies to all full-time students in undergraduate or doctoral training. One fifth of the students at each HEI may be granted full or partial tuition waivers on the basis of academic performance or financial need. Part-time students can be charged a supplementary fee of up to HUF 8000 per month. No limitations have been placed on tuition fees for other programs, including study for a second diploma and specialized advanced training. Revenue from tuition of all kinds is about HUF 7 billion which is equal to about 20 percent of all HEI revenues and covers about 7.5 percent of higher education expenses. 3.28 Anyone admitted to higher education as a state sponsored student receives his or her education virtually free cost, while those not selected for sponsorship must pay the full cost. A student support allowance of HUF65,000 (US$480) per student is provided to each institution. The allowance is distributed by student organizations at each HEI either on the basis of academic achievement or uniformly to all students, but not on the basis of need. The system would be more equitable if (a) all students were required to pay the same amount of tuition, and (b) scholarships were used to encourage study in fields of great national interest or were targeted on students in need. 3.29 Lack of a Student Loan System. User fees should be introduced in order to distribute the costs of higher education more equitably, ensure greater stability in institutional revenues and provide incentives to use resources efficiently. However, an abrupt change in the rules of the game would exclude large numbers of otherwise promising students from the higher education system since parents have not expected to pay and thus have not saved to meet such costs, and loans for education expenses are difficult to obtain. Moreover, high rates of inflation since 1990 would have seriously eroded the value of any savings that families might have accumulated. 3.30 A student loan program should be created to deal with this problem. The availability of student loans would permit an increase in tuition rates and would allow recovery of some of the costs of higher education from beneficiaries. A student loan fund woulcl not only mobilize additional funds for higher education, but would also diversify the sources of funding for higher education and reduce the amount of the implicit transfer to students who gain admission to public colleges and universities. The Ministry of Education and Culture has developed a small "credit" program to help students cover living expense while attending school, but this has not been implemented on a significant scale. 3.31 The creation of an effective student loan program would require overcoming several formidable obstacles. First, applying a means test to identify students who should be eligible for state subsidies would be very difficult. Countries that operate subsidized student loan schemes rely on reports of income and wealth to the tax authorities in order to estimate ability to pay for schooling and capacity to repay loans. Tax compliance in Hungary is low and the accuracy of self-reporting is unsatisfactory. Second. consumer 13 credit is underdeveloped in Hungary and thus there is little tradition of voluntary repayment and little onus attached to default. The principal enforcement mechanism in Western societies is the threat that default will be reported to credit rating agencies and thus the defaulter denied access to a home mortgage, car loan or credit card. These forms of consumer credit are not important to most Hungarian households and thus the threat is believed to be of little import. Third, the enforcement of loan repayment is usually facilitated by the borrower's sense that the lender has a legitimate claim on the borrower. This sense of obligation derives from recognition that the loan has supported the purchase of something of value, and that the terms of the purchase were fair. The history of highly subsidized higher education in Hungary undermines this sense of obligation. 3.32 The implementation of a student loan scheme would also require dealing with the problems inherent in lending large sums of money on a long term basis without collateral. Students generally do not have an established credit history which might be used to assess their character. Few have significant tangible assets that might be pledged as collateral for the loan. The earnings prospects of students are not clear at the time that a loan might be made. In addition, double-digit inflation in Hungary makes nominal term interest rates on fixed rate loans very high and thus imposes large risks on borrowers if inflationary expectations are not realized. Innovative lending products that index the unpaid principal amount of the loan to recognize inflation or that adjust interest rates frequently might be considered. Application procedures that identify a large network of friends and family members might be employed to simplify the tracing of defaulters. Adopting an income contingent repayment scheme (possibly associated administratively with the social security system in which most Hungarians participate) and a program of forbearance for persons who are unemployed, disabled or faced with exceptional financial crises might also be used to avoid formal default and thus increase the probability of eventual repayment. 3.33 Constraints on the Development of Private Higher Education. The Education Law of 1990 authorized the chartering of private colleges and universities. Thirty-five private colleges and universities have since received charters. These institutions respond to the demand for skills created by the emerging market economy and for religious instruction. Some also serve those who failed to gain admission to public institutions. The private higher education system includes 30 institutions which were returned to churches in 1'990 having been seized by the state in 1947. Five new "foundation" schools have been created on a for-profit basis. Private institutions currently enroll about 10 per cent of all students in higher education, with enrollment divided roughly equally between the foundation colleges and church-owned colleges and universities. The foundation colleges charge fees ranging from HUF 60.000 to 75.000 per semester which is about twice the average monthly salary and about 6-8 times the tuition fee charged by public institutions to students who are not state sponsored. Private institutions which have been recognized by the state receive considerable state support. Some of the church-owned institutions receive full state support. The total state support to one business college represented about 40 percent of its total budget in 1996. The rapid growth of privately owned and financed higher education institutions reveals the willingness of some beneficiaries to pay for higher education. The expansion of private higher education could supplant the need for state financing of students, and could thus achieve savings for the state budget. 14 3.34 The development of private education is impeded by several factors. First, the procedure for gaining state recognition is time consuming. In one instance, the Higher Education and Scientific Council (FTT) declined to approve the opening of a new business college without stating the reasons, even though the college had obtained preliminary approval from the accreditation authorities. Second, the legal status of non- profit organizations has not been adequately codified. Third, the tax code provides no incentives for private contributions to non-profit private schools. 3.35 In sum, the main requirements for increased non-state resource mobilization are: (a) all students (both state sponsored and non-sponsored) should pay the same tuition fees; (b) subsidies should be targeted to students according to financial need; (c) a student loan program should be established; (d) financial incentives for HEIs to mobilize resources should be introduced: and (e) non-state financed incentives for expansion of private higher education should be introduced. 15 4. ROLE OF THE STATE, LEGAL FRAMEWORK AND THE REFORM PROGRAM A. ROLE OF THE STATE IN THE TRANSITION PROCESS 4.1 The state must play a substantial role in the short term in the reform of higher+ education, but it must also fulfill several functions in the longer term as well if the system is to function efficiently and equitably. State institutions provide about 90 percent of all higher education in Hungary. These institutions have been granted considerable autonomy since 1989. including authority over the admission of students and the selection of faculty. In addition, Hungarian higher education institutions have been allowed some limited discretion in the use of funds allocated to them from the state budget. The state operates an accreditation system and approves the granting of degrees in new areas of study. The regulatory and oversight functions are likely to be carried out by the state in the future, supplemented by professional organizations and associations of higher education institutions. The state is also likely to continue to provide significant budgetary support for higher education. This support is justified by the need to encourage reform of the higher education system and to ensure research and teaching in fields of national importance. 4.2 The state is also likely to play a major role in providing education loans to students. The precedent has been established of charging students for instruction. However, tuition charges which are large enough to recover a significant fraction of the cost of providing instruction can only be imposed if a student loan program is made available (see paragraphs 3.31 - 3.34). A guarantee, supported by the state, will be required as a substitute for collateral in order attract private lenders to this sector. The state may also recover student loans more efficiently than the private sector, through the use of the administrative apparatus of the income or payroll tax systems. 4.3 The state has an important role to play in assembling and disseminating information about labor market conditions and prospects. The efficient operation of the market for higher education will require that consumers are informed about not only the options before them, but also the likely consequences of each course of action. The state should collect, analyze and disseminate such information. 4.4 Finally state intervention is needed in the near term in order to ensure that past investments in physical, human and social infrastructure for higher education are conserved during the transition. The existing colleges and universities represent very large commitments of economic resources and human talent. During the transition, the state should continue to ensure the preservation of these assets. B. LEGAL FRAMEWORK 4.5 The legal basis for higher education has been articulated in three recently enacted laws and a Parliamentary Resolution. The laws have defined the administrative structure, intermediaries and autonomy of higher education institutions (HEIs). The Government has consolidated these reforms and extended them to cover new issues in a "Letter of 16 Sector Development Policy" (Annex 2). Together these instruments provide an adequate legal and policy basis for the reform of higher education. The following sections summarize these laws and the Letter of Sector Development Policy. 4.6 The Education Law of 1990 (a) allows HEIs to determine the number and type of admissions; (b) gives HEIs the right to nominate professors, subject to Government confirmation; (c) permits the establishment of non-state (private) HEls; and (d) confirms a 1985 initiative that eliminated Marxist ideology from the curriculum and limited the role of the MOE in defining curricula and selecting personnel. 4.7 The Law on Higher Education of 1993 (a) places all higher education institutions under the supervision of the Ministry of Education, and unifies the higher education budget with effect from January 1995; and (b) defines the role of the Ministry of Education as supervisory oversight of HEIs. strategic planning, preparation of education policies, approval of the founding and abolition of faculties, and monitoring of the use of central resources. The Law established two key intermecdiary institutions to provide professional advice on development and control of higheir education: the Hungarian Accreditation Council (HAC) and the Higher Education and Scientific Council (FTT). HAC had been created in November 1992 to review proposed postgraduate programs in HEIs; the Law of 1993 confirmed its status as a quasi-independent body. The HAC renders opinions on the establishment or recognition of H[EIs, establishment or abolition of fields of study, and requirements for qualifications. In addition, the Law specified that HAC must assess the standard of education and research for each HEI every eight years. The Law specifies that the FTT should propose and advise on priorities in development programs and research; establish or abolish courses, faculties, and institutions; recognize non-state HEIs; recommend the distribution of budget support; and recommend the size and allocation of student admissions. 4.8 The Education Law of 1993 also established norms-based budgeting. The norms are related primarily to the number of students enrolled by type of institution and field. The Law defines five budget headings: student support, training, facilities maintenance, program development, and research. The aims of the new financing initiative are first to distribute state budget in accordance with HEI performance, and second to increase the cost effectiveness of higher education. The HE1s may use the budgets without restrictions within each category but may not transfer funds between categories witlhout prior authorization from central authorities. In addition, the Education Law of 1 993 states that students must pay tuition and other fees in higher education, but leaves it to a Government decree to establish the levels. 4.9 The Law of 1993 also gave students considerable influence over HEI affairs. It provided them with control of one-fourth to one-third of the votes on HEI institutional councils. It granted students the right (to be exercised through democratically-elected student unions) to participate in decisions regarding admissions, examinations, selection of elective course offerings, choice of outside speakers, evaluation of teaching staff. management of dormitories, and allocations of student support stipends. 4.10 Finally, the 1993 Law called for the promulgation of a law on the development of higher education within two years. The Government interpreted this as requiring that a 17 Government Resolution set out the principles for further development of higher education, in order to counterbalance the effect of budgetary cuts. 4.11 The 1995 Parliamentary Resolution defined goals for development of higher education: (a) increasing student numbers; (b) creating a flexible system of levels in higher education with transferability between levels and the introduction of a unified national credit system; (c) assuring that the allocation of state funds is based on quality rather than public or private ownership (i.e. "sector neutrality"); (d) increasing the efficiency of the HE system by the increasing the economic independence of HEIs and by mobilizing non-state resources (including tuition and other sources): (e) modernizing and professionalizing HEI management along with greater consideration for labor market needs; (f) increasing cooperation between HEls and research institutes; (g) standardizing the qualification requirements system and the workload of teaching staff, together with revisions of salaries and inclusion of teachers as public employees. 4.12 The July 1996 Amendment of the Law on Higher Education integrates post- secondary vocational training into HE. The Amendment creates a four-tier structure of higher education, with the introduction of two-year vocational training at its base. The four tiers of the system are two years for higher vocational programs; 3-4 years for college programs, 4-6 years for university programs and 1-3 years for postgraduate programs and 3 years for doctoral programs. Higher education institutions may conduct accredited post-secondary vocational training and one-third of the credits acquired in courses of these programs must be accepted by the colleges and universities. 4.13 The Amendment also took steps to lessen the control by the Ministry of Education of the HAC and the FTT. The HAC is now an independent body reporting to Parliament; its decisions can no longer be overturned by the Minister of Education. The FTT nev" elects its own President and the Ministry of Education has only one representative. Proportional representation of private higher education institutions is mandated. The FTT now operates a Training and Research Strategy Subcommittee and a Finance Committee. The Amendment mandates a National Credit Council to be coordinated by the FTT. The task of the Council is to design, and to begin implementing a national credit system by the end of 1997. One of FTT's responsibilities is to prepare a new decree to adapt broader definitions of academic requirements by discipline. 4.14 The Amendment also initiates the integration of individual institutions into multi- faculty colleges and universities. It creates the legal framework for integration and defines the organizational structure, and operation and finance of educational federations as a step towards full integration into multi-faculty colleges and universities. The Amendment allows for federations to become fully merged within two years. It identifies four conditions for successful association: (a) proximity; (b) complementary activities, (c) elimination of duplication of administrative, educational and research activities, and (d) establishment of a common management and financing system. The Amendment provides that the rights and responsibilities of associations shall be exercised by a senate and full-time president and that a Government Decree will establish the specific requirements for forming associations. 18 4.15 Finally, the Amendment earmarks funds for Higher Education Development. The Law stipulates that four funds be created, including: (a) salary supplements for outstanding professors; (b) research and development; (c) program development: and (d) books and libraries. The MOE is to administer and allocate the funds on a competitive basis. C. GOVERNMENT POI,ICV ON HIGHER EDUCATION DEVELOPMENT 4.16 The Government has formulated its policy on the further development of the system of higher education over the medium term (Annex 2, Letter of Sector Development Policy). The main objectives of the policy are: to adjust to and support the market economy; to facilitate accession to the European Union, to maintain higlh quality standards while ensuring greater access; to use public resources efficiently; and to increase non-state revenues for higher education. 4.17 The strategy for higher education calls for an expansion of enrollments to accommodate 25-30 percent of the age group, mainly by channeling increases into short- cycle higher education. The allocation of state-funded places to HEIs, both increases and decreases, and is to be based on student demand and an assessments of needs for occupations of particular concern to the public sector. The content and structure of teaching is to be made more flexible through introduction of a credit system based on full-time equivalency and relaxation of detailed requirements for degrees and certificates. 4.18 Trends in governance will be reinforced. The Ministry of Education will gradually decrease its role in routine supervision of institutions and will increase its role in strategic planning. Umbrella organizations will be restructured in accordance with the new Law in terms of orientation and composition. In particular, steps will be taken to speed up the accreditation process and permit greater freedom to HEIs in starting new programs. The FTT will be re-established on a more professional basis, as opposed to representing interest groups, to guide policy making and allocation of funds. The autonomy of HEIs will be strengthened in terms of financial authority. Development of HE;[s will focus on better strategic and business planning and assistance for professional management. Integration of presently fragmented HEls into multi-faculty colleges and universities will be given high priority. Some eight to ten multi-faculty institutions are envisaged, combining 40 percent of existing institutions into larger enterprises to achieve economies of scale and provide greater program opportunities for students. 4.1 9 Financial objectives stress cost-effectiveness through improvements in the norms- based system of financing in which institutions receive budgets based on the number and type of students. The norms will be simplified and extended to new budget categories, thus covering a greater proportion of total budgets. Plans also include greater private financing of higher education by students through tuition charges for those able to pay. The importance of private higher education is recognized in terms of its contribution to expansion of enrollments and competition in market-oriented fields. Obstacles that impede the development of private higher education, such as overly rigid accreditation. will be removed. 19 D. CONSTRAINTS ON HIGHER EDUCATION REFORM 4.20 Implementation of the reforms faces formidable challenges and constraints. Traditionally favored institutions can be expected to resist the changeover to a full norms- based financing system because they would loose significant amounts of state funding in the process. Within HEls, teaching staff--mainly represented by professors with seniority and often representing traditional fields of study--have the majority of votes on institutional councils. Such interest groups could resist internal reallocation of resources from fields with declining enrollments towards those with growing demand from students. Some teaching staff could also be expected to resist efforts to consolidate classes, decrease student contact hours and increase the number of teaching hours per week since these measures would result in the need for fewer teaching staff and the possible loss of jobs. Improved efficiency eventually will facilitate increases in academic salaries, but in the near term low salaries have led to outside activities on the part of teaching staff that will make increases in productivity difficult. Moreover, in some cases assistance will be needed to support the changeover to different teaching methods required for more independent study. There is virtually no tradition or experience with strategic planning, either at the national or institutional levels. Greater autonomy for HEIs must be combined with clear accountability. and training of managers to assume new functions. Finally, students may resist efforts at greater cost recovery without access to student loans and information about increased opportunities available to them through the reforms. 20 5. THE PROJECT A. WORLD BANK COlJNTRY OBJECTIVES 5.1 The Country Assistance Strategy (CAS) for Hungary. approved in 1995, iclentified six broad aims: (a) to restore macroeconomic stability; (b) to accelerate employment growth; (c) to facilitate accession to the European Union; (d) to promote private sector development; (e) to increase the efficiency of public sector investments; and (f) to develop human resources capacities. The CAS, approved on January 26, 1998, narrowed the focus of Bank assistance to two primary objectives: (a) to sustain the recent economic recovery; and (b) to support the country's efforts to join the EU. 5.2 The 1995 CAS concluded that the Bank's assistance to education should include an investment project designed to restructure higher education and to raise its efficiency, increase its quality and expand access to it. More specifically, the CAS indicated that a higher education project should (a) create incentives for increasing enrollments in both public and private higher education, without increasing budgetary support for the sector; and (b) enable the sector to produce graduates, knowledge and services needed by a market economy and a future EU member country. The CAS identified four policy reforms as critical to meeting these goals: (a) greater financial autonomy for higher education institutions including authority to impose user charges and to control conditions of employment and salaries; (b) an improved system of state funding for higher education. and (c) greater incentives to private institutions to provide student financial support; and (d) an improved accreditation process to facilitate the establishment of new institutions. The proposed project is designed to meet these goals. The 1997 CAS reiterated these goals and stressed in particular the need to make higher education more accessible to a broader group of society, more responsive to the needs of a market economy, and more efficient in its use of resources. B. PROJECT OBJECTIVES AND MEANS 5.3 The proposed project supports the Government's comprehensive reform program for higher education. The over-arching aims of the proposed project are to develop a system of higher education that (a) responds to the nation's changed and changing social and economic needs; (b) operates efficiently: and (c) mobilizes greater private finance andi distributes the costs of education more fairly. More specifically, the objective of the project is to enroll at least 25 percent of the eligible age population in higher education programs appropriate for a market economy at substantially reduced public cost per student. (See Annex 3 for detailed project strategy.) 5.4 Increasing Responsiveness to Social and Economic Needs. The project will support efforts to raise to at least 25 percent the proportion of the age group 18-22 emolled in higher education institutions. This increase will be attained within the present resource envelope by improving operating efficiency, by concentrating enrollment increases in non-degree programs, by modernizing curriculum and teaching methods in 21 existing institutions, and by further encouraging the development of private higher education. 5.5 The project will support government efforts to increase the responsiveness of higher education through implementation of six policy reforms. First, greater importance will be assigned to student choice and institutional performance in allocating public funds to individual institutions and in setting enrollment targets by field of study and institution. The reformed system will redesign HEI finance by placing greater weight in calculating public support on the numbers of students successfully completing their studies. Second, the process for allocating new admission places to institutions will be altered in order to place greater stress on the demands of students. Third, selected HEls will be permitted to reallocate funds among faculties and programs. Fourth, the flexibility of instructional programs will be increased by placing greater emphasis on independent student learning, establishing a credit system. rationalizing the requiremelnts for qualifications, consolidating teaching programs and deferring specialization. Fifth, a wider range of interests will be included in advisory and governing groups in order to increase sensitivity to the needs of clients and other stakeholders. Sixth, the HAC and the FTT will be reformed and strengthened. 5.6 Improving the Operating Efficiency of the System. The project will support initiatives to strengthen the management of higher education and to make more efficient use of resources. It will pursue these ends using six instruments. First, the project will help provide both incentives and means for HEls to control expenses. HEls will be granted greater financial autonomy, by offering block-grant funding, and providing authority to keep. carry-over and invest resources. The reform will also eliminate state funding of budget overruns. Second, the project will help HELs to develop a more business-like approach to management, including the adoption of strategic institutional planning, business planning and resource management; creation of infrastructure to support financial planning, monitoring and control: and development of management expertise within HEIs. Third, the project will help institutions control capital expenditures by adopting a unified approach for the allocation of state and project funds. and by introducing the use of economic criteria -- including least cost analysis -- for the selection of investment subprojects. Fourth, the project will support efforts to reduce administrative expenditures per student through consolidation and integration across and within institutions. Fifth, the project will help to reduce teaching expenditures per student by increasing the number of students taught per teacher. Finally, the project will reduce expenditures for student services by introducing professional management of support services and market tests of the demand for these services. 5.7 Mobilizing Private Finance. The project will support four means to mobilize private resources and create a more equitable system of higher education finance. First, it will seek to increase cost recovery from beneficiaries. A universal system of tuition charges will be introduced and the cooperation of the HEIs will be encouraged by permitting HEIs to set and keep fees and tuition charges. Second, the project will help redistribute public subsidies for higher education to encourage study in fields of strategic, national importance and to ensure greater equity in access to higher education by supporting those with the greatest financial need. Third, the project will support the creation of a national student loan program to assist needy students. Fourth, the project 22 will encourage the development of private higher education and mobilization of resources from other sources, including private donations, alumni giving and commercial income. 5.'3 A "Letter of Sector Development Policy on Higher Education" and a Policy and In:stitutional Matrix have been submitted to the Bank. The letter of sector policy has been signed by the Ministers of Education and Finance on behalf of the Hungarian Government (See Annexes 2 and 3.) C. DETAILED DESCRIPTION OF PROJECT COMPONENTS 5.9 The proposed project supports policy reforms both at the national level and within selected higher education institutions. Consequently, the project is divided broadly into two types of instruments: nation-wide policy and institutional measures, and investments at selected higher education institutions (HEIs.) (See Annex 4 for alternatives considered in the design of the project.) The following project components which are summarized bel[ow and detailed in the Project Implementation Plan (PIP): Policy and Institutional Development (US$ 7.4 Million) Higher Education Institutes (HEI) Investment Program (US$201.5 Million) Management Information Systems (MIS) (US$19.4 Million) Management Capacity Development (US$6.9 Million) StLdent Loan Program (US$2.6 Million) Project Management and Project Preparation Facility (PPF) (US$5.6 Million) 1. Policy and Institutional Development (US$ 7.4 Million) 5.10 The proposed project supports the introduction or strengthening of key policy and adrninistrative reforms in five priority areas: (a) allocation of students and finance; (b) adrninistration of higher education; (c) teaching programs and structures; (d) tuition charges and student loans; and (e) private higher education. These five areas have been selected because they influence the performance of the whole sector--they are key points of leverage for reform. Financial assistance will be provided in the forn of technical assistance for analytical work, preparation of reforms and monitoring of implementation progress by outside experts. 5.11 Allocative mechanisms. The basis on which funds are distributed within the system of higher education strongly affects performance and behavior. Within this context, two methods of resource allocation are particularly important in Hungary, i.e. the methods for allocating state-financed admission places to HEIs, and methods for determining budgets of the HEIs. These are discussed sequentially below. 5.12 Allocation of State-Funded Admissions. Methods for allocating publicly-funded admission places to HEIs rely on methods carried over from the era of central planning. In 1996 central authorities allocated new student admissions for each institution in a total 23 of 64 fields. The process has been subject to interference by pressure groups, has protected historical privileges and has neglected student preferences. A new allocation process will be developed and implemented under the project employing principles outlined in Annex 5. The following procedure will be adopted: (a) The FTT will determine the total number of state financed places annually according to broad fields of study, taking into account student demand, the labor market and other considerations. (b) Potential entrants to higher education will take a national examination and the results will be used to award grants to students by field. Eventually the secondary school leaving examination --the baccalaureate which is to be introduced by 2004 -- might be used for this purpose. To initiate the new system earlier it may be necessary to implement a national aptitude test. (c) Students will then apply to as many institutions as they wished; HEIs will choose whether to give their own entrance examinations; and the individual HEIs will compete for students. (d) Central authorities will eventually impose quotas or ceilings on enrollments only for very expensive fields of study or one for which the state is the principal employer, and on state-supported places in the Budapest region. The new method is expected to lead to competition among HEIs for students and greater responsiveness to student concerns. Students might also choose to take their grants to private HEIs. The ultimate objective will be for students to choose available places freely based on ability and interest. Financial and other incentives will be used to attract students into fields of study deemed in the public interest. 5.13 Further Development of Norms-based Budgeting. Hungary has taken the first step towards the introduction of norms-based financing, i.e. financing HEIs based on the actual number of students enrolled in various programs and average recurrent costs. Norms-based financing is designed to provide comparable funding for comparable programs, regardless of location. IThis change of financing mechanism has already begun to alter the incentive structure for HEI administrations. A premium is placed on attracting new students and on bringing unit recurrent costs into line with the national averages on which the norms are based. However, the present financing formula is overly complex, lacks transparency, covers only a relatively small proportion of total costs, and finances colleges and universities differently for the same degrees. 5.14 Under the project the normative financing mechanism will be refined and improved. A revised model will be introduced beginning in 1998. The new model will reduce complexity by (a) collapsing the number of categories financed from 13 to 7 then ultimately to 5 categories; (b) expanding the teaching normative category to include overheads; and (c) eliminating the disparities for the same degrees between college and university levels. Transitional support will be provided for those institutions most adversely affected by funding reallocations. To achieve greater efficiency the basis for 24 determining teaching norms will be progressively raised from an average of 8.7 students per teacher as at present to 10.5 within two years, 12 within four years of project implementation, and 13 by the end of the project. Proposals have been prepared for the revised allocation mechanisms. Promulgation of a Government decree merging the maintenance with teaching allocation category in normative financing for 1998 and thereafter and reduction in the number of normative categories to no more than 7 is a condition of effectiveness of the project. 5.15 Institutional Development and Reform. Hungary has gone a considerable distance to decentralize its system of higher edncation. Functions that were perforned previously by the central Ministry of Education are now the responsibility of professional intermediary bodies, such as the FTT, HAC and the Higher Education Development Fund (FE,FA). Considerable authority has been given to HEIs. including academic autonomy. However, HEIs still lack administrative authority to manage their own financial affairs. The proposed project will provide suppoIt to strengthen the functioning of the decentralized institutions. 5.16 Restructuring Intermediary Institutions. Intermediary institutions have been reconstituted in accordance with the 1996 Law. A budget for adequate professional staf-fing at FTT, HAC, FEFA, and the National Credit Council (NCC) will be provided by the Government in the 1998 budget to ensure that these important policy and implementation agencies have to capability to conduct the necessary background and policy analyses for decisions required. Because of the relative inexperience with intermediary bodies, the substantial number of initial tasks assigned to these agencies, and the backlog of reviews and decisions awaiting action, the project will support temporary augmentation of their staffs through technical assistance. In the case of the FTT, technical assistance will focus on elaboration of the overall strategy for higher education and integration and refinement of in the normative financing formula. student admissions allocation, a mid-range development plan. new program proposal reviews, and studies on curricular and degree reforms. Assistance for the HAC will concentrate on designing and implementing methods of new program reviews that will result in ways to review programs which promote broader degree reforms rather than reinforce an overly specialized degree structure. In the case of FEFA. assistance will be directed at assisting their role in the review and selection of capital investment projects. Significant technical assistance for the NCC will help develop and implement a credit and transfer system for HEIs. Establishment of the NCC according to the Higher Education Act is a condition of effectiveness of the project. 5.17 Greater financial authority for HEIs. The Ministry of Finance (MOF) has agreed to grant three higher education federations (Debrecen, Kecskemet and Szeged) additional financial authority. Specifically, these three "experimental" HEIs will be allowed to transfer funds freely between budget categories, be exempted from budget revisions during the year and be permitted to carry over year end surpluses and to use these funds immediately. These HEIs will be required to account formally for the use of the funds and to submit annual audits of the accounts. An agreement has been signed by the three HEls, the MOE and the MOF. The Borrower also agreed that it will refrain from deficit financing of HEls and will adopt a policy requiring HEls to operate from a balanced budget. 25 5.18 Reforms in Teaching Programs, Processes and Structures. The higher education system will be re-engineered to emphasize skills in acquiring and applying knowledge, and to reduce the emphasis it now places on the mastery of fact, formula and procedure. More concretely, students will be required to carry out more independent studies in which resourcefulness, judgment and synthesis are demanded. At the same time, instructional programs and teaching materials will be introduced that reduce the role of the instructor in selecting and integrating materials. These changes will place greater responsibilitv on students for their own learning. This will entail a substantial reduction in the number of class contact hours required of students. It will also require the further development of library capacity, laboratories, computer facilities and network connections. and dormitory space with study areas. 5.19 The 1996 Law on Higher Education mandated the creation of an academic credit system and the establishment of a NCC and National Credit Office (NCO). Introduction of a credit system is intended to introduce greater flexibility in the system, permitting students to transfer from one program of study or institution to another or between levels of education. Introduction of a credit and transfer system will permeate every HEI and faculty. Consequently, the design and implementation of the credit system represents an excellent vehicle for general curriculum reform that focuses on defining common core modules as a basis for consolidations across related disciplines, a greater number of elective courses, and less restrictive qualifications requirements. The overall framework of the credit and transfer system will be compatible with the European Credit Transfer System (ECTS). Institutional and national models will be developed and policies implemented for defining numbers of credits for each degree level, full-time study and linking the credit system to professional qualifications requirements. 5.20 The proposed project includes financial assistance for efforts at curricula reforms in several ways: (a) technical assistance to the Hungarian Accreditation Committee to prepare guidelines to broaden the excessively narrow and specialized curricula and degrees; (b) technical assistance to the NCO and NCC in introduction of the credit system; (c) assistance to integrating institutions for provision of additional capacities to permit more independent study, such as information technology, libraries and dormitory space: and (d) grants to institutions for academic innovations and consolidation plans (described below). 5.21 Equitable Higher Education Finance. Under the reform program the basis for allocating state subsidies to higher education will shift from merit to financial need. This reform will reduce the number of able students who are precluded from participating in higher education institutions because of the cost of enrolling without state sponsorship. Benefiting institutions will be allowed to distribute state funding among students through scholarships. In addition, these institutions will be required to adopt a plan for increasing income from tuition and other fees, leading by the year 2004 to recovery from students of at least 20 percent of the cost of instruction. The State will be required to devise a student financial aid program that ensures that qualified students are not excluded from the opportunity for study because their families do not have sufficient savings or income to meet the private costs of education, and that provides incentives to students to study in areas of strategic, national interest. The financial aid program will include a student loan program that will provide guarantees to private banks for lending to students. A 26 condition for effectiveness of the project is submission of an acceptable proposal and terms of reference for a study of procedures for targeting student support subsidies on stuldents in financial need. 5.22 Incentives for Private Higher Education. The project will support development and implementation of a strategy to enhance the role of private institutions in higher education. Policies will be pursued in three areas. First, the State will ensure that public higher education does not crowd out private education. This will involve ensuring that the accreditation process is transparent, timely and fair for private institutions; increasing tuition fees in the public sector as soon as the student loan program is in place; and establishing a division of labor between public and private sectors, such as limiting growth of the public sector in fields that can attract sufficient private financing; the public sector will stress quality and enrollments in fields in which private rates of return are not high and cannot be handled well by private institutions, but are nonetheless important. Second, the State will deregulate private higher education and remove many controls over private institutions, such as governance, selection of rectors, who decides the curriculum, etc. Third, the State will move from the present policy of nearly parallel public funding of public and private sectors to a policy of ensuring that private education is increasingly privately financed, by means of reducing public subsidies as soon as possible, while at the same time ensuring access to other sources of income, such as guaranteed loans for students in private higher education and passage of a non-profit law to boost income from private contributions. The Government has prepared a strategy satisfactory to the Bank for development of private higher education (Annex 6). 2. Higher Education Institutions Investment Program (US$ 201.5 Million) 5.23 The cornerstone of the Government's reform program to reduce costs and improve quality of higher education is the integration of single-purpose institutions into multi- facult> colleges and universities. Consolidation will help to create true universities in which a broad range of disciplines will be taught. This will provided an environment in which interdisciplinary study and research can flourish, and will promote the broadening of students' education and experience through greater informal interaction among students and faculty in other disciplines. In addition, combining foundation courses for related programs of study will force students to begin to develop skills in adapting knowledge and specific skills for use in a focused area of study. 5.24 Most of the project funds will be devoted to addressing critical one-time needs for reforming institutions. The bulk of the project resources will be used to support capital construction and renovation so that integrating institutions can create needed library, informatics and central administrative facilities, as well as lecture halls and larger classrooms made necessary by the restructuring of the curriculum. The project will finance the costs of renovating and expanding libraries, enlarging classrooms, developing computer systems for administrative purposes, and constructing faculty offices, common services facilities, dormitories, and the like. Institutions that agree to integrate into multi- faculty universities or colleges will be eligible to compete for these capital investment funds. The project will finance design services, civil works, the purchase of furniture and 27 equipment, and updating of the information and network technologies for newly integrated services and new facilities. Institutions will also be required to adopt the program of policy reforms for higher education, including the introduction of a credit system, reduction in compulsory lecture hours, imposition of tuition fees. and rationalization of student financial aid. 5.25 So far, some 13 institutions have virtually completed plans to merge into three "federations" to be followed in two years by transition into a total of three multi-faculty institutions. Each of the three "federations" (Debrecen, Kecskemet and Szeged) has prepared a medium-term institution development plan (IDP) based on a self-analysis of strengths. weaknesses, opportunities and threats. The IDPs set priorities for enrollment expansioni and quality improvement, and include plans for administrative restructuring and academic consolidation (Annex 7). Approximately 20-25 additional institutions are expected to consolidate into a total of about six more integrated institutions under the project. Based on IDPs prepared in three locations. each integrated institutionl will require an average of about US$22 million in capital investments. 5.26 Institutional integration is a means to achieve quantum improvements in efficiency and is not an end in itself. The scope for efficiency gains (combinations of cost reductions and quality improvements) throug1h internal academic rationalization in some non-integrating institutions may be similar. per dollar invested, to thle overall efficiency impact achieved thlrough institutional integration. For this reason, up to US$ 30 million of the funds allocated for the Higher Education Institutions Investment Program may be used to support capital investments required to implement the IDPs of non-integrating institutions. These IDPs (and their constituent capital investment projects [CIPs]) will be evaluated against the same criteria and under the same procedures as for integrating institutions. They will have to be demonstrated to be superior in overall efficiency impact per dollar invested compared with the CIPs for integrating institutions which they will displace from the program. No CIP for a non-integrating institution can exceed US$ 10 million equivalent. 5.27 Participating HEIs will also be provided assistance in establishing planning and management systems commonly used in Western universities. The purpose of these systems will be to enable the institution to achieve its goals more effectivelv and efficiently. A strategic planning exercise will be adopted to define the mission and objectives of the institution, and to analyze its strengths, weaknesses, opportunities and threats. A formal institutional development plan (IDP) based on the strategic planning exercise will be published every three to five years. An academic plan will be derived from the strategic plan outlining plans for phasing out or initiating programs and courses. The academic plan will be prepared as part of the annual budget process. A systems plan will be developed which defines management. financial and information systems needed to accomplish the goals articulated in the strategic plan. The systems plan will be prepared on a three-year rolling plan basis and will be updated annually. A business plan will be prepared annually which includes financial and budgetary projections, an overall financial plan (income by source, expenditures by category/function) and an operating budget. The business plan will also be created on a three-year rolling plan basis: actuals will be compared quarterly with projections. Finally a capital investment plan will be prepared which includes a five year master plan. a long-range rolling capital investment 28 program (reviewed annually) and an innual capital development plan which outlines detailed plans and cost estimates for highest priority projects ready for finding. 5.28 Higher student-teacher ratios will be achieved by integrating HEIs (thereby exploiting scale economies in instruction) and by introducing funding norms that penalize over-staffing. These measures will lead to (a) a reduction in the number of class contact hours. (b) a consolidation of courses to achieve larger average class sizes, and (c) an enforcement of minimum teaching loads by faculty. IDPs will define specific targets in each of these areas. 5.29 The Integration and FEFA Decrees have been revised. During negotiations the Government gave assurances that it will select, in consultation with the Bank. higher education associations for investments under the project which have (i) been approved formally by Government as associations. (ii) prepared comprehensive institution development plans based on an analysis of strengths. weaknesses, opportunities and risks for the institution. (iii) prepared comprehensive capital investment plans based on analysis of use factors of existing premises and (iv) justify proposed investments in terms of efficiency gains. 3. Management Information Systems (US$19.4 Million) 5.30 The proposed project will support the development of new management information structures, procedures and systems in the integrating HEIs (see Annex 8). The project will finance: (a) expert services for the development of strategy and process redesign. (b) software development or purchase and adaptation; (c) upgrading of information technology networks; and (d) training support. Priority will be given to budgeting. accounting and financial control systems. Steps in the development of a financial system will include a detailed analysis of requirements, software adaptation. testing and training. Systems development will be coordinated across HEIs through the Committee of the Informatics Association for Hungarian Higher Education to avoid duplication of effort and to facilitate integration. The proposed component will increase the effectiveness and efficiency of management and control systems. Based on detailed estimates for one integrating HEI, the costs for introduction of new financial systems and related information technology will require approximately US$ 1.8 million per HEI, and an estimated nine HEIs will participate in the project funding. 4. Management Capacity Development (US$6.9 Million) 5.3 IStrengthening management skills is one of the most powerful instruments for achieving change and greater efficiency. The project will support increased management capacity in the areas of planning, financial management. information systems, academic reform (in such areas as the development of a credit and transfer system), and policy analysis (Annex 9). The project will finance training for existing practitioners and newly recruited staff responsible for developing the documents and systems necessary to implement the reform programs. particularly in integrating institutions as well as national reviewing bodies such as the FTT and MOE. Highest priority will be given to audiences and programs focused on specific policies and products associated with institutional 29 integration (such as preparation and refinement of IDPs). Training programs will also be developed for skills in areas such as financial management and business process re- engineering. Trainers will be drawn from experienced international experts and Hungarians. with in-country trainers gradually assuming full responsibility for continuing training. Under the project about 750 university professors and administrators as well as central MOE and other national staff will receive training. In addition to product- specific training for project requirements and continuing management training, the project will finance twinning arrangements. fellowships and study tours with leading international universities and national or state bodies. Through these programs, HEIs will send or exchange administrative staff and will be encouraged to draw upon models of operation that they investigate. A provision of US$4.6 Million has been made for these types of arrangements. 5. Guaranteed Student Loan Program (US$2.6 Million) 5.32 The proposed project will finance the development of a national guaranteed student loan program. A loan program based on a state guarantee of repayment is needed in order to enable households to finance a greater share of the cost of higher education (see paragraphs 3.31 - 3.34). 5.33 During preparation of the proposed project two of the largest commercial banks expressed an interest in making student loans. However, they recognize the need to secure these loans. A direct guarantee by government has been rejected by both the banking industry and the Ministry of Finance (MOF). The banking industry prefers instead to have a legally autonomous, semi-private agency provide a guarantee of repayment. The banks believe that such an institution will provide the most credible assurance of the ultimate recovery of such loans. The MOF has also rejected the suggestion that the government establish a lending institution for student loans on the ground that government is poorly positioned to manage the allocation of consumer credit or to pursue the routine recovery of loans. 5.34 Except in the cases of rapidly expanding fields -- such as translation services. accounting and business management -- the salaries currently being offered to new graduates will not allow them to service a conventional. level payment loan. The inability to service an education loan is due primarily to the very high inflation premiums imbedded in nominal interest rates. Such high rates will prevent most students from borrowing. These findings suggest the need for innovative financial products that allow frequent adjustments in payments to reflect actual inflation rates or permit either graduated or income-contingent payment on the loan. An income contingent repayment scheme administered under the social insurance program or income tax is also under discussion. 5.35 Furtlhe-r work is needed in several areas before a student loan scheme can be launched. First. a legal entity must be established to administer the guarantee mechanism. This entity must have the authority to collect debts that originating bank has not succeeded in recovering. The primary guarantee might be financed from a fee imposed at the time a loan is originated. Second, agreements need to be reached on who should have access to guaranteed student loans. Third. responsibility for screening 30 students for eligibility and capacity to repay needs to be assigned. Most student loan guarantee programs rely on the educational institution to certify the student's eligibility and then the guarantor provides the lender with the assurance that it has access to the guarantee. Fourth, the borrower's obligation to repay the loan needs to be developed as fully as possible through an application process that facilitates the tracing of borrowers who abscond and instructs borrowers in the responsible use of consumer credit and in the legal measures that lenders may employ to secure payment. Fifth, the access of the lender and the guarantor to enforcement instruments needs to be agreed. These instruments include the authority to seize personal and real property, attach wages and salaries, claim social insurance benefits at the source, or affect adversely access to other forms of credit. The possibility of using either the tax withholding or social insurance contributions systems to effect payment should also be considered. Sixth, the allowable uses of the funds and the mechanism(s) for disbursing the loan need to be defined. 5.36 The creation of a student loan progyram for Hungary will require considerable design effort as well as significant consultation with commercial banks. The proposed Higher Education Reform Project will provide financing for the establishment of a student loan task force comprised of representatives of the relevant participants, as well as technical assistance to design such a program and to establish the public institutions required to administer the guarantee and/or collections (Annex 10). The terms of reference for this technical assistance have been agreed upon with the Bank. Establishment of the Task Force to oversee the design of the student loan guarantee program under agreed terms of reference will be a condition for effectiveness of the project. 6. Project Management and Project Preparation Facility (US$5.6 Million) 5.37 A Project Preparation Facility (PPF) of US$2.8 million is included in the project to finance the final architectural designs and engineering for the capital investments of the initial three HEIs in Phase I of the Project and to staff the Project Management Unit (PMU) until the Loan becomes effective. The project includes financing throughout the project years for the operation of the PMU. 5.38 Annex 11 summarizes the technical assistance included in the project by category. 31 6. IMPLEMENTATION 6.1 Appropriate arrangements have been devised to implement the proposed project. The design takes into account lessons from previous experience (Section A); the project follows a sector investment approach to support reform implementation (Section B); effective plans exist for organization and staffing of the executing agencies (Section C); procedures and criteria have been defined for selection of investment projects (Section D); and preparation includes realistic scheduling and phasing of activities (Section E) and monitoring and evaluation (Section F). Each is discussed in sequence below. A. LESSONS LEARNED AND REFLECTED IN THE PROJECT DESIGN 6.2 The proposed project draws on lessons from implementation of an earlier project. The Hungary Human Resources Project (LN 331 3-HU), effective since 1991, has provided substantial funding (US$67 million) to higher education. This funding. together with an equivalent amount from the Hungarian Government, has been allocated by the FEFA through three competitive rounds at roughly yearly intervals. The objectives of these discretionary investment funds were to develop new educational programs consistent with the needs of the evolving market economy; to support integration of institutions: and to increase cooperation among universities and research institutions, and between teaching and research. 6.3 Several lessons can be drawn from this project. A large number of new educational programs has been launched. including the re-introduction of Ph.D. programs in universities. Procurement of equipment has been carried out, by and large. effectively. Student enrollment has increased. Efficient methods designed to modernize the curriculum. change teaching methods and introduce credit systems have been evident in a number of institutions. (This is attributable as well to the TEMPUS program and other bilateral support which have facilitated exchange between western and Hungarian institutions.) There has been some progress in the integration of small specialized teaching and research institutions, but advances have been slower than expected. 6.4 On the negative side, it should be acknowledged that many of the specific investments did not achieve their full economic potential because of the constraints imposed by an unreformed system of higher education. In addition, despite well-crafted objectives and criteria, and a basically sound evaluation system, the decision-making apparatus has not operated without outside influences; the temptation to continue to distribute funds uniformly across institutions has often prevailed thereby yield small amounts of funds to individual institutions. 6.5 Two conclusions can be drawn from these experiences. First, without systemic reform additional investment funding is not likely to yield the full benefits to society and the economy that the country requires and expects from higher education. Second, efforts by the World Bank to monitor the details of procurement, either centrally or at the level of the institution, are no longer justified. Therefore, the proposed project will: (a) support and monitor the entire sectoral reform program (including the achievement of important goals at the HEt level); (b) require that the rules governing all investments for the sector be consistent with those of the project: and (c) concentrate on the application of agreed 32 procedures and criteria in the selection of investment subprojects. The proposed project takes these lessons into account in the design of procedures to allocate funding. 61.6 Difficulties experienced during the ongoing implementation of the Health Services Development Project (Ln 3597-HU) and the Pensions Administration and Health Insurance Project (Ln 3596-HU), both approved in 1993, reconfirm in Hungary the vital importance, especially when the ultimate productivity of the financed investments presupposed a reforned policy environment, of: * achieving mature entry conditions for the project -- i.e., developing detailed understanding of needed policy changes and agreeing during preparation on a concrete timetable for their implementation. with the indispensable legislative enabling conditions being enacted prior to Board presentation, * fixing realistic project objectives in concrete operational terms; * specifying quantifiable, monitorable targets or benchmarks along the road to achievement of those objectives so as to be able periodically to assess progress; 3 developing -- and testing repeatedly -- broad ownership by stakeholders of the reform strategy and the project's contribution to its fulfillment, through a participatory preparation process and major effort at ongoing public dissemination; * establishing unambiguous "exit points" at which, if progress falls significantly short of agreed expectations, both the Bank and Borrower agree in advance to restructure or abort the project; and - requiring that implementation capacity and agencies be fully operational prior to Board presentation. Each of these lessons is fully taken into account in the design of the proposed project. B. APPROACH 6.7 An appropriate lending instrument has been selected for the proposed project. It will be implemented as a sector investment project (SECIL). This type of lending instrument stresses, first, agreement and continuous dialogue with the borrower on the policy and institutional framework. and on the objectives and content of the reform program. Second, the sector investment approach involves delegation to intermediary institutions of the selection of specific investment projects., or "subprojects." Under this Project, subprojects are capital investment plans by HEIs. Apart from subprojects at three selected HEIs, no specific subproject investments have been pre-identified, and no quotas have been fixed by institution or type of investment. Instead. emphasis has been placed on the organizational framework, procedures and criteria for selection of specific investments. 6.8 There are two reasons for this approach (See Annex 4). First, the project seeks to maximize its impact on the functions of the newly-restructured intermediary institutions and the participating HEIs. An explicit objective of the project is to assist in capacity building by transferring project procedures and criteria to the normal functions of these institutions. Second, the project -- in contrast with previous experience in the command economy -- takes a "bottom-up" approach, in which the HEIs can propose innovations in programns they offer. This approach relies on the initiatives of the main providers of higher education and has proved instrumental in other contexts in stimulating thinking, development of alternative approaches and reform on a wide scale. Under this approach Bank involvement will focus on implementation of policy and institutional reforms. and the procedures and criteria for selection of investments. not on procurement or physical implementation. C. ORGANIZATION AND STAFFING OF PROJECT IMPLEMENTATION 6.9 The Government has devised a satisfactory organizational plan and adequate staffing plan for implementing the overall reform program. The Project will be implemented by the Ministry of Culture and Education (MOE) through a Project Management Unit (PMU), the Higher Education Development Program (FEFA), and the participating universities. The PMU will monitor policy and institutional changes, and will implement the system development and management development components, organize technical assistance, and liaise with the Bank. FEFA will be responsible for reviewing and making recommendations on capital investment (subproject) proposals by integrating HEIs. MOE would enter into a formal grant financing agreement with successful HEIs. The HEIs will contract directly for goods and services, including civil works. The FEFA secretariat will supervise the contracts. The HEIs, thus, will prepare plans for institution and capital development, implement approved plans and enter into contracts with suppliers and contractors. Under the project, six staff will be appointed to the PMU. Each HEI will establish a Development Office for managing project implementation at the site. Project implementation responsibilities are described further in Annexes II and 12 and in the Project Implementation Plan. 6.10 The Government (a) has confirmed that the Deputy State Secretary for Higher Education will be Project Director; (b) will appoint the FEFA Executive Director in consultation with the Bank; will establish the PMU with a Director acceptable to the Bank; and (d) will establish and staff FEFA's Ad Hoc Committee with terms of reference and members acceptable to the Bank. 6.11 The Government has agreed that it will (a) maintain the FTT, FEFA secretariat and PMU with funds, facilities. functions, authority and sufficient qualified staff satisfactory to the Bank: (b) consult with the Bank about the appointment of the Executive Director of FEFA and maintain a Director of the PMU acceptable to the Bank; and (c) carry out a Project Implementation Plan agreed with the Bank in a manner satisfactory to the Bank. 34 D. PROCEDURES AND CRITERIA FOR INVESTMENT SELECTION 6.12 Procedures appropriate for implementation have been designed and tested. These procedures assign responsibility for specific subproject selection to intermediary institutions, mainly FEFA. HEIs that wish to integrate will prepare institutional development plans (IDPs) setting out strategic and medium-term objectives and prograrns, obtain their approval from institutional senates, and apply to the FTT for approval. Once overall framework plans are approved by FTT. the HELs will prepare specific CIPs for consideration by FEFA. FEFA will select specific investment subprojects for financing. The HEIs will contract for the goods and services called for in the investment plans according to Hungarian and Bank procedures. 6.13 Four sets of criteria will be used in the project selection process, including: eligibility criteria, guidelines for the content of applications, evaluation criteria, and approval criteria. Except for up to US$30 million available for academic consolidation purposes at non-integrating institutions, only institutions that have accomplished serious steps towards integration will be eligible to receive capital investment funds under the project. Such pre-requisites will include: (a) having obtained Government approval to be considered as a "federation" of institutions under the provisions of the 1996 Law on Higher Education; (b) development of a comprehensive institutional plan for integration based on an analysis of strengths. weaknesses, opportunities and threats for the institution; (c) preparation of CIPs based on analysis of use factors of existing premises; and (d) provision ofjustification of investments in civil works in terms of efficiency gains. IDPs and CIPs will be evaluated in terms of relevance to priority objectives, effectiveness of design, feasibility of implementation and efficiency in the use of resources. There are no pre-set quotas for distribution of funds among HEIs. However. to ensure reasonable distribution of funds. no integrating HEI will be allowed to claim more than US$30 million for capital investments. Details of the procedures and criteria appear in the Project Implementation Plan and in Annex 12. The Government has provided assurances that it will: (a) employ procedures acceptable to the Bank for selection and approval of investments during the project period; (a) follow criteria acceptable to the Bank for selection and approval of capital investments during the project period, including selection of HEIs that have: A. been approved formally by Government as associations. B. prepared comprehensive IDPs based on an analysis of strengths, weaknesses, opportuLnities and risks for the institLtioln. C. prepared comprehensive CIPs based on analysis of use factors of existing premises; D. obtained the approval of the IDP and CIP from the respective institutional councils. and 35 (c) consult with the Bank before final decisions about proposed IDPs,CIPs and grant agreements. A condition of disbursement on the civil works under the project is that such investments were made in accordance with procedures, criteria. and on terms and conditions agreed with the Bank. 6.14 The proposed project will create a unified structure, procedures and criteria for the selection of investment projects. A common set of criteria will be adopted for all government development expenditures in higher education based on cost-effectiveness. During negotiations the Government provided assurances that it will apply the same procedures and criteria as under the proposed project for allocation of its owin capital and development funds. E. SCHEDULE AND PHASING 6.15 A detailed, feasible implementation schedule has been prepared for the proposed reform program. The project has been phased to achieve its objectives. The project will be implemented in three phases of approximately two years each, i.e. Phase I comprises contracts for capital investments signed from 1998 through 1999; Phase II comprises contracts signed from 2000 to 2001; and Phase III comprises contracts signed in 2002 and beyond. The content of each phase will be the same (i.e. each phase will finance the same kinds of things), but will involve possibly different HEIs and different subprojects by the same HEIs. It is expected that three IDPs will be approved in 1998; approximately three additional IDPs in 1999 and a final three IDPs in 2000. Implementation of capital investments will involve a series of contracts for specific works over a period of approximately 2-3 years for each IDP. Annex 14 shows the overall implementation schedule and the following Table shows roughly the general sequencing of implementation: Table 6.1: Implementation Schedule Phase I Phase 2 Phase 3 Year 1998 1999 2000 2001 2002 |2_00' Phase 1: 3 HEIs* _________ = ________ _ _ K00X Phase 2:3 HEIs* _ _ _ . : , - _______ Phase 3: 3 HEls* _777__ __ _77 _ _7 * HEI associations or federations of integrating institutions 6.16 The purpose of phasing, which was introduced at the request of the Finance Ministry, is to provide two distinct check points for taking stock and evaluating the overall progress of the reforms. The check points will help to ensure that reform measures are on track and that investments are achieving savings in public funds as intended. Contracts already approved and in process will not be stopped, but no new contracts will be allowed unless satisfactory progress has been certified. 6.17 Specific triggers for the second and third phases pertain to (a) the policy and institutional framework; and (b) investments at participating HEIs. 36 6.18 Conditions for Phasing (See Annex 15) The conditions for phases 2 and 3 of the project have been specified corresponding to the main strategic points of reform as outlined in Sector Policy Development section of the project (paras.). These include: (a) introduction of new student enrollment allocation model featuring student choice (para. 5.12); (b) further improvements in the normative financing model, including reduction in the number of categories; merger of the maintenance and teaching normatives and progressive increases in the student:teacher ratios from 8.7:1 to 12.1 (para. 5.14); (c) establishment of the national academic credit system (para.5. 16); (d) granting of greater financial authority to participating HEIs (para. 5.17); (e) greater cost recovery from students through tuition and instructional fees. progressively increased from about 5-7 percent at present to 20 percent of actual teaching costs by the end of the project (para. 5.21); (f) concentration of at least 75 percent of student support subsidies on students in financial need according to means tests (para. 5.21); and (g) introduction of a guaranteed student loan system (para. 5.34-5.35) Annex 15 presents the specific conditions in these seven strategic areas for the start of the project, second phase, third phase and the targets for the conclusion of the project after year six. 6.19 Investments in Participating HEIs. Another instrument for ensuring achievement of project objectives at the level of HEIs will be the reforms specified in the grant agreements signed between the MOE and the HEIs. These will specify targets and reforms sought on a case by case basis. Satisfactory progress in implementing these reforms will be a condition for subsequent phases of the project. These criteria include: Demonstrated progress in implementation of IDPs and systems reforms including: (a) restructured administrative and management practices in terms of. * mechanisms for internal reallocation of normative finance to programs in demand. * integrated administrative organization. * integrated financial management and control procedures * adoption and use of business planning processes. (b) more tlexible teaching programs in terms of. * adoption of credit system * development and introduction of modular curricula (c) achievement of specific efficiencies including reduced recurrent cost per student and increased number of students per teacher in terms of: 37 * reduced contact hours/student * enforcement of minimum teaching requirements * increased average class size * merged departments; greater proportion of non-diploma enrollments as share of total. (d) greater private resource mobilization in terms of: * increased user charges through tuition fees * increased generation of outside income A condition for Bank approval for signature of civil works contracts after 6/30/99 and after 6/30/01 is performance satisfactory to the Bank in (a) meeting the targets of Annex 15, and (b) achieving the reform goals specified in grant agreements between MOE and the HEIs. F. MONITORING AND EVALUATION 6.20 An International Advisory Panel of five persons will be established to assist in evaluating implementation of reforms. The function of the Panel will be to review progress in implementing the various reforms semi-annually, raising policy issues with the Government, intermediary organizations and the Bank. The Panel will also assess the progress of institutional development and reforms at HEIs. During negotiations the Government provided assurances that it will maintain throughout the life of the project an International Advisory Panel with terms of reference acceptable to the Bank. Establishment of the Panel with terms of reference and experts acceptable to the Bank is a condition of effectiveness for the project. 6.21 A detailed project monitoring matrix has been prepared which sets out in a logical framework the aspects of the project that will be monitored (Annex 16.) Progress under the various reform measures and investment components will be assessed periodically through the following means: (a) quarterly progress reports by the PMU; (b) semi-annual Bank supervision missions, (c) annual applications for capital assistance by integrating HEIs. at which point progress in the previous year will be checked against the key indicators (para. 6.), and (d) major reviews of project performance towards the end of each two year phase. as a basis for satisfying the condition of disbursement on the next phase. 6.22 The Government has agreed to report on a semester basis on the achievement of Key Performance Indicators defined for project outcomes and for project development objectives, as defined in Annex 16. Progress reports will include information on number and value of contracts signed by category. Semester progress reports will be submitted to the Bank within one month after the completion of each semester, and will include a concise summary of progress and issues under each subcomponent, as well as progress on procurement. loan disbursements. and national counterpart expenditures. The first semester progress report will be due to the Bank on July 31. 1998. 38 6.23 Bank Supervision will require, on average, about 36 staff-weeks of Bank's supervision per year during the first two years of implementation. In the following years the supervision will decrease to about 24 staff-weeks. The Bank will supervise and monitor: (a) the implementation of agreed policy and insititutional measures; (b) the application of procedures and selection criteria for investment projects; (c) the implementation of IDPs at participating HEIs; (d) the overall progress of implementation; (e) the impact of the investment on reforms on the system of higher education. Annex 17 presents the proposed Bank supervision plan. G. STATUS OF PREPARATION 6.24 Major background studies were prepared, addressing private rates of return to higher education, description of the system. issues analysis, national survey on household willingness to pay for higher education, and analyses of overall student application and acceptance trends. An economic analysis of HEI budgeting was also carried out. The following things were produced at the policy level: (a) a policy document governing development of higher education over the medium term, now presented formally as the Letter of Sector Development Policy (Annex 2); (b) principles outlining development of private higher education; (c) new decrees were debated and adopted covering responsibilities of the three major intermediary buffer organizations. together with a decree defining the goals and procedures for institutional integration; (d) the Government adopted a new normative financing plan for higher education. Similarly. a new model of student enrollment allocations was prepared; (e) an agreement easing financial rest:rictions was agreed between the central government and three pilot institutions; (f a framnework for a new credit system was published; and g) higher education funding agencies were merged to streamline activities. 6.25 The following tasks have been carried out at the level of HEIs: Comprehensive IDPs and CIPs have been prepared by staff at three HEIs. Civil works space standards were developed at each site, as were strategic requirements in the institutional development plans. A model business plan was developed. MIS management training program was developed by MOE officials. Implementation structures and procedures have been worked out. A PPF has been signed. H. INDICATIONS OF BORROWER COMVIMITMENT 6.26 The extensive preparation work, outlined above, indicates the level of Borrower commitment to the proposed project. More generally, recent legislation mandates various reforms including: HEI autonomy, restructuring of the intermediary organizations. creation of short-cycle higher education, establishment of the credit system. introduction of norms-based financing, introduction of student tuition fees, creation of multi-faculty institutions tlhrough integration and imposition of sanctions on institutions exceeding 39 their budgets. At the policy level the Ministry of Education has earmarked all available development funds for integration purposes for implementation through FEFA. Further, the Ministry of Education is empowered and prepared to appoint crisis managers for institutions that cannot manage the process of hard budget constraints: this sanction is reinforced under a recent law establishing the government's Treasury System. At the level of HEIs, interest in integration is evident from the 17 applications received for FEFA integration funds in 1996 representing some 50 individual institutions. Many HEIs have begun serious planning for integration, including preparation of three comprehensive IDPs by staff of the HEI groups. Most institutions have begun collecting tuition fees and have plans to generate more self-financing. 40 7. PROJECT COSTS, FINANCING AND PROCUREMENT A. PROJECT COSTS 7.1 Since the project will be implemented as a sector investment project (para. 6.6), the number and type of subprojects to be financed is not known in advance and, therefore, cannot be costed in detail. Consequently, cost estimates have been prepared in three parts: * .subprojects" or CIPs for three selected HEIs, for which detailed costs were appraised, about six future 'stubprojects " (or CIPs) where costs were budgeted on the basis of an average cost of the three appraised CIPs mentioned above; and * specific investment expenditures for goods and services. 7.2 Total project costs are estimated at US$250 million, with base costs estimated at US$243 million. Total costs for the subprojects (US$202 million) do not include contingencies. Total costs for other components (US$48 million) include both physical and price contingencies. Combined physical and price contingencies on investments costs for components referenced under (iii) above are estimated at US$6.6 million, or about 14 percent of the respective base costs. Price contingencies are based on most recent projections of local inflation and devaluation for Hungary.7 Physical contingencies are estimated at 10 percent for goods and 5 percent for services. 7.3 Basis of Cost Estimates. (a) Price estimates for the three appraised CIPs are based on current prices for construction, equipment and furniture, and for architectural designs and engineering. The three CIPs included construction price estimates per square meter based on preliminary architectural designs; (b) cost estimates for financing subsequent CIF's, which are to be prepared and selected according to agreed criteria (Annex 12). are based on an average cost of the appraised CIPs. It is expected that a total of about nine CIP's will be approved for financing, averaging about US$22 million each. (c) rates for technical assistance are based on curTent rates for international consultants and for national consultants in Hungary according to area of expertise: prices for computers and other goods are based on international market prices based on recent similar tenders; (d) recurrent costs are based on current local government salaries and local costs for maintenance and supplies. 7 Local and international inflation rates are based on Bank estimates as of March 1997. Local annual average inflation rate estimates respectively for the Bank FY98/99. 98/99, 99/00, 00/01, 01/02. 02/03. and 03/041 are 15.9%, 12.8%, 9.8%, 6.8%, 4.9% and 3.4%. International inflation rates respectively for these years are 2.2%, 2.6%, 2.9%, 2.9%o, 2.8% and 2.7%. Average exchange rates respectively for these years in Forints are 176, 195, 209. 220. 226 and 229. 41 7.4 The foreign exchange component of the Project is estimated at US$I 13 Million or 45 percent percent of total project costs. The local cost component of the project is estimated at US$ 137 million. This includes taxes and duties estimated at US$43 Million or 17 percent of total project costs. Estimates of taxes are based on a 25 percent tax on goods, and 20 percent on civil works. No taxes have been included for services contracts. 7.5 The project investment costs include expenditures for construction, equipment, furniture, consultancy services, production of training materials, anid local training and foreign fellowships. Project recurrent costs include limited incremental salaries and operating costs for the new entities envisaged under the project, including the necessary maintenance and support contract for the operation of the computer systems for the MIS component. A PPF for US$2.8 Million approved on October 15, 1997, will finance project start-up activities, including detailed architectural designs. Detailed project cost tables are included in the PIP. Summary tables of total costs by component and expenditure category are shown in Tables 7.1 through 7.3 below. Table 7.1 Prject CostSummarbyCmn (Forints Million) (US$ '000) percent percent percent percent Foreign Base Foreign Base COMPONENT Local Foreign Total Exchange Costs Local Foreign Total Exchange Costs 1. Sector Policy Development and Implementation 555.7 714.7 1,270.4 56 3 3,271.6 4,134.9 7,406.5 56 3 2. Higher Education Institutes 19,173.9 14,074.5 33,248.3 42 82 116,205.2 85,299.7 201,505.0 42 83 3. HEI Management Information Systems 1,294.4 2,074.4 3,368.8 62 8 7,482.2 11,990.7 19,472.9 62 8 4. Management Capacity Development 86.1 1,090.0 1,176.1 93 3 497.5 6,300.6 6,798.1 93 3 5. Student Loan Program 294.7 152.3 447.0 34 1 1,703.5 880.1 2,583.7 34 1 6. Project Management 492.9 14.3 507.2 3 1 2,871.9 85.1 2,957.1 3 1 7. Project Preparation FacAtity 346.3 116.2 462.5 25 1 2,098.7 704.3 2,803.0 25 1 Total BASELINE COSTS 22,243.9 18,236.3 40,480.2 45 100 134,130.7 109,395.5 243,526.2 45 100 PhysicalContingencies 176.6 278.6 455.1 61 1 1,020.6 1,610.2 2,630.8 61 1 Price Contingencies 944.1 1,206.8 2,150.8 56 5 2,061.7 1,782.2 3,843.9 46 2 Total PROJECT COSTS 23,364.5 19,721.6 43,086.2 46 106 137,213.1 112,787.9 250,000.9 45 103 Table 7.2 Project Cost Summary by Component and Expenditure Category Sector Policy HEI Development Higher Management Management Student Project and Educatio Information Capacity Loan Project Preparation EXPENDITURE CATEGORY Implementation Institutes Systems Development Program Manageme Facility Total percent Amount I. Investment Costs A. Civil Works New Construction & Refurbishment - 174,998.0 - - - - - 174,998.0 Design and Supervision - 11 687.0 - - - 1700.0 13,387.0 Subtotal Civil Works - 186,685.0 - - - 1,700.0 188,385.0 - B. Vehicle - - - - - 30.1 - 30.1 10.0 3.0 C. Equipment 30.1 10,137.3 14,242.2 - 125.4 - - 24,535.0 5.9 1,439.8 D. Furniture - 4,682.7 - - - - - 4,682.7 - - E. Technical Assistance International Consulting Services 2,765.2 - 3,434.5 4,017.0 376.6 - 604.0 11,197.3 4.7 529.7 National Consulting Services 1,970.8 - 1,796.2 - 883.1 2,376.9 138.0 7,165.0 4.9 351.3 Fellowships/Study Tours 1,272.4 - - 1,604.3 160.7 - 85.0 3,122.4 4.9 151.9 National Training - - - 1,176.8 149.7 - 225.0 1,551.5 4.3 66.3 Subtotal Technical Assistance 6,008.4 - 5,230.7 6,798.1 1,570.1 2,376.9 1,052.0 23,036.2 4.8 1,099.2 F. Training Materials - - - - 888.2 - 51.0 939.2 9.5 88.8 Total lnvestment Costs 6,038.5 201,505.0 19,472.9 6,798.1 2583.7 2407.1 2803.0 241608.2 1.1 2,630.8 II. Recurrent Costs A. Salaries 840.0 - - - - - - 840.0 - B. Operating Materials and Supplies 528.0 - - - - 550.0 - 1,078.0 - - Total Recurrent Costs 1,368.0 - - - - 550.0 - 1,918.0 - - Total BASELINE COSTS 7,406.5 201,505.0 19,472.9 6,798.1 2,583.7 2,957.1 2,803.0 243,526.2 1.1 2,630.8 Physical Contingencies 303.4 - 1,685.8 339.9 179.9 121.9 - 2,630.8 - - Price Contingencies Inflation Local 568.9 - 2,373.7 176.3 447.3 1,135.0 - 4,701.1 Foreign 272.0 - 980.9 498.8 30.0 0.4 - 1,782.2 Subtotal Inflation 840.8 - 3,3547 675.1 477.4 1,135.4 - 6,483.3 Devaluation -313.4 - -1,284.0 -103.5 -244.5 -694.0 - -2,639.4 - Subtotal Price Contingencies 527.5 - 2,070.6 571.6 232.9 441.4 - 3,843.9 6.6 253.8 Total PROJECT COSTS 8,237.4 201,505.0 23,229.3 7,709.6 2,996.4 3,520.3 2,803.0 250,000.9 1.2 2,884.6 Taxes 8.5 38,470.5 4,3022 - 248.2 1100 10.2 43,149.5 1.0 414.4 Foreign Exchange 4,610.5 85,2997 13,999.0 7,114.4 971.3 885 704.3 112,787.9 1.5 1,728.9 w Table 7.3 Project Cost Summarv by Expenditure Cateuory (Forints Million) (US$ '000) percent percent percent percent Foreign Base Foreign Base EXPENDITURE CATEGORY Local Foreign Total Exchange Costs Local Foreign Total Exchange Costs I. Investment Costs A. Civil Works New Construction & Refurbishment 15,881.1 12,993.6 28,874.7 45 71 96,248.9 78,749.1 174,998.0 45 72 Design and Supervision 2,208.9 - 2,208.9 - 5 13,387.0 - 13,387.0 - 5 Subtotal Civil Works 18,089.9 12,993.6 31,083.5 42 77 109,635.9 78,749.1 188,385.0 42 77 B. Vehicle - 5.2 5.2 100 - - 30.1 30.1 100 - C. Equipment 1,663.5 2,500.0 4,163.5 60 10 9,803.0 14,732.0 24,535.0 60 10 D. Furniture 695.4 77.3 772.6 10 2 4,214.4 468.3 4,682.7 10 2 E. Technical Assistance International Consulting Services - 1,932.3 1,932.3 100 5 - 11,197.3 11,197.3 100 5 National Consulting Services 1,238.4 - 1,238.4 - 3 7,165.0 - 7,165.0 - 3 Fellowships/Study Tours - 539.5 539.5 100 1 - 3,122.4 3,122.4 100 1 National Training 149.1 117.5 266.6 44 1 872.2 679,3 1,551.5 44 1 Subtotal Technical Assistance 1,387.5 2,589.3 3,976.8 65 10 8,037.2 14,999.0 23,036.2 65 9 F.TrainingMaterials 113.3 48.8 162.1 30 - 656.4 282.8 939.2 30 - Total Investment Costs 21,949.6 18,214.2 40,163.8 45 99 132,346.9 109,261.3 241,608.2 45 99 II. Recurrent Costs A. Salaries 138.6 - 138.6 - - 840.0 - 840.0 - - B. Operating Materials and Supplies 155.7 22.1 177.9 12 - 943.8 134.2 1,078.0 12 - Total Recurrent Costs 294.3 22.1 316.5 7 1 1,783.8 134.2 1,918.0 7 1 Total BASELINE COSTS 22,243.9 18,236.3 40,480.2 45 100 134,130.7 109,395.5 243,526.2 45 100 Physical Contingencies 176.6 278.6 455.1 61 1 1,020.6 1,610.2 2,630.8 61 1 Price Contingencies 944.1 1,206.8 2,150.8 56 5 2,061.7 1,782.2 3,843.9 46 2 Total PROJECT COSTS 23,364.5 19,721.6 43,086.2 46 106 137,213.1 112,787.9 250,000.9 45 103 45 B. PROJECT FINANCING 7.6 The proposed Loan of Deutsche Marks 263.4 million (US$150.0 million equivalent) will finance 60 percent of total project costs, or 100 percent of foreign costs for all direct and indirect expenditures and about 40 of local expenditures, excluding taxes. The Government contribution of US$ 100 million will finance 40 percent of total project costs, including all duties and taxes, 77 percent of incremental recurrent costs and about 40 percent of local investment expenditures including taxes. All project ,counterpart funds are expected to be secured through the Government's central budget; financing of CIPs will also be supplemented through local, municipal and institution budgets. The Loan includes the refund of PPF (US$2.8 million), but does not provide for retroactive financing. The project's financing is as follows: Table 7.4 Project Financinm Arraneenients (US$ '000) Local The Government The Uank Total (Exel. Duties & EXPENDrITuRE CATE(GOIRV Amount Amount Amount For. Exch. Taxes) Taxes 1. Investncusct Costs A. (Civil Works New Constructlioni & Ref1urbishment 76,386.6 43.7 98,611.4 56.3 174,998.0 70.0 78,749.1 61,249.3 34,999.6 Design and Supervision - - 13,387.0 10(.0 13,387.0 5.4 - 13,387.0 Subtotal Civil Works 76,386.6 40.5 111,998.4 59.5 188,385.0 75.4 78,749.1 74,636.3 34,999.6 B. Vehicle - - 33.5 100.0 33.5 - 33.5 - - C. Equipmlent 14,483.3 52.6 13.038.0 47.4 27,521.2 11.0 16,366.6 4,274.4 6,880.3 1). Furniture 4.682.7 100.0 - - 4,682.7 1.9 468.3 3,277.9 936.5 E. Techiuical Assistance Iiternational Consulting Services 514.1 4.1 11.984.7 95.9 12,498.8 5.0 12,498.8 - - National Consulting Services 2,201.8 25.5 6,431.1 74.5 8,633.0 3.5 - 8,633.0 Fellowships/Study'Tours - - 3,470.5 100.0 3,470.5 1.4 3,470.5 - Nationall Training 0.0 - 1.743.2 10(.0 1,743.2 0.7 745.2 997.9 Subtotal 'I'cchnical Assistance 2,715.9 10.3 23.629.5 89.7 26,345.4 10.5 16,714.5 9630.9- F. Training Materials 223.0 20.0 892.0 80.0 1,115.0 0.4 321.7 570.4 223.0 'I'otal Investment Costs 98,491.5 39.7 149.591.4 60.3 248,082.9 99.2 112,653.7 92,389.8 43,039.5 11. Recurrent Costs A. Salaries 840.0 100.0 - - 840.0 0.3 - 840.0 B. Operating Ilaterials and Supplies 638.0 59.2 440.0 40.8 1,078.0 0.4 134.2 833.8 110.0 TOotal Recurrent Costs 1.478.0 77.1 440.0 22.9 1,918.0 0.8 134.2 1.673.8 110.0 lotal l)isbursement 99,969.5 40.0 150,031.4 601.0 250,000.9 100.0 112,787.9 94,063.6 43,149.5 (( )NIIRN LA I iON IIY H1 11 M INIS IRY ( oI INANA N'I.I ' 1'1 ( ).:J( I1 I:NAN( IN( i'I .LAN ANI ('() INII NTERIPART 1:I NAN(CING R EQUIR ',IFM I .N'I S WOUI I 13 1 A CONDITI'rON FOR NElO( it )lIA l )I5i. 47 C. DISBURSEMENTS 7.7 The proposed Project is expected to be implemented over a period of six years, and will be disbursed over a period of six half years. The Loan Closing Date will be June 30, 2004. The longer than average implementation period is needed to complete the capital investments in the HEI and the longer-term institutional development objectives. The disbursements schedule is based on a payment lag of about six to twelve months as the majority of the Loan funds are allocated for construction. Since the MOE already has experience in implementing a Bank-financed project, it is expected that the project will benefit from the procurement and accounting capacity that exists in FEFA, the MOE entity responsible for these activities. The estimated schedule of disbursements is as follows: Table 7.5: Withdrawal of the Proceeds of the Loan (Deutsche Marks Million) Bank Fiscal Year: 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 Disbursements: Annual 7.0 14.0 31.6 43.9 56.2 61.5 49.4 Cumulative 7.0 21.0 52.6 96.5 152.7 214.2 263.6 Cumulative % of Total: 2% 5% 20% 37% 58% 81% 100% 48 7.8 The Loan will disburse against the following expenditures as shown below: 60 percent of the civil works component of the CIPs; or other components of the project, 100 percent of foreign and local (ex-factory) or 80 percent of other locally procured goods, and 100 percent (net of taxes) for consultant's services, fellowships, and national training: Table 7.6: Withdrawal of the Proceeds of the Loan (Deutsche Marks) Amount of the Loan Allocated (Expressed in % of Expenditures to be Category DEM) Financed (1) Civil works for Investments 173,400,000 60% under Part B of the Project (2) Consultants' services 50,770,000 100% (including auditing services), training and fellowships (3) Goods 23,010,000 100% of foreign expenditures, 100% of local expenditures (ex- factory cost) and 80% of local expenditures for other items procured locally (4) Incremental Operating Costs 4,220.000 100% up to June 30, 2000 and 75% thereafter (5) Refunding of Project 4,920.000 Amounts due pursuant Preparation Advance to Section 2.02 (c) of this Agreement (6) Unallocated 7,280,000 TOTAL 263,600,000 49 7.9 All disbursements will be fully documented except for civil works and goods contracts costing less than US$300,000 equivalent and for technical assistance contracts less than US$ 100,000 for firms andUS$50,000 for individuals and all training and fellowship expenditures. For expenditures below that level, disbursements will be made on the basis of Statements of Expenditures (SOE) certified by the PMU director. The required supporting documentation will be retained by the PMU for at least one year after receipt by Bank of the audit report for the year in which the last disbursement was made. The documentation will be made available for review by the auditors and by visiting Bank staff upon request. 7.10 A PPF (US$2.8 Millionj has been provided to finance project activities up to the point of Loan effectiveness. A Special Account (SA) for the PPF has been opened. The same SA may continue to be used for the Loan. Any amount not used under the PPF, at the time the PPF is refinanced, is devolved to the Unallocated Disbursement Category. D. PROJECT ACCOUNTS AND AUDITS 7.11 Under the project, MOE will sign subproject grant agreements with HEIs whose CIPs have been approved. The agreements will commit the government to financing the agreed works from two accounts, the Special Account and the Project Account. The FEFA secretariat will supervise administration of contracts and expenditures made under these accounts. as approved by the MOE. 7.12 A Project Account (PA) in Hungarian Forints (HUF) could be established prior to Loan Effectiveness which will be used by PMU and FEFA for expenditures to be covered by local counterpart financing. The PA and SA will be audited in accordance with the Bank "Guidelines for Financial Reporting and Auditing of Projects Financed by the World Bank" (latest edition). The Borrower will provide the Bank (within six month of the end of fiscal year. and not later than by June 30th each year), an audit report of such scope and detail as the Bank may reasonably request. including a separate opinion by an independent auditor acceptable to the bank, on disbursement against certified SOEs. The separate opinion should mention whether the SOEs submitted during the fiscal year, together with the procedures and internal controls involved in their preparation. can be relied upon to support the related withdrawal application. 7.13 Special Account (SA) To facilitate the timely flow of payments for project expenditures, the Government will establish, maintain, and operate a Special Account in the NBH, under terms and conditions acceptable to the Bank. The Account will be denominated in Deutsche Marks. An authorized allocation of DEM 7.0 million (equivalent to an average of four months's expenditures expected to be made through the SA) has been agreed. However. the allocation should not exceed DEM 3.5 million until an aggregate of withdrawal should be equal to or exceed DEM 21.0 million. Procedures for making payments directly from the Loan Account or directly out of the local Special Account and outlined in the Loan Agreement and will be supplemented by a separate Disbursement Letter issued by the Bank's Loan Department. 50 7.14 The financial management and control systems of the project implementation agencies, PMU and FEFA, are in place and operating satisfactorily. The Government will maintain separate project accounts and records of expenditures financed under the Loan, according to international accounting standards and principles. Records and invoices will be available to Bank supervision missions which will conduct random reviews, in particular, of invoices for expenditures documented to the Bank on the basis of SOEs. Records will be maintained for one year beyond Loan closing. The auditors will be selected by the time of project effectiveness. 7.15 The MCE expects to enter into a contract with independent auditors to conduct an annual audit of expenditures incurred with the proceeds of the loan to comply with bank guidelines for audit reporting. the MCE/PMU will prepare terms of reference acceptable to the bank to define the scope and details of the treasury audit which should include random visits to project provincial sites. annual audit reports of project expenditures eligible under the loan will be submitted within six months of the end of each calendar year. the first audit will be due to the bank by june 30. 1999, six months after the completion of the first project year. E. PROCUREMENT ARRANGEMENTS 7.16 In May 1995, the Hungarian Parliament passed the Public Procurement Law (POL), Act XL of 1995. The PPL is based on the European Union's directives on procurement and on the UNCITRAL model public procurement law. It provides for competitive procedures and is consistent with the underlying principles served by the Bank's procurement rules --i.e., economy, efficiency, and transparency. In November 1996, a draft Country Procurement Assessment Report (CPAR) was prepared by Bank staff, and discussed in detail with the Hungarian Government in January 1997. The final version of the CPAR is expected to be issued soon. The procurement arrangements of this Project are based on the recommendations of the draft CPAR and discussion of it with Hungarian authorities. 7.17 A detailed Schedule of Procurement Arrangements has been prepared which identifies all contracts to be tendered for goods, works, and services under the Project and is attached as Annex 17. Procurement arrangements by expenditure category are shown in Table 7.7. 51 Table 7.7 Procurement Arrangements (US$ Million) Procurement Method Procurement Element ICB NCB Other N.B.F. Total A. Works 1. CIVIL WORKS CONSTRUCTION AND REFURBISHMENT 110.0 65.0 - - 175.0 (60.1) (38.5) (98.6) ARCHITECTURAL DESIGNS AND ENGINEERING - - 11.7 - 11.7 (11.7) 8 (11.7) B. Goods 1. VEHICLES - 0.0 - 0.0 (0.0) (0.0) 2. EQUIPMENT 12.8 - 4.6 10.2 27.6 (9.4) - (3.6) 9 (13.0) 3. FURNITURE - - 4.7 4.7 C. Consultancies 1. TECHNICAL ASSISTANCE CONSULTANT SERVICES - 22.6 - 22.6 (19.8) (19.8) 2. FELLOWSHIPS - 3.6 - 3.6 (3.6) (3.6) D. Miscellaneous 1. INCREMENTAL OPERATING COSTS - 0.6 1.4 2.0 (0.4) (0.4) 2. PPF REFINANCING /a - - 2.8 - 2.8 (2.8) (2.8) Total 122.8 65.0 45.9 1 16.3 250.0 of which Bank financed (69.5) (38.5) (42.0) - (150.0) Note: Figures in parenthesis are the respective amounts Not Bank Financed Others includes \a Includes US$1.7 million for Architectural Design and US$1.1 million for technical assistance and training materials. Procurement of Civil Works (US$188 million): 7.18 The Loan will finance civil works for about nine Higher Education Institutes (HEIs). The project envisages architectural design competitions for the works at each HEI. Architectural firms will be contracted through a design competition under QCBS selection procedures in accordance with the Bank's Guidelines for Selection and Employment of Consultants and the Bank's Standard Form of Contract. It is estimated that there will be nine architectural contracts with each university, totaling US$ 13.4 Million in aggregate value. Contracts for new construction and refurbishment estimated d through International Competitive Bidding (ICB). It is estimated that about three MIS equipment packages will be procured through ICB, totaling US$12.8 Million in 8 Use of Guides for Selection and Employment of Consultants (see Procurement Arrangements, Ailnex 17). 9 lnternational Shopping (US$4.1 Million); National Shopping (US$500,000) for vehicles, office equipment and materials. 52 aggregate value. Contracts estimated to cost between US$500,000 and US$100,000 will be procured through International Shopping (IS) procedures. It is estimated that about 14 contracts will be procured through IS, not exceeding US$4.1 Million in aggregate value. Contracts costing below US$100,000 will be procured through National Shopping (NS), not exceeding US$2.2 million in aggregate value. Non- Bank Financed i(NBF) goods estimated to cost about US$14.9 million will be procured according to Government procedures. 7.19 The World Bank's requirement for economy, efficiency, and transparency in the procurement process will be fully met through the above procedures. including through the use of NCB. Hungary is a highly open economy with a well developed and competitive construction industry. Approximately 60 firms have been identified which are either foreign-owned or joint ventures, representing vigorous participation in the Hungarian market of at least ten countries (Austria, Belgium, Canada. France, Germany, Scandinavia [Sweden. Finland. Norway}. Spain, Switzerland, USA). Construction firms in other neighboring countries (e.g.. Slovenia, Slovakia, Croatia, Romania, Serb Repubic) typically have ready access to Hungarian language capability because off their substantial ethnic representation and historical connections. Finally compliance with Bank Guidelines for NCB would be closely monitored through the Resident Mission's experienced national procurement specialist. In short, use of NCB procedures would ensure economy and transparency while achieving substantial gains in efficiency, since time and effort would be saved by the various universities working in the Hungarian language. Procurement of Goods (US$34million): 7.20 Goods would be procured in accordance with the Bank's "Guidelines for Procurement Under IBRD Loans and IDA Credits, published by the Bank in January 1995 and revised in January and August 1996. Contracts estimated to cost more than US$500,000 would be procured through International Competitive Bidding (ICB). It is estimated that about three MIS equipment packages would be procured through ICB, totaling US$12.8 Million in aggregate value. Contracts estimated to cost between US$500,000 and US$100,000 would be procured through International Shopping (IS) procedures. It is estimated that about 14 contracts would be procured through IS, not exceeding US$4.1 Million in aggregate value. Contracts costing below US$ 100,000 would be procured through National Shopping (NS) not exceeding US$2.2 million in aggregate value. Non-Bank Financed (NBF) goods estimated to cost about US$14.9 million would be procured according to Government procedures. Technical Assistance (Consultancy Services, Foreign Fellowships, and Local Tiraining) (US$26 million): 7.2 1 Technical Assistance will be procured according to the "Guidelines for the Use of Consultants by World Bank Borrowers and by the World Bank as Executing Agency " dated January 1997. It is expected that about 12 technical assistance contracts will be tendered on a quality- and cost-based selection (QCBS), totaling about US$15.8 million in aggregate value). About 9 technical assistance contracts will be tendered through Fixed Budget Services contracts, mainly for twinning arrangements with foreign 53 universities for each participating HEI (aggregate value of US$4.6 million). Individual university experts and international scholars will be contracted according to Section V of the Guidelines (aggregate value of US$4.7 million), including members for a consultative panel for implementation of the higher education reform policies (Intemational Advisory Board, para. 6.18), training specialists, and project management and sector specialists. In addition, a PPF agreement includes technical assistance services for project preparation, training, and project management, for about US$ 1.1 Million. Contract Review Provision 7.22 Civil Works: (i) The first two contracts. irrespective of value, and each contract thereafter estimated to cost more than US$ 1.0 million equivalent will be subject to prior review according to Appendix I. para. 2-3 of the Guidelines; (ii) Contracts estimated to cost less than US$ 1.0 million equivalent will be subject to post review according to procedures et forth in para. 4 of Appendix I of the Guidelines. Goods: Contracts estimated to cost more than US$300,000 equivalent will be subject to prior review according to Appendix I, para. 2-3 of the Guidelines; and (ii) Contracts estimated to cost less than US$300,000 will be subject to post review according to procedures set forth in para. 4 of Appendix I of the Guidelines. Technical Assistance: (i) Contracts estimated to cost more than US$100,000 equivalent for the employment of consulting firms will be subject to prior review according to procedures set forth in Appendix I of the Consultant Guidelines. (ii) With respect to the selection procedures for the employment of individual consultants, the qualifications, experience, terms of reference, terms of employment and selection will be subject to prior review; and (iii) Contracts for consulting firms and individuals below the above-mentioned threshold will be subject to post review according to the provisions of Appendix 1, para. 4 of the Consultant Guidelines. 54 8. BENEFITS AND RISKS A. PROJECT COSTS AND BENEFITS 8.1 Overview. Implementation of system-wide and institution-specific reforms under the project will produce a significantly smaller number of integrated, reorganized and rnore cost-effective multi-faculty institutions with fewer and consolidated academic units offering programs more directly responsive to market needs. The reforns and investments will enable Hungary to increase the capacity of the higher education system by half, while stabilizing or reducing its recurrent costs, improving the quality and relevance of learning outcomes and speeding the adjustment of skills of workers to the requirements of an outward-oriented, market economy. The reforms will distribute the costs of education more equitably and reduce the burden on the state of paying for higher education. 8.2 Specifically, implementation of the project will enable Hungary to reduce the cost per student of higher education by up to 30 percent, and to shift about 20 percent of the burden of paying for higher education from the state to beneficiaries. Thus, the publicly financed cost per student will decline by up to half. The reform of the structure of the curriculum and of teaching methods will increase graduates' ability to function effectively in a rapidly changing economic environment. Finally, the reforms will also enable the Hungarian higher education system to provide high quality higher education to about fifty percent more of its young people. 8.3 The quantitative benefits from the project will be very large. The initial investment may be recovered through cost savings alone in fewer than 3 years. Shifting fifth of the burden of financing higher education to beneficiaries will not only make higher education more equitable but will also reduce the cost to society of financing higher education by reducing the dead weight loss imposed by a highly inefficient tax system. Based on conservative assumptions about the likely success of the project (ALnnex 19), economic analyses reveal that the rate of return to the project may be reasonably expected to exceed 25 percent a year. 8.4 Costs. The proposed project will cost US$250 million. A fifth of these expenditures (about US$50million ) will be for the development of sector policy. modernization of management information systems, strengthening of management capacity and project management. The remaining three-quarters (about US$200 million) will be used to fund the investments in buildings and equipment required to allow the formation of multi-faculty universities from smaller institutions. These requirements include the construction of lecture halls, libraries, administrative offices, and student services facilities. These investments will allow the constituent faculties to function as an integrated university, increase the capacity of the university and provide the physical infrastructure to permit these new universities to exploit scale economies in instruction and in student services. 8.5 Benefits. The institutional development plan for Szeged University has been analyzed in detail in order to provide an understanding of the benefits and costs that are 55 likely to be obtained from the higher education reform program. Five higher education institutions have agreed to integrate to form a multi-faculty university; three other institutions have agreed to become associated members. The new university has prepared an institutional development plan (IDP) that defines the mission of the university and outlines the steps that are to be taken in order to fulfill it. Total enrollment is planned to increase from 11,100 to 13,400 over a five year period. The need for academic staff is expected to shrink by about 5 percent and for the non academic staff by about 41 percent as a result of the merger and associated reforms. The number of students per academic staff member will increase from 7.7 to 9.8 as a result. The investment program will provide a joint library, lecture halls. dormitories, and administrative offices, as well as support for the development of an administrative computing system and the improvement of management capacity. Estimates of costs have been prepared on the basis of actual bids for similar work. 8.6 The merger and reform of the five institutions is estimated to lead to savings in recurrent costs of US$ 20.6 million a year if academic salaries remain at their 1996 real level. This will generate a rate of return of 47 percent, derived from a benefit stream of recurrent salary cost savings and a cost stream of the enabling investments. However, academic salaries have fallen dramatically during the 1 990s and no longer provide a reasonable return on investments in human capital. If one assumes that salary levels are restored to a level that provides a competitive return on private investments in human capital, then the annual savings rise to about US$38.7 million and the internal rate of return on investments on this sub project will then be 84 percent. The enrollment projections that have been adopted are conservative. If the maximum capacity of the university were used, about 17.700 student could be enrolled. Annex 18 describes these plans in greater detail and provides a more complete economic analysis of them. 8.7 The economics of the proposed student loan program have also been analyzed in detail. The purpose of the student loan program is to ensure that the introduction of tuition charges does not result in the exclusion of able students from higher education. (The imposition of tuition charges is motivated by the need to distribute the costs of education more fairly, to create a demand driven system of higher education and to diversify the revenue sources of universities.) The aim of Government is to recover approximately 20 percent of the cost of education from the beneficiaries. The commercial banking system will provide loans secured by a guarantee from an autonomous student loan guarantee agency. The guarantee agency will in turn be insured by the Government. Loans of about US$90 million a year will be required if a third of students enrolled in higher education financed half of the private cost of attendance with a guaranteed student loan. If the default rate were similar to that observed in very well run programs elsewhere (10 to IS percent) and the average loss on a bad loan's were 40 percent of the original amount of the loan, then the annual loss will be 4 to 6 percent of the initial amount or roughly US$3.5-5.0 million a year when the system becomes fully mature. This amount should be offset against the reduction in public expenditures on higher education that a student loan program will make politically feasible. Recovery of a 20 percent of the cost of higher education will have reduced public expenditures by about US$77 million in 1996. In as much as the cost of mobilizing public funds is estimated to produce a welfare loss of about 70 percent of revenues, this saving is worth more than US$ 131 million in private consumption. Therefore the net economic gain 56 fromn the introduction of a student loan program will be in excess of US$125 million a year. 8.8 The value of improvements in the quality of education is difficult to quantif', but clearly will be significant. The creation of multi-faculty universities and colleges will increase the likelihood of cross fertilization among disciplines and promote interdisciplinary research and teaching. The development of modular curricula will increase opportunities for students to interact with students in other degree programs and will force students to develop skills in applying knowledge and in applying skills from a cognate discipline to their own field of interest. The modularization of the curriculum will also produce more flexible and responsive degree programs, thus allowing students to construct programs of study that address emerging interests and needs. Finally, the emphasis on independent study and self-directed research activities, made possible by strengthening library. computer and laboratory facilities, will develop skills in accessing, evaluating and synthesizing a variety of information resources. In view of the high rate of return to the investment when these benefits are ignored and the difficulty in assigning a value to these benefits, no effort-has been made to quantify benefits of improving the quality of education. B. DISTRIBUTION OF BENEFITS 8.9 The policy conditions and investments to be supported by the proposed project will benefit several groups. The principal group of beneficiaries will be students. Systemic reforms -- such as the introduction of the credit-hour system of academic accounting; development of short training programs and continuing education; creation of greater choice of study program; greater concentration on basics; and provision of more elective courses within degree programs -- will greatly increase the responsiveness of higher education to the needs. aspirations and capacities of students. The immediate result will be graduates trained in subjects more relevant to a market economy, leading to increased productivity, more rapid labor re-deployment and gre,ater flexibility in response to shifts in demand. Less financially advantaged students will also benefit from a fairer system of financing of higher education, an effective student loan program and the targeting of subsidies. 8.10 The project will also help to contain public spending on higher education through reduced recurrent costs per student and increased mobilization of non-state resources. The public budget will benefit through a cap, in relative terms, on public spending for higher education. The proposed project will have a major impact on the efficiency of resource allocation within higher education. Recurrent costs will be allocated according to enrollment-based norms and average units costs by field of study. Development expenditures will be awarded by intermediary organizations on the basis of competition according to least-cost criteria. Individual HEIs will take steps to reduce teaching costs per student. The HEIs will also improve their management of resources through improved management information services. Reliable data will become available on the national level, leading to better decision-making. These steps will achieve more efficient use of resources within higher education, and will tend to reduced unit recurrent costs per student. In addition, mobilization of non-state resources through increased tuition fees 57 and other sources will reduce the public cost per student. In the end the economy and the population at large will benefit through narrowing the overall fiscal gap. C. PROJECT RISKS 8.11 The proposed project calries substantial risks. The fundamental changes it seeks to achieve will have major consequences for three key interest groups: the higher education establishment, teaching staff, and students and their parents. The proposed project will reduce substantially centralized control in a number of areas: finances, enrollment allocations and curricula. It will extend institutional autonomy to new areas with monitoring and increased accountability. Each of the basic changes will threaten key interest groups and thus entail risks to the project. The risk of resistance or opposition from one or more of these groups cannot be eliminated, but it can be reduced by careful planning that explicitly acknowledges its potential. 8.12 Members of the academic establishment might resist the reform because the project will accelerate the introduction of norms-based funding and thus undermine the privileges enjoyed in the past by large. prestigious institutions. This risk has been addressed by the state decision to phase in the normative budgeting system over a period of years. In addition, the institutions seeking integration can themselves expect internal resistance to giving up traditional authority enjoyed by each of the constituent faculties and departments. Twinning relationships are being created with world-class universities that operate under principles similar to those being proposed for Hungary in order to provide opportunities for Hungarian faculty members to see first hand how large, multi- faculty universities operate, to help to show the advantages to students and faculty of integration. and to provide a respected peer group for professors who are dealing with chang. 8. 13 The most serious risk associated with this project is that academic staff may not embrace the changes in curricula and teaching methods required to effect the desired reforms. Efforts to increase the student-teacher ratio through reduced weekly student contact hours, and merger of courses to produce larger class sizes will initially reduce the need for teaching staff with consequent loss of jobs. This outcome might be resisted by the staff. Enforcement of minimum teaching hours by staff will impinge upon the ability of teachers to engage in income supplementing work outside the institution. Older faculty, approaching retirement may be less willing to embrace change or to make the effort required to effect the reform. In the slightly long term, the maturity of the existing faculty offers an advantage in that much of the staff that will implement the reforms will be recruited after the reforms were officially adopted. 8.14 Students and parents may be expected initially to resist the universal application of fees and tuition charges. The student protests against tuition charges in 1996 resulted in a rollback of proposals for supplementary charges set by individual institutions. This risk will be countered by introduction of student loans, also a demand of student associations. In addition, the loss of control of the distribution of the student support grants may produce resistance from the student unions. Students now control the allocation of these funds and in most instances distribute the money evenly among students, regardless of need. Changing the rules for allocations of financial assistance 58 will deprive many students of current income and might provoke unrest. This risk has been reduced by closely involving of student leadership in the design of the project. 8.15 Finally, the project's fundamental risk derives from uncertainty about the willingness of the national leadership to sustain short-term discontent from key educational actors in order to achieve the nation's long term goals. The project's basic strategy -- central action on fundamental changes, implemented initially (and incrementally) in a self-selected group of pilot institutions -- is designed to minimize this risk. In addition, the project has been designed in stages so that the central government and the pilot institutions must continue the reforms in order to secure continued funding. 59 9. AGREEMENTS REACHED AND RECOMMENDATION 9.1 During negotiations the Borrower gave assurances that it would: (a) refrain from deficit financing and maintain a policy requiring HEIs to operate from a balanced budget.; (b) maintain the HERC, FEFA Secretariat and PMU with funds, facilities, functions, powers, and qualified staff in adequate numbers (including Project Director. Executive Director of FEFA and Director of PMU) necessary to assist MCE to supervise and manage the Project as deemed satisfactory by the Bank; (c) select, in consultation with the Bank, higher education associations for investments under the project which have (i) been approved formally by Government as associations, (ii) prepared comprehensive institution development plans based on an analysis of strengths, weaknesses, opportunities and risks for the institution, (iii) prepared comprehensive CIPs based on analysis of use factors of existing premises and (iv) obtained the approval for these plans of the respective institutional councils; (d) approve IDPs and CIPs, in consultation with the Bank, in accordance with agreed criteria and procedures and on specified terms and conditions; (e) make capital investments under the project in accordance with specified procedures and terms and conditions of approval; (f) use the same procedures and criteria as under the proposed project for all its capital investments in the higher education sector; and (g) establish, staff and maintain an International Advisory Panel for the purpose of evaluating, commenting and advising on the implementation of the reform program under terms of reference acceptable to the Bank. Prior to Board presentation, the Borrower: (a) signed an agreement between the three HEIs, the MOE and the MOF granting the HEIs greater financial authority, (b) adopted a strategy on private higher education acceptable to the Bank; (c) adopted an acceptable plan for development of a student loan scheme; (d) confirmed that the Deputy State Secretary for Higher Education will be the Project Director, appointed the Executive Director of FEFA in consultationwith the Bank, and established the PMU with a Director acceptable to the Bank; (e) established and staffed the FEFA Ad Hoc Committee with members and TOR acceptable to the Bank; 60 (f) sent a "Letter of Sector Development Policy on Higher Education" to the Bank and prepared a Policy and Institutional Matrix acceptable to the Bank; (g) obtained acceptance in principle from the FTT of at least two IDPs and completed first stage review by FEFA of at least two CIPs; (h) revised and re-issued the Integrationi and FE} A decrees; (i) confirmed througlh the MOF the project financing plan and counterpart funding: (j) signed PPF agreement and ensured that funds can be disbursed; (k) sent a copy of the Ministerial Resolution (MCE) establishing the PMU and relevanit provisions of the ACT CV 1995 ameniding the Act on1 State Budgetary Procedures. 9l.2 During negotiations, the Borrower agreed to the following condition of disbursement, namely, that capital investments in civil works will not be financed by the Bank. unless the said investments have been made in accordance with the procedures, criteria and on the terms and conditions specified by the Bank. The Borrower agreed to the conditions for approval of capital investments for phases 2 and 3 of the project. 9.3 Additional conditions of effectiveness of the Loan are: (a) promulgation of a Government decree intended to: (i) merge the maintenance with the teaching allocation category in the normative financing system for 1998 and thereafter, and (ii) reduce the total number of normative recipient categories from 14 to no more than 7; (b) establishment of the Office of the NCC pursuant to the relevant provisions of the Higher Education Act; (c) submission of a proposal with terms of reference for a study on methods and procedures for targeting student subsidies on students in financial need; (d) establishment of a task force to oversee the design of the Borrower's student loan guarantee program under terms of reference acceptable to the Bank; and (e) establishment and staffing of the International Advisory Panel under terms of reference acceptable to the Bank. Recommendation 9.4 Subject to the agreements outlined above, the proposed project is suitable for a Bank single currency loan of DEM 263.4 million to the Republic of Hungary. with a 15- year maturity, including five years of grace, at the Bank's LIBOR-based fixed interest rate. Annex 1 Page 1 HIGHER EDUCATION IN HUNGARY March, 1997 Annex 1 Page 2 REPUBLIC OF HUNGARY HIGHER EDUCATION REFORM PROJECTI I. Background A. HISTORICAL BACKGROUND Prewar characteristics of the higher education system 1. Hungarian higher education is still in transition from a system inherited from the Socialist period. The CurTent system, however, is built on the prewar system whose major characteristics were the following: 2. Low student numbers. The number of students between 1935/36 and 1939/40 was 153 per 100,000 inhabitants, one of the lowest ratios in Europe. Hungary was one of the first nations in Europe to introduce a quota system for Jewish students in 1920. The number of female students was also limited. 3. Structure of the system. Compared to other countries in Europe, the structure of higher education was quite outdated and disproportional. Table I shows the distribution of students by field in Hungary in 1937/3 8: Table 1. Distribution of students by field of study, Hungary, 1937/38 Field of Theol. Law Social & Natural Techn. Medic. Agricult. Econom. Art study _ Sc., Pedagogy % of 11% 38% 17% 8% 12% 8% 5% 2% students; Source: Ladanyi, 1989 (p. 14) 4. Hungary had one of the highest proportions of legal (38 %) and theological (11 %) programs, and among the lowest of economic or business programs (5 %) in Europe. The 1941 Census also showed that more than a third of university and college graduates had possessed a law degree, and only 13% a technical (engineering) degree. 5. In the last academic year before W.W. II., Hungary had 42 higher education institutions, 70% of which were religious institutions. These HEIs were the following by type: 4 universities of sciences, a University of Technology, 3 parochial law academies, 3 colleges of economics, a college of fine arts, a state-owned and a parochial teachers' college, a teachers' college of special education, a teachers' college of physical education and 26 theological colleges. This distribution shows that technical and economics training was conducted in one, law training in 7, and theological training in 29 higher education institutions. ' This analysis was prepared by Judit D. Nagy. Annex 1 Page 3 Major changes at the beginning of the socialist period Expansion in student numbers. 6. The first reform in 1948-49, following the Communist take-over in 1948, aimed at subordinating the system to the needs of the "populist democracy" and planned economy. The socialist state's higher education policy was to produce the appropriate number of graduates who, according to the party's directives, would be needed in the future industrialized country. A large increase in student numbers thus occurred: the number of first-year students more than doubled between 1949 and 1952, from 6,262 to 13,534. By the early fifties, the number of students per 100,000 inhabitants (490) reached fourth place among 22 European nations. Higher education reform focused on training in economics, technical and natural sciences. Accordingly, one of the first measures was the establishment of an independent University of Economics in 1948, then a second and a third technical university. By 1949, technical training became the largest field of training in higher education. The largest increase in student numbers took place in technical and teacher training programs, and the greatest decrease in social science, law and medical programs. Large expansion of evening and correspondence classes, as well as the abolition of limits on female student numbers significantly contributed to the increase of students in higher education. 7. Sectoral supervision. The role of higher education administration was given to ministerial authorities who made most decisions for the institutions, including new curriculum, as well as examinations, and some in daily matters. The governmental structure of higher education administration was further divided between different supervising authorities and branch portfolios, each in charge of training programs for the high-level labor force under their jurisdiction. In 1953, the 32 HEIs of Hungary were under the supervision of 11 ministries. Professorial nominations were made at national level by the Presidential Council until 1950, and thereafter by the national government. 8. Ph.D. programs taken out of universities. One of the most radical changes in the vertical structure was brought about by the 1949 Act on the Hungarian Academy of Sciences. The law effectively weakened the role, power and institutional autonomy of universities by subordinating of doctoral programs and the right of awarding doctoral degrees to the administration of the Academy. The Act also introduced a new doctoral level above the doctoral degrees, called "Candidate", a Soviet import, which was issued through a separate governmental institution, the Committee of Scientific Qualifications. The candidature replaced the traditional process of habilitation, and professorial control with a bureaucratic oversight. 9. Research taken out of universities. The Party's policy was to separate teaching and basic research. Thus were established independent research institutes with the explicit purpose of taking research entirely out of universities. These research institutes operated under the Hungarian Academy of Sciences (HAS), and their researchers had very little contact with the universities. HAS research institutes were better equipped and more highly respected than university departments. Characteristics of the Socialist Period 10. The most important inherited characteristics of the higher educational system of the Socialist period are the following: 11. Rigid training and diploma structure. The Hungarian higher educational system is traditionally two-tiered, following the continental traditions of a binary system of universities ("egyetem") and colleges ("foiskola"). Colleges and universities provide courses leading to distinct diplomas, called "college diploma" and "university diploma." Universities may issue both diplomas, and furthermore, they may provide Ph.D. degrees in certain programs accredited for that purpose. The duration of studies is 4-6 years at universities, and 3-4 years in colleges. The college diploma may abroad be presented as a BA Annex 1 Page 4 degree and the university diploma may be presented as a Master's degree. However, the existing two diplomas may not be considered equivalent to BA and MA as they do not represent different levels or degrees: Both college and university programs start at the same age, following the successful completion of secondary school, and the completion of college education is not a prerequisite of continuing studies in a university program. 12. Specialized programs. Higher education programs in both colleges and universities were highly specialized, focusing on training for specific professions. These specialized training programs were not based on modular and transferable training blocks or designed to be built on one another. Instead of starting with general subject matters and heading towards more and more specific skills during the course of studies, the system of higher education consisted of disconnected training tracks leading towards different diplomas and professional careers. 13. Without any central effort to integrate the training programs and institutions into a unified higher education system, students could not take classes outside their respective institutions and were destined to graduaite and start employment in a pre-planned and pre-decided field of study (without options to modify the course of their education later). Interdisciplinary courses were not offered because of inadequate staffing, and rigid departmental structures, but most of all, because such provisions appeared to be irrelevant to the specialized manpower needs higher education was planned to serve. 14. Central planning system. Higher educational governance was based on the dominant role of state government. Up until the mid-1980s, the higher education system was entirely planned, controlled and financed by the state. The centralized governance resulted in limited administrative, financial or professional autonomy for institutions, a government-controlled planning of admissions, enrollments, overall student: numbers and graduations. Professional and academic quality was subordinated to quantitative needs, and institutions and training programs were specialized to serve these manpower needs of the planned economy. Enrollment numbers were centrally determined by manpower needs of the Socialist economy, based on forecasts by the National Bureau of Planning and the respective ministries (often ignoring other aspects, such as demographic changes, individual aspirations, or academic standards). 15. Beginning in the 1 970s, the planning system gradually lost its resoluteness and political power, and became an increasingly incremental, informal (less transparent), and incoherent bargaining arena for various institutional interests and sectors of the economy and public administration. Manpower forecasts gradually lost their vital importance by the 1980s, and were substituted by more haphazard budget negotiaLtions between the various Ministries in charge of various higher education sectors and the Ministry of Finance. Institutional interests were represented by the ministries of Culture and Education; Agriculture; Welfare; Defense; Industry and Commerce and Interior. This negotiation process, however, allowed only minor, if any, changes in the training structure, and it retained over-specialization and limited institutional authority. As a result, the training structure developed and later retained a heavy concentration on technical fields, agriculture and engineering. It exacerbated the incongruence between the qualifications of higher education graduates and labor market needs, even though this concentration and level of specialization did not correspond either to student demand orthe changing labor market For example, according to data from the Ministry of Culture and Education (MKM), even in 1986, 40% of higher education students enrolled in teacher training programs, 21% in technical, and 6% in agricultural programs In the same year, in fields with heavy market demands, however, enrollments remained low,u.e.., 11% in economics, 6% in law, 2% in natural sciences and 2% in human sciences. 16. The Socialist government had recognized "over-production" in certain fields but had neither the political capacity or willingness to undertake strategic restructuring towards more generalized and demanded professional fields. Annex 1 Page 5 17. Selectivity and elitism. From the 1970s on, development of higher education in Hungary halted. The earlier trend of expansion, based on the emergence of technical training, was restrained, but no new direction emerged. As a result, higher education was stuck at a selective level and remained essentially elitist in terms of access. The trend between the early 1970s and late 1980s in Hungary (and Central and Eastern Europe) was markedly different from the West. In 1989, less then 10 percent of the age group 18- 22 was enrolled in higher education, one of the lowest ratios in Europe. Even including students in evening and correspondence programs as well, this ratio, at around 15 percent, was still low compared to the Western European average. Despite the regime's strong political commitment to support the access of the children of low income families, higher education was unable or unwilling to increase relative enrollments The percentage of children of manual workers among first-year full-time students decreased from 66 percent in 1955, to 36 percent in 1987. Admission to higher education was controlled through entrance examinations and occasionally through special quotas favoring children of the working class. The number ofapplicants and admittances to higher education institutions showed a constant surplus of applicants (i.e. in the 1987/88 academic year, over-application was about 250%, and 255% in the following year.) 18. Fragmentation of institutions. During the Socialist period, institutional, professional and local authorities were strongly limited and innovative capacities were curbed. Universities were divided, various faculties were either closed or re-established as separate units, such as universities of economics, medicine, agriculture or horticulture. New colleges were established to serve various branches of industry or the public sector. Thus the institutional structure of the higher education system was fragmenled, consisting of a high number of individual institutions, the majority of which were small with greatly specialized profiles In 1978, there were 80 HEIs, with the following enrollment figures: Table 2. Number of students and HEIs, Hungary, 1978 Number of students Number of institutions less than 300 24 (30%) 301-500 18 (22%) 501-1000 20 (25%) 1001-2500 15 (19%) over 2500 3 (4%) Total 80 (100%) Source: MKM 19. The table indicates that only the three largest universities enrolled more than 2,500 students, and that 77% institutions had less than 1000 students. Students enrolled in specialized programs with prescribed subjects from the day of entry until the day of graduation. Institutions did not take advantage of potentially common facilities and/or resources such as libraries, computer halls, language departments, or equipment maintenance, etc. The fragmented and over-specialized institutional structure fragmented and constrained intellectual capacities, and resulted in serious drawbacks in cost effectiveness and in academic quality. 20. Institutions and faculties had neither the authority nor the drive to diversify or to modernize their programs significantly. Similarly, their capacity to engage in innovation was also fragmented. Institutional leaders and faculty members used their intellectual and professional capital instead in active lobbying to preserve their favorable position or to gain more access to public resources. The lobbying and the negotiations virtually assured the status quo in finances and erosion of the higher educational infrastructure, as well as a lack of responsiveness to any newly emerging social, professional, academic or local demand. Once trained as educators, faculty members had difficulties in changing professional or academic profiles or improving skills. Chairs and departments were similarly specialized and tied to narrowly defined training fields. These faculties and departments had instead strong incentives to defend their positions and the existing structure. Annex 1 Page 6 21. In sum, higher education inherited from the Socialist period an inadequate level of integration between programs, substituted by an overly specialized training structure and confusing govemmental authorities based mostly on planning admissions and student numbers instead of strategic financial policies. The absence of a coherent higher educational development strategy was accompanied by the lack of solid innovative capacities either at central or at institutional levels, and by the lack of institutionalized representation of consumers' or users' interests and responsibilities. The current Hungarian higher education system's inefficiency is embedded in a structure and organization inherited from the previous regime; a departure and reform require the development of a coherent, complex, systematic and gradual strategy. 22. Management of the system of higher education. Up until the 1993 Law on Higher Education, the power of supervising ministries was left untouched. HEIs were placed under the relevant ministries: agricultural HEIs under the Ministry of Agriculture, military HEIs under the Ministry of Defense, medical universities under the Ministry of Health (renamed Ministry of Social Welfare in 1992). In 1992, supervisory authority was distributed among the following ministries: Table 3. Supervising ministries of HEIs, Hungary, 1992 Supervising Ministry Universities Colleges Total # of HEIs % of all supervised supervised supervised students Ministry of Education 13 30 43 (70%) 73% Ministry of Agriculture 6 - 6 (10%) 8% Ministry of Social Welfare 5 - 5 (9%) 11% Ministry of Defence 1 3 4 (6%) Minisbty of Industry & - 1 1 (2%) Commerce _ Ministry of Interior 2 2 (3%) ** Total 251 36 61(100%) 100% ***The Ministries of Defense, Industry & Commerce and the Interior together accounted for 9% of all students Source: Statistical Bulletin. Higher Education, 1991/92 23. This division of control by different ministries divided the higher education system into subsets, prevented the formulation of cohesive policies, and impeded the practice of interdisciplinary teaching and research. 24. Geographical inequities. The heaviest concentration of HEI enrollments is in Budapest. In academLic year 1995/96, 41.3% of all students in full-time, correspondence and evening programs were enrolled there, while only 18% of the population lived in the capital. If those HEIs very close to Budapest are also counted, the enrollment figure rises to 45%. Among students in Budapest, the distribution of university and college students was 53% and 47% respectively. Financing of higher education 25. Incremental system. In the socialist system, with the exception of church-run institutions providing religious education, HEIs were state-owned and financed. Each year, budgetary appropriations for HEIs were decided by a cumbersome process, based on (1) governmental approval of the budgetary guidelines, (2) proposals of the related ministries, (3) negotiations with the Ministry of Finance, and (4) final approval of the Parliament. The actual amount of funding was not based on performance indicators, Annex 1 Page 7 but rather on the previous year's level of operational costs, undifferentiating "automatisms"(wage and material automatism) to compensate for inflation, and approved increments. 26. Total educational expenditure was 5% of GDP in Hungary in 1986. The same year the figure was 4.5% for Germany, 5.8% for France and 6.1% for Austria. Total expenditure in higher education in the same year was 0.7% in Hungary, while 1% in Germany, 0.7% in France, and 1.2% in Austria. 27. As Table 4 shows, in the last six years, 3.6% to 4.0% of the state budget went to the support of higher education, accounting for 1-1.3% of GDP: Table 4. State funding for higher education, in proportion to total central budgetary sources and GDP, Hungary, 1991-96 1991 1992 1993 1994 1995 1996 actual actual actual actual expect. plan Total higher education expenditures from the state budget (billion HIUF) expenditures 56.2 62.2 73.5 91.5 82.9 93.0 support 32.1 38.4 45.7 57.7 55.9 59.9 Total state budgetary expenditures 856.2 988.7 1264.1 1453.5 1404.8 1498.6 GDP 2491.7 2935.1 3537.8 4330.0 5530.0 6665.0 Total expenditures to higher education, in 6.56% 6.29% 5.81% 6.30% 5.90% 6.21% proportion to state budgetary expenditures Total state support to higher education, in 3.75% 3.88% 3.62% 3.97% 3.98% 4.00% proportion to total state budgetary expenditures Higher educational expenditures, as a percentage 2.26% 2.12% 2.08% 2.11% 1.50% 1.40% of GDP _ Total support to higher education, as a percentage 1.29% 1.31% 1.29% 1.33% 1.01% 0.90% of GDP Source: MKM 28. Thus although state support has been increasing, it has decreased by one-third in proportion to GDP. Considering that in the same period full-time enrollment numbers doubled (from 76,600 to 146,000), per capita budgetary support declined significantly in relative terms: Table 5. Per student state support to higher education, Hungary, 1991-1996 ______________________________ 1991 1992 1993 1994 1995 1996 Amount of support to higher education 385.9 415.9 440.7 495.8 431.7 418.9 per full-time student, at nominal value (th HUF/stud) State support to higher education per 0.045% 0.042% 0.035% 0.034% 0.031% 0.028/% student, as a % of total state budgetary expenditures State support to higher education per 160.4% 146.5% 128.4% 117.7% 79.9%1 64.1% student, as a % of per capita GDP Source: MKM Annex 1 Page 8 29. As Table 6 illustrates, in an intemational comparison, Hungary's expenditure in higher education as a percentage of GDP in 1992 corresponds to that of OECD countries. Its relative enrollment, however, is only about one-half or one-third that of the OECD countries: Annex 1 Page 9 Table 6. Educational expenditure as a percentage of GDP in selected countries by type of institution .________________ (Public and private institutions combined), 1992 Tertiary education All levels of education combined USA 2.5 7.0 Japan 0.8 4.8 Denmark 1.3 6.7 France 1.0 5.9 Germany 1.0 4.9 Ireland 1.4 5.7 Netherlands 1.4 5.0 Spain 0.9 5.2 United Kingdom 0.8 .... Finland 1.9 7.9 Country mean 1.4 6.1 OECD total 1.7 6.1 Hungary (1992) 11_ 167.3 Hungary (1993) 1.1_ 6.6 Source: Education at a Glance, OECD Indicators, Paris, 1995 (p. 73), OECD 1996 (p. 62) 30. Furthermore, the end of the demographic boom (a result of the strict abortion laws of the Stalinist, early 1950s) of the 1970s means that the size of the respective age cohort is shrinking, further skewing comparisons. 31. 1992 OECD indicators show that in Hungary, relative expenditure per student in tertiary education is five times greater than the expenditure per primary school student and nearly five times that of secondary students, which compared to other OECD countries (at 2.2 and 1.7 times on average) is very high: 1993 indicators show a moderate decrease in relative expenditure per tertiary student. Table 7. Relative expenditure per student by level of education (primary = 100) in selected countries, 1992 Early childhood Primary education Secondary education Tertiary education education USA 69 100 115 212 Japan 85 100 110 336 Belgium 78 100 215 275 Denmark 145 100 129 181 France 90 100 175 236 Ireland 97 100 156 410 Netherlands 87 100 129 340 Spain 103 100 137 185 United Kingdom 59 100 141 305 Austria 67 100 150 160 Finlwid 148 100 127 226 Sweden 128 100 110 149 Country mean 97 100 142 251 OECD total 86 100 128 227 Hungary (1992) 88| 100 128 523 Hungary 86 100 105 323 Source: Education at a Glance, OECD Indicators, Paris, 1995 (p. 99), OECD 1996 (p. 73) Annex 1 Page 10 32. Underfinancing of development and capital costs. Recent cuts in public expenditures on higher education, exacerbating the already poor condition of buildings and facilities, resulted in a low level of developmental financing. The 1996 Amendment to the Law on Higher Education regulates some aspects of asset management of HEIs; it stipulates that donated and inherited assets, gifts and contributions received are tax-free, and any revenues generated from these assets can only be used for new development (investment or reconstruction) and restructuring. Data for the last five years shows that of the total state budgetary expenditure on HE, investments accounted for only about 3% up until 1994, and although since then it has risen, the percentage by 1996 is still only 7.6 % (lagging still behind student support at about I 0%): Table 8. Total state budgetary expenditures to higher education (bill HUF), Hungary, 1991-96 = _________________________ _ § 1991 1992 1993 1994 1995 1996 Expenditure 56.2 62.2 73.5 91.5 82.9 93.0 Investment 1.4 1.4 2.8 2.7 4.8 7.1 Proportion of investment, as % 2.5 2.3 3.8 3.0 5.8 7.6 Financial support to students 4.1 5.5 6.7 7.6 8.4 9.3 Proportion of student support as % of 7.3 8.8 9.1 8.3 10.1 10.0* total expenditure Source: MKM *Counting support for dormitory students and for textbooks, the level of support to students is 13% of total expenditures 33. Traditionally high unit costs occurred for various reasons: (a) fragmented institutional network, and fragmentation within institutions (resulting in redundancies in educational-organizational units), (b) the dominance of academic considerations in higher education management, as opposed to financial considerations, (c) low staff: students ratios, due to the lack of elaborate and independent institutional employment policies, (d) costly teaching practices such as high number of class hours per week, high proportion of seminars, little independent or self-designed study, (e) costly, overspecialized undergraduate training, providing from 350 to 400 majors, (f) low level of institutional income and (g) old, run-down buildings which are expensive to maintain. 34. Distinguishing Historical Characteristics. * Low enrollment rates * Rigid training and diploma structure * Specialized programs * Central planning system * Selectivity and elitism * Fraigmentation of institutions * Sectorial supervision * Incremental financing system * Underfinancing of development and capital costs * High unit costs B. CHANGES IN THE 1980S AND 1990S Changes during the 1970s and 1980s 35. Enrollment in the 1970s stagnated, as it did in other countries of the Socialist block. Capacities as well as needs to serve industrial growth ran out of steam and so did most energies of innovation. Manpower forecasts gradually lost importance in determining enrollment numbers. Neither central Annex I Page 1 1 planning nor market demands had a significant impact on higher education. From the mid 1970s on, enrollment numbers were decided through a multi-level bargaining process among the MOF, the other ministries supervising HEIs and the HEIs themselves, and incremental decision making de facto reproduced inherited structures and structural inconsistencies. 36. A Party Resolution of 1981 sought to break the stagnation by developing a coherent program under an improved governmental structure and providing some limited autonomy for the institutions, and even some democratic decision authority at the institutional level. The Resolution furthermore designed a new development program continued by the Government in 1983. This Government program included several elements still relevant in higher education today: rational governance; deregulation; legal regulation of the status and selection of leaders, faculty members and students; and provision of special autonomous status for certain (larger) institutions. 37. The 1985 Law on Education defined universities and colleges as the basic higher education institutions (while allowing some training programs, g. higher vocational programs, to be run by institutions other than colleges or universities), and established a more monolithic and coherent authority concentrated at the Ministry of Culture. At the same time, though, it did not establish the Higher Educational Council defined by those drafting the legislation. The Law regulated the status and rights of students (including their right to self-government), the participation of faculty members in institutional decision making and the status, rights and authorities of institutional leaders. 38. The main problem of the 1980s was the absence of efforts, capacities or funds for developing the institutional and programmatic framework of higher education. Although the 1981 Party Resolution and especially the subsequent work by expert committees identified many critical elements, including the dominance of small and specialized institutions, lack of modularity and dominance of certain training fields, there were no institutional or governmental capacities to initiate radical changes or implement development plans. Typically, the Party Resolution was not even made public until 1986. Interestingly, it was precisely the publication of this Resolution and the following discussions between various interest groups, including students, which provided for the first time a more or less open debate and discussion of higher education reform. Changes of the 1990s 39. Since 1990, the Hungarian higher educational system has gone through significant changes. Important achievements are the following: 40. Enrollment expansion. HE expanded greatly in the 1990s, with a doubling of full-time students from 1985 to 1996: Table 9. Full-time HE enrollment, Hungary, 1985-1996 Year 1985 l 1990 1991 l 1992 l 1993 l 1994 l 1995 1995/96 Thousand 0 64.2 76.6 83.21 92.3 103.71 116.41 129.51 141.6 students Source: Statistical Bulletin. Higher Education, 1995/96 41. The proportion of the 18-22 year age cohort admitted to HE rose from 10% before 1990 to 17% in 1996. The goal for 2000 is 25 % and 30% for 2005. 42. Increased institutional autonomy. The 1990 Act (No 23.) amended the 1985 Law on Education to conform to some of the new political principles of the emerging post-Communist system, and consequently a major part of previous legal restrictions was rescinded. The Amendment provided further Annex 1 Page 12 deregulation and institutional autonomy. It gave the right to HEIs to determine volumes and structures of admissions, and to nominate professors and rectors, to be confirmed by the President. (From 1951 through the 1990 Act, rectors had been nominated by the government on the basis of a recommendation by thie Minister of Education) The Law also allowed the establishment of non-public higher educational institutions. 43. Until 1990, the Ministry of Education had broad overall authority over organizational issues, including determining the general duties of the universities, the functions and duty of the university and faculty leaders, the bodies of the universities and faculties, their composition, jurisdiction, the types of educational-organizational units, their composition and legal status, the jurisdiction of their leaders, the principles of curriculum, the function of curriculum and programs and the procedure for their creation, and the list and structure of administrative units. Typically, the ministries had general and unspecified rights to issue orders, re-examine and possibly dismiss institutional decisions and actions, including those of leaders and councils as well, that were considered contrary to state interests or general educational policy principles. 44. Since 1969, the supervising ministries had retained the right to participate in meetings of institutional councils, observe lectures, examinations, and gatherings regarding the educational and research activities of universities, examine documents, and even arrange hearings with university people. These rights were generally minimized in 1990 to controlling the legality of public institutions, but, even this lijmited authority recalled the hierarchical legal relationship between governmental agencies and institutions. 45. A Governmental Decree of 1990 legalized most actions that were in common practice during the previous two years, including the elimination of Marxist ideology from the curriculum, and limiting the jurisdictions of the supervising ministries in organizational and personnel issues and in determining curriculum and educational requirements. The new Act and the new GD tried to establish the first guarantees of institutional autonomy in higher education, but did not fully satisfy the newly assertive participants of an emerging higher educational policy arena. Yet the Act rescinded almost one-third of the previouas regulations, opening the way for new revisions and possibly new statutory actions governing institutional control. July 1993 Law on Higher Education 46. Consolidation under MKM. The 1990 Law left the power of supervising ministries untouched. Even in 1992, the Ministry of Education supervised 33, the Ministry of Agriculture 6, the Ministry of Social Welfare 5, the Ministry of Defense 4, the Ministry of Industry and Commerce I and the Ministry of Interior 2, HEIs. This shared system of governance was abolished by the 1993 Law on Higher Education, and a single supervisory power was delegated to the Ministry of Culture and Education. The first unified budget came into force on January 1, 1995. The Law mandates that the Ministry shall limit its legal supervisory role; conduct strategic planning and preparatory work on education policy making; approve the creation and abolition of new faculties and monitor the efficient use of central resources. The MKM is to work closely with MOF, which prepares the guidelines for the annual state budget. 47. Establishment of intermediary institutions. The creation in the 1993 Law of new buffer organizations such as the Hungarian Accreditation Committee (MAB) and the Higher Education Scientific Council (FIT) brought a second level of central administration, with consultative and professional decision-making purposes. Members of these agencies are appointed by the Prime Minister on the recommendation of the Minister of Education and Culture, and they function quasi-independently as adjuncts to the government. According to the law, the FTT is a proposal-making, decision-preparing and opinion-giving body. It assists in matters concerning priorities in development programs and scientific research carried out in HEIs, national competitions at HEIs financed by the state, establishment and Annex 1 Page 13 abolishment of courses, faculties and entire HEIs, state recognition of non-state HEIs, distribution of budgetary support for HEIs, student numbers annually in HE, amount of student support. FTT has twenty-one members who are mandated by the Prime Minister for a period of three years. The chairman of the FTT is the Minister of Culture and Education; seven members are delegated by the Government, eight members by HEIs. The remaining six members (one member each) are delegated by the scientific research institutes, the HAS, the local authorities, the employers, the professional associations and the employees' interest representation bodies. (But cf. "July 1996 Amendments to the Law" below for modifications regarding FTT membership.) 48. The MAB was created for the ongoing supervision of the standard of education and scientific activity in higher education. (The interim MAB had been already established in November 1992, with the urgent purpose of accrediting the nascent postgraduate programs at universities). Members of the MAB are also mandated by the Prime Minister for a period of three years, half of them representatives of HEIs and half of them representatives of the scientific research institutes. There must be foreign specialists among the members. The MAB decides in what field and which university may conduct Ph.D. training. The Committee expresses opinions concerning the establishment or recognition of a university or college, the establishment or abolition of field of studies, requirements for qualification and the doctoral or habilitation regulations of a university. At least every eight years, the Committee is to assess the standard of education and research activity in each HEI. 49. Ph D -granting authority restored to the universities. The Higher Education Law of 1993 - based on international experience and the traditions of Hungarian higher education - restored the right of universities to provide doctoral education and to award the doctoral (Ph.D.) degree. The Hungarian Accreditation Committee guaranties the quality of doctoral programs. Doctoral education, which lasts three years, is in progress at 19 universities with 2361 full-time students (as of May 1996). The freedom of scientific research and the autonomy of institutions of higher education are also ensured by the Law. 50. Establishment of basis for normative financ. The 1993 Law has created the basis for a new, mostly formula-driven finance system for HE. HEIs are to collect their income from (a) the state budget, (b) other sub-systems of the public finances, (c) tuition fees and other charges to students, (d) basic activities as well as from entrepreneurial activity, (e) donations, and (f) state wealth, or own wealth acquired on the basis of a contract or as a donation. The financial resources for functioning, operating and development must be planned as state budgetary allocations, and/or in the different funds operated by the state. The norms are mainly determined by numbers of students in the various disciplines, and HEIs can use their budgets without restrictions. The six state allocation headings are the following: student allocation, training allocation, facilities maintenance allocation, program financing allocation, research allocation and development allocation. The aim of this support scheme is to distribute state budgetary resources in proportion to HEIs' performance, to harmonize the capacity of central budget and the total budgetary requirement of HE, to regulate the training structure of HE according to social-economic needs, and to improve the cost effectiveness of HE. This finance model is partly the device for the allocation of money among HEIs, and it partly defines the state support needs of the HE system. 51. The creation of the legal basis of tuition and cost recovery. The 1993 Law mandated that students, for the first time, must pay tuition and other fees if participating in HE. The amount of tuition was left to be determined by a Government Decree in the case of state HEIs and by the Regulation of HEIs in the case of non-state HEIs. This decree, however, did not come into effect until 1995. It set a low amount of state tuition, and allowed HEIs to charge fees other than tuition only for services which are not related to program requirements and to the fulfillment of academic obligations. The 1993 law also called for the introduction of a state guaranteed student loan system, and for personal income-tax exemption for a definite amount of tuition fees. Annex 1 Page 14 52. Student acquisition of influence within HEIs. According to the law, the governing body of each HEI is the institution council, of which at least one quarter (and one third at the most) should be representatives of the students. A student union, whose members are elected by the students, must operate as part of the self-government of each HEI. The student union has important additional rights, including a role in admission and entrance examination issues; optional subjects and seminars, as well as invitation of outside teaching staff; evaluations of teaching staff; management of student dormitories and management of the study, stipend and support affairs of students. 53. Untouched higher management of HEIs. The 1993 Law did not create the institutions of president and board of trustees for universities, and thus the institutional councils, whose members are mainly professors, make the main decisions. The president of this council remained the rector (also a professor) of the: university, appointed and/or dismissed by the President of the Republic as recommended by the council and the Minister of Culture and Education. 54. 1994 Law on the Hungarian Academy of Sciences (HAS) This law made the HAS an independent, legal, self-governing entity, an "organization of public law" which owns its property. The research institutes of the HAS operate on state property, are autonomous, and are governed by the 30- member "Council of Academic Research Units. " The Academy can no longer award scientific degrees, but only the title of "Doctor of the Academy of Sciences" whichi is necessary for HAS membership. HAS institutes are to cooperate with universities autonomously. 55. The "Bokros package" of 1995. In 1995, following a serious fiscal crisis, then-Finance Minister Bokros introduced a set of measures restricting money out-flow, devaluing the Hungarian currency, stimulating exports and limiting imports, as well as radically restricting the state budget of certain public services including HE. At first, the Minister initiated a program of reducing the number of staff at HEIs by approximately 20%; This proved, however, to be an intervention in the autonomy of HEIs, and the Constitutional Court thus ruled that the program was contrary to the existing laws. Bokros then announced that allocations for the salaries of staff would be cut by 20%, and each institution should make its own decision how to implement the 20% cut. The "Bokros package" also introduced the tuition fee. 1995 P'arliamentary Resolution 56. The 1993 Law on Higher Education required that a future law on the development of HE be enacted, accelerating integration of HEIs and securing financial resources. The government later decided that development of higher education could be handled by the somewhat more limited legal force of a Governmental Resolution (GR). Presumably, enacting a Resolution appeared to be a faster and perhaps easier process than to enact a new law. The GR certainly created less of a public and parliamentary debate. The GR aimed at providing a more proactive program, counterbalancing the effect of budgetary constraints and restrictive measures brought by the government's economic program. It defined most of the agenda of ensuing higher education policy debates. The GR called for sector neutrality, freedom of founding institutions and continuous training. It defined the goals of HE development in the following main points: * increasing student numbers; * creating a flexible HE system with permeability among levels, and correspondingly, introduction of a unified national credit system; * assuring an impartial role for the state and allocation of financial resources based on quality not owniership, thus spurring competition in the development of the academic marketplace; * increasing the efficiency of the HE system by the increased economic independence of HEIs and by the mobilization of non-state resources (including tuition and other sources); * modernizing and professionalizing HEI management along with more consideration given to labor market needs; * increasing support to the cooperation of HEIs and research institutes; Annex 1 Page 15 * increasing independent work of students within their HE studies; * standardizing the qualification system and workload of instructors, along with revision of the conditions of remuneration and promotion of HE teachers. July 1996 Amendment to the Law 57. Integration of postsecondary vocational training into HE. The 1996 Law created a more vertically structured training system which ensures transparent permeability among the different educational levels. A major step towards this was the integration of postsecondary vocational training into the structure of higher education. The 1996 Law declares that higher education institutions may conduct accredited higher vocational training, and issue certificates in accordance with requirements prescribed in the National Qualification Register, if students have the possibility to continue their studies at the college or university level. One third of credits acquired in higher vocational training programs must be accepted at the college or university level, and the same rule applies to transferring college or university credits to higher vocational studies. Thus, there is clear legal regulation for increased transfer between the following four levels: (a) accredited higher vocational education; (b) college education (undergraduate college and postgraduate college programs); (c) university education (undergraduate university programs); (d) postgraduate education (postgraduate university, doctoral and DLA programs). The Amendment sets the duration of each level, allowing: a minimum of two years for accredited higher vocational programs, three to four years for college programs, four to five years for university programs, one to three years for postgraduate programs, and three years for doctoral programs. 58. Modifications conceming the MAB. The 1996 Law modified the composition and size of the MAB, raising its membership to 30 people, of which 15 are representatives of HEIs, 10 are representatives of the scientific research institutes and 5 are of professional bodies. According to the law, the MAB is an independent body whose decisions cannot be overruled by the Minister of Culture and Education. The MAB is to complete its first evaluation of all HEIs by the year 2000, and only those satisfying its requirements are allowed to issue state-recognized diplomas. An I 1-member International Advisory Board helps the work of the MAB, whose members are invited by the president of the MAB. The Board evaluates the accreditation decisions made by the MAB and helps to match them with international practice and requirements of accreditation processes. They have to meet at least once a year. The Committee also expresses its opinion concerning the regulations of the application of the credit system and on the operation of foreign higher education institutions in Hungary. 59. Early in 1997, a proposal for a new ministerial decree was introduced regulating the structure and operational procedures of the MAB. Accordingly, the Minister of Culture and Education has the right of supervision over the MAB, but, the Minister's right of supervision may not be extended either to professional concerns nor to quality-evaluations made by the MAB. In order to assure the participation of all fields of science and humanities, the MAB can invite participants from unrepresented fields as discussants. Every three years at least half of the committee must be changed and attention must be paid that delegates from every part of Hungary representing all scientific fields and all type of institutions take part in the MAB's work. Members of the FTT, the to-be established Credit Council, Advisory Board (Curatorium) of Higher Education Development Fund or the Office of Higher Education Grants or any other curatoria which deal with issues of higher education may not take part in the work of the MAB. In each field of science the MAB has at least one expert-committee and its president can be the member of the MAB. 60. Modifications concerning FTT. As a governmental advisory, and not Ministerial, body, all the major portfolios are represented in the FTT. As a result, it worked slowly, had a burdensome procedure and a reactive style and did not establish strategic programs. Since the 1996 Amendment to the Law, efforts have been made to define the FTT more in a strategic and policy-making context rather than to limit its role to strictly professional matters. At present, a new, and according to the expectation, more effective FIT structure is emerging. According to this new structure, the FTT has two major sub- Annex 1 Page 16 committees: the Financial Subcommittee and the Strategic (Training and Research) Subcommittee. These subcoimmittees work out large-scale strategic plans for HE and advise the Minister in determining admission numbers and analyzing institutional applications for state-funded admission numbers. These numbers are then forwarded to the state budget negotiations. 61. The Law also mandates that ten of the MAB's members should be experts elected by HE, an additional ten members should be representatives of the users' sphere (professional chambers, employers, scientific bodies such as HAS and research institutes), and of the local governments. One member of the Council is sent by the Minister. The president of the Council is no longer the Minister but elected from among the members. The law states that proportional representation of non-state HEIs must be ensured in the Council. 62. Credit system. The Amendment provides the legal framework for the establishment of a unified credit system to stabilize the structure of four-level training. The Amendment mandates the creation of the National Credit Council, whose coordination is delegated under the Secretariat of the FTT. The Credit Council's task is to work out a national credit system and implement it in 1997. It is the FTT's responsibility to prepare a new decree to adapt broader definitions of academic requirements by discipline. The work on defining minimum requirements for several disciplines is already under way. 63. Integration of institutions into multi-purpose universities. The Amendment also creates the legal framework for the integration of institutions, detailing the regulation of organizational structure, operation and finance of so-called higher educational associations which can function as the main step towards full integration. The Law states that higher education associations are transitional organizations to full merger into single multi-faculty universities approved by the Parliament within two years of the founding charter. The basic conditions of establishing such associations are demonstrating the feasibility of cooperation in terms of (a) distance, (b) complementary activities, (c) elimination of organizational parallelisms of educational, research and other activities, and (d) establishment of mutual economic and managerial leadership. The rights and responsibilities of associations are exercised by the senate and the full-time president of the association with full responsibility for finances. Further requirements of forming associations are to be specified by a Government Decree. 64. To date, real institutional integration has not taken place on a large scale; rather, loose partnerships have developed mostly in order to lobby for grants. These loose cooperation schemes have not brought sufficient results in joint administration, curricula, interdisciplinary research, or in eliminating redundancies among staff and facilities. 65. Salary increase for selected full-time teachers. The Act creates a competitive scholarship system for the best teachers with Ph.Ds. This "Sz6chenyi Professorial Scholarship" is awarded to 500 teachers each year, and may be won for a period of four years; its value equals five times the current minimum wage. The scholarship is awarded by an advisory board assembled by the Minister of Culture and Education. The restructuring of staff is still problematic, since full-time instructors are civil servants with highly secure employment conditions (with centrally determined salary scales and career paths). According to the law, a substantial and age-sensitive compensation has to be paid to dismissed academics, which makes rationalizing very expensive for HEls. The lack of a merit pay system and meaningless student evaluations makes financial differentiation of teaching staff difficult. Annex 1 Page 17 11. ISSUES IN HUNGARIAN HIGHER EDUCATION A. Issue 1: Lack of Relevance to the Needs of a Market Economy Introduction 66. Labor market and HE in the planned economy. Labor market needs under the command economy were planned in great detail and far in advance. The political system sought to predict the required skills and jobs for the whole economy, which had critical consequences for the higher education system. The "production" of the required labor force was assigned to higher education institutions, based on very specific directives and prescribed numbers for each institution. As a result, HEIs were structured to provide narrowly specialized programs from start to finish, and were unable to respond flexibly to other social needs (e , student needs). Upon graduation, HE graduates were centrally placed into jobs, not taking into consideration individual preferences in location or type of workplace. 67. Moving towards a market economy. Since the 1989 turnover in Hungary's political system, not only the country's social but also its economic needs have changed drastically. Since the 1 990s, about 1,4 million jobs ceased to exist, a third of those who lost their jobs became unemployed, and two thirds became economically inactive Moving towards a market economy, as well as towards European integration, presents the higher education system with new and challenging tasks. Higher education policy-making should seek to transform the higher education system in such a way that it will be able to satisfy newly emerging needs of society. Such needs include graduates with less specialized skills and knowledge, making them more adaptable to quick changes in the work environment. Teaching broader basic skills and preparation for life-long learning would result in more responsiveness to labor market demands from the part of the students, who, in this way, could better update or modify their skills according to specific job requirements. It not only means introducing of new fields of study, but also modifying or restructuring existing ones in a way that they provide less specialized skill so early, and more opportunities for corrections or specialization after the point of entry into the labor market. Problem 1: Rigid structure 68. Structural problems. Higher education inherited a structure in which about 50 percent of students went to universities and 50 percent to colleges. More than half (55%) of full-time students are still enrolled in university programs, despite several developmental strategies in the last six years to develop short-term education and thus boost the role of colleges. Between 1990 and 1995 a similar increase in enrollment at universities and colleges occurred. A very high percentage of students spend 5 to 6 years studying for their first diplomas, which are equivalent to master's degrees. These lengthy programs specialize studies from the very beginning, thus forcing students to specialize too early (even before entry into the system). Change in specialization is only possible by starting over the entire program, given the practical impossibility of transferring. The low proportion of short-term educational programs in the higher education system also contributes to the problem in changing fields of study in response to changes in labor market demand. 69. Bottle-neck phenomenon. The so called "bottle-neck" phenomenon is present from the fifth grade (age 10), when students may enroll in eight-year gymnasia. At age 14, pupils face three choices with different consequences regarding their access to and direction within higher education. From the early 1950s, a great number of lower vocational schools with an apprenticeship feature (szakmunkaskepzo) were founded in order to fulfill the rapidly growing needs of industry. This kind of school represents the lowest level of post-primary education and does not prepare students for entering the tertiary level. In fact, graduates of these schools, lacking a high school diploma, are not allowed to take entrance exams at HEIs. At the next level, still within secondary education, there are vocational secondary schools (szakkozdpiskola), which provide vocational training and a high school diploma. Since heavy concentration on learning vocational skills lowers the level of general knowledge of students in this type Annex 1 Page 18 of schkool, graduates mostly tend to be able to go into lower quality HEIs within their specialized vocation. (At best, a graduate of a technical vocational secondary school would be able to go into a small technical college). Graduates of these vocational schools cannot compete well with students coming from the third, academic type of high schools (gimnaizium) where the main purpose is to prepare for higher education. Thus, basically at age 14 children (or rather their families) are to decide not only about chances to but also specialization within higher education. 70. Compartmentalization owing to faculty and departmental structure. Rigid departmental and faculty structures within HEIs hinder the possibilities for interdisciplinary studies and for courses with the cooperation of several departments. Among HEIs, cooperation is even more difficult, and incentives for cross-collaboration are virtually non-existent in the present system. In the typical course of study at the universities and colleges, students take single or double majors. During their studies, they have very little opportunity to take courses in different disciplines and can take very few elective courses or choose among various specializations. Due to the lack of a national credit system, individual case-based authorizations apply when students wish to take courses at institutions other than their own. The fact that there are some 350-400 majors at Hungarian HEIs shows that the degree of over-specialization is very high. Often sub-specialties run as separate programs, or the difference between two programs is minimal. 71. Small, specialized institutions. Another serious obstacle to broadening the content of education is the existence of small and narrowly specialized higher education institutions which cannot offer the prograrn variety required in a changing market environment. These small institutions operate independently from each other, and thus capacities cannot be "pooled together" with the cooperation of other institutions. Limitations in terms of teaching staff and budgetary resources prevent these institutions from being competitive and sought-after by students, as well as from being cost-effective and being able to satisfy students' individual interests. For example, in the case of a non-Budapest based teacher training college, it is hard to recruit highly qualified, flexible teaching faculty who would be able to teach courses taking into consideration actual student demand, such as the .latest computer applications in the classroom). Fragmented teaching resources make the education process not only expensive but also lower quality than required. Further consequences include rigid curricula, low mobility of students, and low use of infrastructural capacity. 72. Lack of articulation among levels. Although the 1996 Amendment of the Law on Higher Education provides the appropriate legal framework for the establishment of a unified, national credit system to stabilize the four-level training, at the moment, there is still no clear articulation among the levels. Lack of a transparent transfer system results in lack of flexibility and permeability within the system. Students cannot now transfer to a different program without practically starting it from the beginning, and furthermore, the vague relationship between degrees and diplomas cf. above in section on historical background part) prevents students from being able to move between levels. For example, from a college program, there is no way to transfer to a university program and transfer the credits acquired thus far. Entering a doctoral program is similarly only possible for university graduates, but not for college graduates. The implementation of the 1996 Law will increase transfer among the levels of accredited higher vocational, college, university and postgraduate education. Annex 1 Page 19 Problem 2: Lack of Demand Responsiveness 73. Besides structural rigidities, lack of responsiveness is also a crucially important problem of the higher education system. Lack of significant changes in enrollment reflects the inability of the system to correlate student and market demands. This concerns not only the low level of overall student numbers, but also the traditional distribution of enrollments among fields and institutions. To a large degree, disproportional and/or dysfunctional enrollments in certain disciplines still exist despite labor market projections or heavy demand by applicants to the contrary. 74. Fields having the strongest and weakest labor market demand. Labor market projections for the next decade predict that about 40% of higher education graduates will need university, about a third college, and a quarter higher vocational type of training. According to the figures in the following two tables, however, the university and the college sectors have expanded to almost the same degree in the last five years, by 52% and 51%, respectively. The 1996 integration of accredited, higher vocational programs into the HE system is an important step towards more realistic provision of such needs. 75. Labor projections predict that based on today's enrollment figures, in fifteen years, the biggest deficiencies are likely to occur in economics, business, management, law and public administration, whereas training surpluses would occur in the agricultural sector and in the teaching profession. For the last ten years, decreasing demand is observable in teacher training, technical and agricultural programs Even in recent years, though, outdated or under-demanded programs are rarely closed down voluntarily, instead, they are only terminated when HEIs can no longer sustain them. Since state money comes according to enrollment numbers, and students with weak results at entrance exams might still want to apply to unpopular, and therefore more easily accessible programs, many outdated programs survive. 76. Enrollment figures (Ministry statistics) at universities for the last five years show the following picture: Table 10. Percentage increase in enrollments, by field of study at the university level, Hungary, 1990/1995 l 1990/91 1991/92 1992/93 1993/94 1994/95 humanities 100 126 168 218 265 religious studies 100 110 200 193 224 economics 100 105 120 154 163 natural sciences 100 103 131 140 158 state admin. & law 100 111 119 129 143 art and physical education 100 107 112 124 131 technical 100 108 115 117 127 agriculture & veterinary 100 103 113 112 120 medicine medicine & pharmacy 100 119 116 114 113 total university enrollment 100 111 126 138 152 Source: Statistical Bulletin. Higher Education, 1990-1996 77. These figures indicate growth of more than 50% at the university level with respect to enrollment in the humanities, in religious studies, in economics and in the natural sciences. In today's post- Communist Hungarian society, evolving towards a market economy, the latter group of study fields is obviously in high demand. The first group, humanities, includes traditionally high-prestige fields, which either provide useful and flexible knowledge profitable in a changing labor market (such as foreign languages), or provide education in traditionally highly respected fields g, in history, philosophy, etc.,). Annex 1 Page 20 Despite high demand, however, the increase of enrollment in law and state administration was below 50%. And surprisingly, despite the strong need for decreased enrollment in agriculture and the technical fields, enrollment increased by 20%. 78. Table 11 indicates that the picture is even more contradictory to desired trends: Table 11. Percentage increase in enrollments, by field of study at the college level, Hungary, 1990/1995 1990/91 1991/92 1992/93 1993/94 1994/95 agriculture 100 103 125 222 263 technical 100 111 126 151 189 health care 100 117 134 155 168 businesss 100 108 125 124 163 primary school teaching 100 108 113 126 133 secondary school teaching 100 102 101 122 127 military & police 100 79 88 102 125 state administration 100 109 1 08 111 119 r,ursery_ 100 101 97 III 118 total college enrollment 100 105 113 132 151 Source: MKM 79. In colleges, the highest increase in enrollment (163%) took place in the field of agricultural studies, clearly the field most in need of downsizing. A 89% increase can be observed in technical studies, a field which should similarly be reduced. College training in business grew, but only by 63%, while state administration training increased only by 19%. In general, instead of targeted enrollment growth, all fields have expanded, even those which are not marketable. These examples show that despite the obvious need for contraction or elimination of programs, there is a "self-sustaining" characteristic in the system which does not allow reduction of capacities (and therefore keeps alive unnecessary programs at the expense of the public). 80. It has to be taken into consideration that despite enrollment increases over the last several years, a large measure of demand remains unsatisfied. Thus, over-demand also occurs because the inherited higher education system has not been opened up to the desired degree yet. (For example, according to OECD data, 11% of the 18-21 age groups was enrolled in tertiary education in Hungary in 1993, compared to the OECD country mean of 21.5%. The shortfall was due in part to the absence of "non- university" tertiary educational opportunities in Hungary). Individual demand can be followed in Table 12, which presents percentages of over-applications by type of institution: Annex 1 Page 21 Table 12. Percentage of applications received above the admittance quotas, by type of institution in 1992, 1995 & 1996, Hungary Type of Institution 1992 1995 1996 humanities 304 346 260 teacher training 209 230 143 economics 353 247 251 natural sciences 685 229 168 state admin. & law 507 369 426 art 810 765 601 technical 156 139 124 agriculture 223 193 186 health care 255 227 255 military 280 276 217 total 246 237 202 Source: Polonyi (1996) 81. The figures indicate that student demand corresponds to labor demands, with the most popular fields in law, humanities, economics, and the least demanded technical, agricultural and teacher training. According to Ministry data, from the academic years of 1989/90 to 1995/96, the proportion of admitted students and applicants to higher education only increased from 43% to 48%. 82. The main reasons for the lack of demand responsiveness can be characterized by the following: 83. Over-centralized control of enrollments. Despite increases in student numbers in higher education in the last five years, enrollment structure has not changed significantly, which has resulted in the preservation of the old, outdated allocation system. The FTT has been the agency monopolizing enrollment allocations to specific HEIs, and several sources claim2 that it does not have the sufficient capacities for this task mainly because of its particular representational composition. This and the lack of a transparent strategy on educational development seem to indicate that higher education development policy is determined by the political power of individual institutions instead of objective demands. 84. Demand responsiveness is also slowed down by the quite bureaucratic and cumbersome process of approval of new programs and institutions. The two main agencies responsible are the MAB and the FTT, and the reasons behind their slowness include overwork, backlog and in the case of the FTT, powerful representatives of the established academia who prevent or slow down approvals of competing institutions or programs. The MAB reported a serious lack of financial capacities, which makes it very difficult to make use of the appropriate Hungarian and foreign experts. (Outside experts are paid a symbolic amount, and thus it is hard to find the experts who are able or willing to work for so little.) Despite the measures of the 96/1995. (VIII. 24) government decree which says that the accreditation committee must reach a decision within 120 days of the submission of the request, significant delays occur. 2 For example, Timar (1996) cites that both in the case of 1996 and 1997 HE enrollment numbers, The FTT accepted the proposed numbers from the colleges and universities, because " The FTT did not have any background studies based on which it could propose different numbers than the ones sponteneously formulated." Annex 1 Page 22 85. Lack of student choice in financial allocations. At the institutional level, year-to-year enrollment figures are set according to the institution's momentary will and perceived capacities which do not reflect adequately student choice and the needs of the economy at the national level. The proposed numbers by BEIs are accepted at the higher levels (first by the FTT and then in the Ministry) without making significant changes, since the FTT is composed of powerful representatives of HEIs. Thus, "usefulness" of the activities of HEIs is not a factor in determining state support. Nation-wide guidelines on state- supported enrollment by broad fields would be a more responsive way to allocate money. 86. Based on MKM data on application and admittance figures in higher education for 1996, student over-application to available places was highest in art (600%), law and state administration (426%), humanities (260%), health care (255%) and economics (251%). The fewest applications (proportionally to admittance quotas) were received in the fields of technology (124%), teacher training (143%), natural sciences (168%) and agriculture (186%). 87. Monopoly of the public sector. Private, non-religious education tends to be more responsive to labor market signals. Foundation colleges offer training in highly marketable fields, such as computer science, business management, and foreign languages. However, non-religious private education accounts for only 5% of total enrollment. Despite the remarkable speed of enrollment growth in the non- state higher education sphere, by the 1996/97 academic year, student enrollment was still about 10 percent of total higher education enrollment. Among non-state HEIs, the fastest growth can be found in the five private foundation colleges which enroll as many students as the 30 church-owned universities and colleges together. Significant competition among the state and non-state sector is missing for several reasons: (1) church-run HEIs dominantly focus on religious and theological training; (2) traditional churches have a relatively strong political power to get substantial state allocations from the government; and (3) so far only the private foundation colleges charge "real" tuition fees ranging from HUF 60,000 to 75,000 per semester (about 200 percent of the monthly average salary), which in theory puts them in a disadvantageous situation as far as state tuition is still HUF 2,000 per month. Since foundation colleges offer training in highly marketable fields, they equip their graduates with profitable and flexible skills which will result in high salary returns on the changing labor market3. Significant increase of state tuition would create a more competitive system in which the level of responsiveness to demand would be significantly raised. A slow but gradual development of the private sector in relevant fields is reflected in the fact that according to the Ministry, 18% of the total number of students admitted to economics courses in 1995 were admitted to private colleges, and 25% of all business courses are offered by private schools today. 88. Constraints imposed by the state on development of private education. There are several constraints on the development of private higher education. These include: (a) The procedure of state recognition is quite long and bureaucratic; (b) decreasing age cohorts create a situation in which state HEIs look upon non-state HEIs as competitors for students, and this interest can be well represented through the FTT; (c) the lack of a non-profit law; and (d)the lack of tax incentives which would stimulate private investment into the private education system. One example is the case of a private business college whose curriculum was approved by the MAB early 1995 but the FTT refused to approve the institution. Following an appeal to the Minister and a second application procedure, the FTT finally reversed its opinion and the college received official approval in the summer of 1996. 89. Lack of teaching staff in heavily demanded fields. Recent cuts in the number of teachers, as well as the introduction of new programs, have resulted in shortages in some fields of study where the teaching load can be as high as 16-18 hours a week. Such fields where the heaviest demand occurs are economics, management and law. Because of serious problems at the structural level of the system (e.g., very little 3 One exception is the Peto Institute and College of Physiotherapy, which despite being a private foundation college, still charges the amount of state tuition, and receives more than half of its budget from the state in return the unique services and treatment it provides for motor-disabled children and adults. Annex 1 Page 23 change in enrollment according to market needs, continuation of training in fields not in demand), shortages of appropriate faculty occur in the demanded fields. In other words, the pool from which future faculty can be selected does not reflect the real demand of the education market. 90. Priority needs and changes required to achieve more responsiveness to labor market and student demands. Structural changes needed: * increase enrollment in fields highly demanded in a market economy: economics, business, law & public administration, social/health services; * decrease enrollment in fields producing over-supply: medicine, teacher training, technical and agricultural areas; * introduce new fields of study, interdisciplinary studies, more elective courses, and independent study; * decrease the level of specialization at the level of programs, faculty and institutions as well; * increase the ratio of short-term, non-university and non-degree programs; * create transparent articulation among levels of training to assure permeability within the levels (full credit system); * lessen monopoly of the public sector. Needs to be met in order to boost demand responsiveness: * assign more importance to student choice and demand; * decrease the over-centralized control of enrollments; * increase the role of student choice in financial allocations; * ease constraints imposed by the state on development of private education. Issue 2: Low Efficiency in Use of Resources Background. 91. High public expenditure per student rate. Recent increases in enrollment figures and budget cuts in 1995 have achieved a substantial reduction in unit recurrent costs, but these levels are still high in comparison with other OECD countries and countries of Eastern Europe. In Table 13, OECD and MKM indicators from 1995 show that in an international comparison, Hungarian participation in HE is about half of that in other OECD countries, although, at very similar rates in terms of GDP and budget. Annex 1 Page 24 Tabile 13. HE expenditures per student in selected OECD countries and in Hungary, 1995 Countries Expenses relative HE students in HE public HE public to GDP the 18-21 age expenditures per expenditures per (%) group student student, per capita (%) in USD GDP (%) USA 2.5 38.8 11,800 52.0 Finland 1.9 15.4 8,650 59.7 Holland 1.4 20.1 8,720 51.5 Ireland 1.4 7,270 56.9 Dennark 1.3 9.2 6,710 38.1 France 1.0 29.0 6,020 32.5 Ge=many 1.0 9.7 6,550 32.2 Spain 0.9 22.8 3,770 29.4 UK 0.8 18.0 15,060 95.2 Hun -arv 1.6 10.0 9,690 140.8 Hungary 1.1 I 11.0 5,189 86.4 Source: Education at Glance, OECD Indicators, Paris, 1995 and The Reform of the Central Budget in Hungary, MOF, September 1995, OECD 1996 (p. 61-62, 71-72, 127) 92. Consequently, the per student central budget rate or the GDP rate is two or three times higher than in countries of highly developed economies. As indicated in Table 13, in Hungary HE public expenditures per student in 1992 add up to 140% in terms of per capita GDP, whereas this figure ranges from 30 to 60% (with the exception of the UK where it is as high as 95%). Although Hungary's public expenditures on tertiary education per student relative to per capita GDP decreased from 140.8% in 1992 to 86.4% in 1993, the 1993 level is still substantially higher than that of other OECD countries. (In the remaining 25 OECD countries with data for 1993, the level of public expenditures ranged from 27.1% to 75.40%, with a mean of 46.5%.) 93. Variations in unit costs. The heritage of incremental financing is large variations among unit costs for very similar training at different institutions. HEIs sought additional funding sources which could built in to their recurring budgets. In addition, the political influence of institutions working in the same field of study could vary to a great length. For example, in 1992, cost per student in law was very different at various universities: 146 units at ELTE in Budapest, 73 at JPTE in Pecs, 80 at JATE in Szeged and 89 at ME in Miskolc. Often it is the case that universities and colleges in Budapest have much higher training costs than those located elsewhere in the country. (Budapest institutions tend to have greater access to central authorities and thus support. Consequently the extent of over-staffing is more present in Budapest. ) 94. The most important reasons for low cost efficiency in the system could be described as follows: Problem 1: Legacy of the Past. 95. Small average size of institutions. The fragmented institutional network consisting of small average-size institutions is a significant part of the system's inheritance. Today there are 90 HEIs, 57 state and 33 non-state. HEIs are scattered all around the country (at 31 settlements); however, 15 of them enroll only 7% of all students. 96. The present distribution of students among higher education institutions is shown in Table 14: Annex 1 Page 25 Table 14. Number of students and institutions in BE, Hungary, 1995 Number of students Number of institutions less than 300 * 24 500-600 13 1000-1500 9 1500-2000 11 2000-3000 6 3000-4000 8 over 4000 2 over 5000 2 over 8000 2 over 12,000 1 * Several institutions have less than 30 students. Source: MKM 97. Twenty-four institutions enroll fewer than 300, and only one university over 12,000 students. More than half of HEIs (46) have fewer than 1,500 students. The average number of students per university is still around 2600, and per college around 1600. It has to be noted that non-state, small-size institutions also lower the average figures somewhat, i.e., state universities have 3000 students on average, while non-state (church-run) universities only 630. In the case of colleges, the averages are 2600 and 510, respectively. The rapid growth in non-state enrollment works against this tendency of small HEI size, especially since it is not the number of non-state institutions which is growing so rapidly, but rather the capacities of the existing, successful ones. 98. Poor condition of buildings. As mentioned previously, buildings of HEIs had not been properly maintained, and very little money was spent on them. By now this lack of investment in buildings has severely exacerbated maintenance costs. Substantial amounts of money are needed to make facilities adequate for teaching purposes, as well as to keep them running (i.e., huge energy bills, or repair costs). Problem 2: Academic Organization and Teaching Programs. 99. Fragmented institutional structures. Fragmentation is also present at lower faculty and departmental levels. Atomized inner institutional structures result in redundant educational and structural units, as well as in underutilized capacities and facilities. Inter-faculty cooperation in teaching and research is rare, disregarding the possibility of significant savings in spending without loss in quality. 100. Low-teacher-student ratio. Despite some improvement in the 1990s, the inherited, low teacher- student ratios are still a big burden on the entire system. Table 15 provides data over time, in Hungary as well as in some other Eastern European countries: Annex 1 Page 26 Table 15. Number of students per instructor in some Eastern European countries, 1975-1988 - Country 1975 1980 1985 1988 Hun=arv 7.16 5.82 5.34 5.37 Czechoslovakia 7.28 8.77 7.07 7.36 Poland 9.31 7.95 6.27 6.47 - Bulgaria 9.67 6.92 7.24 7.43 Romania 11.70 13.21 12.33 - Source: T. Melega, E. Sandor Kriszt, A magyar felsooktatas nemzetkozi o sszehasonlitasa (The Hungarian Higher Education System from an International Perspective), in Magyar Felsooktatas (Hungarian Higher Education), 1992/1. 101. The ratio of instructors and students in the year proceeding the 1989 changes was 1:5, which was about one-half to one-third that of Western European countries at the time. Estimates show that, in theory, the present number of teachers in Hungaiy could teach 50-100% more students. The ratio for 1995 in an international comparison is shown in table 16 below: Table 16. Full-time students per instructor in some OECD countries and in Hungary, 1995 Countries Full-time students per instructor USA 15.8 | Holland 13.9 Ireland 15.0 Denmark 29.3 France 17.8 Germany 10.7 Spain 22.6 UK 14.0 Hungary 6.9* Source: Education at Glance, OECD Indicators, Paris, 1995, the data for Hungary is from "Az allamhaztartasi reform" (The Reform of the Central Budget), Hungarian Ministry of Finance, Budapest, 1995. *This number in 1995 is 7. 2 according to the Central Statistical Office, see their publication "Public Education and Higher Education," 1995/96, Budapest 1996. 102. The ratio for 1996 is estimated at 8:1 (Ministry statistics, see Polonyi, A Review of the Economic Parameters of Higher Education in Hungary) which is still very low, roughly half the number found in OECD countries. According to estimates, the expansion of the education system while retaining old staffing levels and class sizes by itself would imply a doubling of the cost of higher education. 103. Staff management. Except in the case of professors, HEIs do not need any external approval to appoint staff, provided the total budget for staff costs does not exceed the approved level. All HEI staff are pubilic servants, and their legal status is based on the 1992 Law on Public Employees. This law makes it very difficult to dismiss staff because severance costs are high, and because the terms and conditions of employment do not clearly specify duties, there is no system for fonnal and systematic appraisal. In 1995, Annex 1 Page 27 approximately 6000 staff members were dismissed throughout the higher education sector, as part of a restrictive measure issued by MOF. These positions were, however, canceled by either not filling vacant posts, or by retirements of those who were at retirement age already. Thus, staff redundancies were not adequately targeted. 104. Teaching patterns. Labor intensive teaching practices which require a high number of contact hours are still typical of the system at the present, and contribute greatly to the high costs. Traditionally, since teaching salaries were low, the number of teachers was increased to a degree which considerably contributed to high unit costs. Such teaching practices are: high proportion of small group sessions, seminars and oral examinations and high number of class hours per week. Table 17 below indicates the high proportion of small group sessions and seminars, by type of HEIs: Table 17. Average number of classes, number of lectures, seminars and small group sessions a week by type of institution, Hungary, 1995 Type of institution Average No. of Lectures Seminars Small group sessions classes per week per week per week per week Medical University 31.6 9.2 16.0 6.3 Agricultural Univ. 23.3 17.1 6.2 0.0 Technical Univ. 28.5 9.6 19.0 0.0 Univ. of Economics 20.5 14.1 6.4 0.0 Faculty of Law 23.6 13.7 9.9 0.0 Faculty of Arts 16.7 6.7 6.6 3.5 Faculty of Sciences 25.3 11.7 10.7 3.0 Agricultural College 27.6 11.3 16.3 0.0 Technical College 27.6 11.3 16.3 0.0 College of Economics 21.2 8.3 9.8 3.1 Teacher Tr. College 42.9 13.0 25.5 4.4 Kinderg. & 1-4th grade 29.2 7.0 16.8 5.4 Teacher Tr. College I I_I_I Medical College 44.4 10.4 25.2 8.8 Seminar class (35 students), small group (8 students) Source: MKM 105. Early specialization. As mentioned above, the proportion of short-term programs is low, limiting opportunities for students to change their course of studies, and forcing them to enroll in lengthy, specialized programs early. The lack of basic, non-specialized courses prevents students from completing some basic subjects before declaring a major course of study, which also forces students to select an area of study earlier than is necessary and encourages excessive specialization. This early specialization can often result in the need for correction in the direction of studies, or just the need for tailoring course work to special interests, which can be made only with great difficulties or not at all (iLe., many students finish their long program even though they know that they would rather study something else, thus wasting resources and capacities both at the institutional and individual level). The dominance of long, degree programs in the system is still present, and the longer university programs have a higher percentage of classes than shorter college programs. Also, until a unified, national-level credit system is introduced, flexibility in choices concerning courses, disciplines and institutions remains limited. Problem 3: Administration: Lack of financial discipline 106. Public money allocation is not based on performance indicators or requirements. Financial support for higher education used to be allocated among institutions and faculties based on "historical costs" (always based on last year's support) and political negotiations by rectors and program directors Annex 1 Page 28 (which was heavily influenced by political connections, power relations and negotiating skills of institutional leaders). Thus, national priorities or objective needs did not play a significant enough role in the allocation system, making finances separate from performance or measurable indicators. 107. Leadership of HEIs is academic-rather than management-oriented. One of the most important issues in the transformation of higher education is institutional governance and administration. Higher education management -- leaders and members of institutional councils -- is dominated by people of academic and scientific merits, who tend to draw on their academic perspectives rather than economic ones. Managerial abilities and knowledge (including human resources and financial management, decision making) do not carry high importance in the selection process. Managers of HEIs who are elected by their direct subordinates tend not to undertake rationalizing labor measures which might harm their re-election chances. 108. Management practices are often poor at the institutional level. This is true not only in terms of bureaucratic procedures but also in terms of market consciousness. Student demand and satisfaction is not monitored scrupulously; some evaluation is conducted but it does not have a serious role in faculty evaluation. Professional PR and fundraising have not been developed yet. 109. Teaching performance is unrelated to financial rewards. There is no central regulation or definition of teaching hours per week for staff, and thus it is difficult to be fair in organizing teaching schedules on the one hand, and to hold staff responsible according to defined categories on the other. Laws (governing professional or public employees) do not define a unified system of requirements for teachers, nor is there is any quality assurance system. Thus salaries and other financial rewards are not related to performance (in terms of quality and quantity), which allows faculties to be rather heterogeneous quality-wise. The public employee law sets salaries based on age, time in employment, foreign language proficiency, etc. 110. In Table 18, the numbers of compulsory hours per week to be taught by teachers varies considerably among institutions: Annex 1 Page 29 Table 18. Hours per week taught by teachers at various types of HEIs in Hungary, 1995 Type of Institution class/teacher/hour/ full-time student/ week full-time teacher training at Medical School 3.9 3.1 training at Agricultural University 3.2 6.0 training at Technical University 4.0 6.3 training at University of Economics 2.2 9.4 training at Faculty of Law 7.7 17.3 training at Faculty of Arts 8.9 9.4 training at Faculty of Sciences 7.8 7.3 training at Agricultural College 6.8 10.3 training at Technical College 8.4 12.5 training at College of Economics 9.5 9.8 training at Teacher Training College (5-8th 12.3 9.5 grade) training at Kindergarten & Teacher 12.3 10.2 Training College (1-4thgrade) training at Medical College 16.1 11.0 Average 6.9 7.8 Source: MKM data 111. The figures in Table 18 indicate that the lowest number of hours per week (under or equaling 4) is taught at Universities of Economics, Agricultural Universities, Technical Universities and Medical Schools. 112. The new normative financing model includes some norms for teaching loads in its calculation of funding, ranging from 8 to 10 hours a week at universities and 10 to 12 hours at colleges, according to seniority. 113. Surplus of non-teaching staff. The internal governance system of HEIs is usually very similar to that of 10-20 years ago, not adjusted to the developing educational market environment. Administrative and financial staff mostly execute tasks instead of formulating independent decisions based on financial considerations. Administrative offices, such as the so-called "Educational" or "Finance Offices," employ extra people from the previous era when full employment (over-employment in reality) was a goal, and thus many jobs were artificially created. This, in the long-term, naturally increased bureaucracy and inefficiency, not only in the educational system but also in society in general. For example, comparisons with Western European non-teaching staff (relative to teaching staff) patterns today show a ratio approximately double in Hungarian HEIs. 114. Lack of control by HEIs over their own resources. Various factors undermine the efficiency and effectiveness with which institutions manage their financial resources. First, state money comes according to six (too many) budget headings, between which institutions may not transfer funds without prior approval from MKM. Second, income from tuition fees may only be used to support certain types of expenditure, mainly development and refurbishment. HEI running costs cannot be covered by monies coming from tuition sources. Third, some types of income of HEIs are heavily taxed by the government, which creates disincentives for the institutions to produce them (mainly revenues from non-core activities). Fourth, until the beginning of the 1996 financial year, HEIs were able to carry forward Annex 1 Page 30 unspent balances into the next financial year, and thus were able to build up reserves4. At the end of 1995, however, these reserves were taken away by the MOF to reduce the overall budget deficit. This obviously concemed HEIs, and even though they can carry forvvard end-of-year surpluses in theory, they do not see guarantees that these surpluses will not be taken away again. Therefore, this year HEIs plan to spend all their funds in-year, which might lead to less than optimal spending decisions on their part. 115. Inadequate level of accountability. The main office carrying out the external audit of HEIs is the eight-member Audit Office within the MKM, responsible for reviewing (a) the adequacy of financial systems and controls, (b) the compliance with government rules and regulations, (c) asset inventory, and (d) non-core activities. Audits of individual HEIs are conducted on a long, two to three year rolling cycle, and currently, even this regular cycle is slowed because of the Office's present priority (which is investigating the causes of large deficits in many HEIs). The procedure of audits is the following: the Office's audit report is followed by an action plan from the HEI in which it resolves any weaknesses identified in the audit report. At the next audit visit, the given institution must account for the implementation of its action plan. Annual audits would raise the level of institutional accountability, as well as the introduction of sanctions for institutions which consistently incur deficits. 116. Priority needs and changes required to increase efficiency in use of resources: - increase the size of institutions by integrating, reorganizing or if necessary closing HEIs; * unify unit costs across training fields; • reduce the number of expensive, oversupplying programs; * increase teacher-student ratio; * standardize academic requirements across institutions; * lessen labor intensive teaching practices; * decrease the number of weekly class periods; - delay the time of specialization; * increase the role of performance indicators and requirements in financial allocation; - provide more management-oriented leadership; • increase control by HEIs over their own resources; and - increase accountability. Issue 3: Low Non-Public Resource Mobilization Background. 117. The government's scope of responsibility is tenuous with respect to higher education financing. The cost of public funds is very high; a large shadow economy is untouchable by taxes, and therefore activities in the formal economy must be taxed at high marginal rates in order to yield in adequate government revenues. In recent years, higher education has received about 6-7% of all central budget expenditures in Hungary. Low cost efficiency, no accountability and dominant public financing make the systemri very expensive to taxpayers, an untenable trend for the country in the light of its economic growth5. HEIs are able to cover only a decreasing part of their institutional expenditures from their own revenues (about 40%). Furthermore, nearly 40% of overall HEI revenues come from social security fees paid to them in return for their providing health care services. Estimates show a decline in institutional revenues; from the start of the 1990s, the proportion of institutional revenues minus the social security fee which compensated medical universities for providing health-care services, has dropped from one fourth 4 Though surpluses from one year to the next were possible to carry over, often it took six months in the new year for the spending to be authorized. 5 Hungary's GDP in 1996 is at the same level as it was in 1980. Between 1980 and 1990 the GDP grew on average by 1.1% each year, declined by 5.4% per year between 1990-1993, and started to grow again from 1993 by 1.9% annually. Annex 1 Page 31 to not quite one-fifth by the mid 1990s. Significant factors contributing to this process are the low-level of tuition fees, and of cost recovery from other sources, lack of a loan system for students, privatization of certain institutional services and ventures (into companies, foundations) and various constraints on the development of private higher education. It would be essential to mobilize more non-public resources not only into the state but also into the non-state sector of higher education. Problem 1: Lack of private resource mobilization at public institutions 118. Low state tuition fees. Tuition fees at public HEJs were introduced in 1995 in Hungary at a monthly rate of HUF 2000 (about USD 13 at today's exchange rate) over ten months. It had been planned as a flexible amount between HUF 2,000 and 10,000, to be determined autonomously by each HEI, but considerable political pressure (mostly from student organizations) forced legislation to set a low, unified amount instead. 119. Government Decree 83/1995 (VI. 6) mandated that this tuition amount must be paid by those who are in their first, full-time program in college or university, either in undergraduate or in doctoral training. Those studying part-time in undergraduate programs (i.e., correspondence or night classes) can be charged an additional supplementary fee (max. HIUF 8000/month). Other programs (post-secondary training; part-time, specialized advanced training, second diploma training; part-time doctoral training and other programs and advanced training) have no tuition restrictions. The decree allows one fifth of students in each institution to have full or partial tuition waivers (only from the basic fee), on the basis of academic performance or financial need. The Government Decree also states that HEIs can only charge fees besides tuition fees if those services are not related to program requirements and to the fulfillment of academic obligations. 120. Tuition does not generate significant revenues. It is estimated that the revenue from basic tuition is about HUF 4 Billion, and including the additional revenues from other restriction-free programs, totals about HUF 7 Billion (which is equal to about 20% of the non-state revenues of HEIs and covers about 7.5% of their expenses). Thus, this amount is not able to generate significant revenues for the sector, especially since subsistence grants to students remained almost unchanged. Subsistence grants to students are a much bigger budget expenditure item than total revenue from tuition fees: the average per-student grant is about four times higher than the tuition fee6. 121. Recent legal regulation of tuition. The 1996 Amendment to the Law does not define the amount of tuition, which will have to be regulated by further government decrees. Section 31 of the Law states that tuition and other fees must be set (1) "by the Regulations of the institution within the framework of a Government Decree in the case of a state higher education institution and state financed higher education conducted in a non-state higher education institution," and (2) "by the Regulations of the higher education institution in a non-state higher education institution." Thus, private institutions providing state-funded training on the basis of government commission can only charge tuition from funded students equaling the tuition charged for similar training in public HEIs. 122. Recently, a Government Decree 144/1996 (IX. 17) introduced a differentiated tuition scheme to take effect in September 1998. The decree allows HEIs to differentiate the level of tuition state-supported students pay within a range, the minimum being 3% of the normative support per student (at least HUF 2000/month), and the maximum being 10% of the normative support (This normative is HUF 65,000 at 6 From 1990, subsistence grants are fmanced according to a normative system, the per capita amount is being determined each year in the annual state budget. Based on enrollment numbers, institutions receive an amount only to be used to cover cash benefits to students. This amount then can be distributed according to the institution's individual policy, thus, it is possible to differentiate between students. Annex 1 Page 32 present). The decree stipulates that HEIs must raise at least 30% of that amount on average, and the institutions can differentiate the amounts individuals pay. The basis of differentiation is academic performance and financial need. In the case of evening, correspondence or part-time programs, second diploma or other specialized forms of training, HEIs can charge a supplementary tuition fee (on top of the basic tuition described above) not more than 12% of the normative support. 123. Low fee for and unequal access to dormitories. Dormitory places for students coming to HElIs from other places than where they enroll is also a cost-related issue to be solved. There are several factors which create a difficult situation around this question: (a) the number of available dorms is not enough, and ithus equal access to this service cannot be ensured; (b) considering the high level of rents in Hungary, unequal access to dormitory places also means that those living in dorms are financially at a significant advantage compared to those who live outside of dorms; (c) maintaining dorms is very expensive for the state considering the current, low level of dormitory fee required from students. According to the latest regu]lation, Government Decree 144/1996 (IX. 17), dormitory fees are to be set annually by the individual HEIs, but cannot exceed 5% of the current normative support. 124. Budgetary constraints do not allow the establishment of more dormitories, and even maintenance of the existing ones is a high burden on the system. Table 19 indicates that increasing student numbers at the present in HE makes the number of dormitory places even smaller proportionally: Table 19. Percentage of full-time students living in dormitories, 1990-1996 E 1990/91 l 1992/93 I 1993/94 l 1994/95 l 1995/96 46.8% 41.5% 39.8% 36.7% 33.5% Source: Public Education and Higher Education, 1995/96, Central Statistical Office, Budapest 1996. 125. In the last five years, the percentage of full-time students receiving dormitory accommodation has decreased by 13. 3%, which creates more inequalities and consequently possible conflicts among students. 126. The following possible solutions have been considered so far: (a) a unified, monetary "rent" allocation provided for students in need, which would help those who do not get into dorms as well; (b) raising dorm fees; (c) extending available places by HEIs renting additional facilities; (d) reorganizing dormitories into non-profit units contracted by HEIs. 127. High subsidy for students. Overall, financial aid for students was 13-15% of the total public expenditures for higher education last year, and if we add subsidies on the maintenance of dormitories and on textbooks then it totals up to 20% of the total subsidy for higher education. A 1996 TEMPUS survey on the welfare of 1500 students revealed that among all respondents, only 8 percent thought that the present tuition fee was a high burden on their budget. Students were also asked what amount of additional tuition fee they would consider reasonable, and the average tuition fee proposed by them was 130% of the present amount (about HUF 2,700). 128. Cost recovery from other sources is relatively small. HEIs' income can come from (a) grants from central government budget, (b) other state grants from subsystems belonging to the general government budget, (c) tuition, cost payment and other fees, (d) own revenues from basic and business activities, (e) monetary donations and grants from foundations, and (f) real estates and tangible assets donated. Up to the present financial year, if a HEI earned more than the budgeted amount (through items c, d, e and f), it could only keep 50% of the excess revenue, while the other half had to be paid to the MOF. This procedure can discourage institutions from seeking revenue generating opportunities. Annex 1 Page 33 129. Student loans have not been an option. The 1993 Law on Higher Education called for the introduction of tuition fees, as well as a national, state-guaranteed student loan system. The former became reality in 1995, but the latter has not been realized yet. Reasons for this lack of a loan system include: (a) Double digit inflation figures make long-termn debts prohibitively expensive. (b) Financial experts advising the government believe that the central budget cannot be burdened further by the introduction of a student loan system (interest guarantees). They also argue that since the present, decentralized system of student aid is in the hands of student councils, the re- organization of the system would meet significant resistance from students. (c) Students are considered as high-risk borrowers from the perspective of bank. (d) Some analysts doubt the capacities of the present banking system to handle such a complicated financial scheme (i.e. problems in terms of liquidity, nation-wide branch system, expertise in the banking sphere as well as at the ministerial level). Problem 2: The private sector is underdeveloped and receives substantial public financing. 130. Types of HEIs in the private sector. The Hungarian private higher education sector consists of two types / of HEIs: church-run or foundation-run institutions. These two types have, at the moment, significantly different profiles and political influence. As a result, they also follow different organizational, academic and financial strategies. (I) Church-owned institutions dominantly focus on religious and theological training and have only scattered initiatives to continue humanities, teacher training or social worker programs. These institutions continuously seek state-support either through direct lobbying or through state-church negotiations. Their general strategy is to gain support equaling that of state higher education institutions. (2) Private foundation institutions, however, which are supported through foundations and by municipalities, try to fulfill regional and community development functions and their training programs have a strong focus on present and future professional labor market needs: computer skills, managerial and business skills, foreign language skills and education of the physically challenged. Training in these fields also brings higher than average starting salaries, which is not an unimportant factor in the new economic order where the relative equity of salaries is long gone. The transformation process from centrally planned to market economy created a new social demand for training in up-to-date, modern fields which help Hungary to catch up and keep up with European development. The leadership of the newest foundation college explicitly expressed that one of the most important goals of their school is to train experts for the European integration process. The fact that the next candidate for gaining state recognized foundation college status (from the Fall 1997) is also a business school--called International Business College--, also supports the labor market conscious and responsive argument. 131. Size of the private sector. In 1996, in addition to the 25 state universities and 34 state colleges, 33 non-state higher education institutions are registered in Hungary. Among the 33 non-state higher education institutions, there are 5 universities and 23 colleges owned by the church, and 5 colleges were established through private foundations. Although other forms of private education institutions are also permitted by the law, so far none of those were established. 7 A third group of HEIs consists of schools not recognized or accredited by the Hungarian state, but by some other country's university or college. Thus, their degrees are granted at foreign institutions. Such is the Central European University (CEU) founded by the Hungarian-born philanthropist George Soros, or the International Management Center (IMC) which is the oldest western-style graduate management school of post-Communist Central and Eastern Europe. Annex 1 Page 34 Table 20. Number of students in higher education in Hungary, 1995/96 and 1996/97 1995/96 1996/97 all students* (full-time students) full-time8 students State HEIs 162,465 (117,992 full-time) 127,334 (90%**) Church HEIs 9,055 (6,302 full-time) 7,502 (5%) Foundation HEIs 9,049 (5,247 full-time) 6,722 (5%) Non-state HEIs 18,104 (11,549 full-time) 14,224 (10%) All HEIs: 180,569 (129,541 full-time) 141,558 (100%) **Percentages were the same in both years Source: Statistical Bulletin. Higher Education, 1995/96 132. As Table 20 indicates, in the 1995/96 academic year, student enrollment in non-state higher education (18,104) took up 10 percent of total higher education enrollment (180,569). The four foundation colleges enrolled about as many students (9,049) as the thirty, church-owned universities and colleges together (9,055). In the present academic year, the proportional distribution of full-time students has remained the same, although enrollment in private and church-owned institutions has increased significantly during the last three to four years. The feasibility and popularity of these institutions indicate their importance in the higher education system. The existence and growth of privately owned higher educational institutions testify about the willingness of users, social and economic partners to invest in higher education. 133. Growth of the private sector. Figure 1 below illustrates that the speed of enrollment growth was highest in foundation colleges among all non-state higher education institutions: 134. Low administrative staff ratio in private colleges. The ratio of students and administrative staff is lower in private colleges than in state institutions, which is partly due to the fact that private schools did not inherit the often inefficient and over-sized bureaucratic structures of state institutions. Foundation colleges all make conscious efforts to hire as few administrative staff as possible, compensating quantity with high quality and multi-skilled employees. Maintenance staff is also selected carefully, preferring employees with multiple skills. In foundation schools, administrative staff in the Educational Offices and Finance Offices are generally as low as 3-6 people per college, wvhich is an important differentiating feature of non-state institutions where it can reach levels four-five times higher. 135. Legal regulations. In order to be able to issue a state-recognized diploma, non-state higher education institutions are required to gain state recognition and the approval of the Parliament. Besides all the requirements state HEIs need to fulfill, non-state institutions are also required to show the existence of appropriate personnel, material and financial capacities. Concerning accreditation, non-state HEIs fall under the same requirement as state institutions, that is, they must be accredited regularly (at least once in every eight years), and the first accreditation evaluation must be done by June 30th, 2000. For non-state HEIs, gaining state recognition is based on the recommendations of the Hungarian Accreditation Committee and the Higher Education and Science Council (FTT). ' For the present academic year, national statistics are only available on full-time students (except in the case of foundation schools which were asked personally to provide data on all of their students this year). Annex 1 Page 35 Legal constraints on private higher education 136. State recognition. The procedure for gaining state recognition is quite long and bureaucratic. Even in the case of just starting an additional major, paper work takes approximately a year and a half. One of the private colleges reported that their application for an additional major (technical manager training) has not been responded to for almost two years. (According to a 96/1995. (VIII. 24) government decree, the accreditation committee must reach a decision within 120 days of the submission of the request. ) 137. State HEIs protecting their own institutional interests against non-state HEIs. Between 1990 and 1993 (when the Law on Higher Education was enacted), several actors, state institutions and members of the academic community had vested interest in allowing the emergence of private institutions. This interest partly stemmed from the fact that faculty members were underpaid, and had financial incentives in taking additional, part-time teaching jobs. Following the 1993 Law, however, existing state institutions have acted and lobbied to protect their own institutional interests against emerging competition in the academic market. This happened through influence in the MAB and the FTT. State institutions are usually concerned about private institutions as competitors for scarce resources and in the long-term, decreasing student cohorts. 138. The 1995 Parliamentary Resolution on the Development of Higher Education defined a somewhat contradictory set of objectives concerning the institutional structure of higher education. On the one hand, the Resolution called for sector neutrality, freedom of founding institutions and running training programs. The resolution also urged an increase in the role of the state in stimulating competition and in the development of the academic marketplace. Furthermore, the resolution argued for transparency in the process of providing state recognition and permission for institutions. On the other hand, however, the Resolution calls for overall institutional restructuring, where priorities are being given to larger, more integrated institutions. Therefore, this strategy may -- even if indirectly -- be biased against the establishment of new, possibly small and specialized institutions. 139. Bias of public authorities. Leaders of the existing private colleges claim that both Ministry officials and advisory bodies define their priorities in view of the interest of the existing large institutions, rather than according to the principle of supporting the emergence of competitive capacities. As a result, since 1993, only one new institution (College of Management) has been given state recognition. 140. Although the clauses of the modification regulating internal organization do not often distinguish between public and private institutions, leaders of private institutions do not feel particularly impeded by them. They claim they have their own authority and competence in defining their internal structure, governance, administration, admission procedures or other organizational issues. A study on private education (D. Nagy, 1996) reported that private institutions feel themselves de facto freer to pursue their strategies and to initiate changes in their organizations, and furthermore, that they were allowed as well as pressured to be more entrepreneurial than state institutions. 141. Financial constraints on private higher education. The 1996 Amendment to the Higher Education Law distinguishes between state-funded and user fee-based training within all higher education institutions. This means that not all admitted students of accredited programs will be sponsored by the state. In the meantime, according to the law, non-state higher education institutions will need to apply for state support, for which the application process is as yet undefined. This program is expected to bring about a new system of sector neutrality: neither state-owned nor private institutions will have guaranteed support for all admitted students; in principle they will be equal competitors and decisions on grants will be decided based on the recommendations of the FTT. This is why foundation colleges would prefer to have appropriate influence and representation in the FTT which is dominated by state-university interests. The Amendment's intent is to finance higher education based on the state's needs, regardless of the status Annex 1 Page 36 (state or non-state) of the institution's maintainer. Transformation to normative financing requires more preparation, and thus a further government decree will regulate the details of the financing process. 142. According to the Amendment, state higher education institutions receive state funds in the forms of (a) student allocation, (b) training allocation, (c) facilities maintenance allocation, (d) program allocation and (e) research allocation. Institutions may decide independently how they prefer to use their incomes which are not connected directly to their state determined and financed basic activities. These incomes include fund contributions, donations, and gifts. These latter are exempt of duty or tax. Non- state higher education institutions may receive state funding for their training. However, this support should be solicited through a special procedure through which the state effectively maintains the right to issue special authorization for state supported training activities. Based on a contract between the government and the institutions, the latter will have the same right as state institutions to receive state allocations, based on the number of students defined in the authorization each year: (a) student allocation and (b) training allocation. Furthermore, non-state institutions may also receive facilities maintenance allocation (c) which is equivalent to fifty percent of the training allocation. They can also receive program financing allocation (d) and research allocation (e) on the basis of special competition. The Law states that the use of state support by non-state higher education institutions may be supervised by the state. 143. However, private institutions fear that the new system will not favor their programs as they will be pressured to comply with more state-determined requirements. As we mentioned earlier, they also feel that private institutions do not have appropriate representation in the key intermediary organizations which define financing priorities and bring crucial decisions. Neither the foundation schools nor the church- owned schools would have been able to begin their activities without significant initial support from a majoi sponsor. In fact, foundation schools received buildings free of charge from municipalities. For example, one college received two large, run-down, ex-Russian army barracks, and had to make substEmtial investment into their reconstruction. Operational costs are generally partly covered through the foundations, tuition fees and state support. 144. Decreasing municipal support. Municipalities, which were especially active at the time of the foundation of institutions, have run out of resources, and their participation in supporting and influencing private institutions is decreasing substantially. This is a significant problem in cities where these institutions are the only schools at the higher education level. In lack of municipal support, further investbments and improvement of these institutions may be halted. Similarly, there are no clear incentives for local business actors to sponsor these schools, as they can only deduct a limited amount based on their sponsorship of higher education. 145. Finances at church schools are less transparent as support from the state comes partly through direct funds, partly through the Churches who receive allocation from the state on their own right. As mentioned earlier, three of the church-owned teacher training colleges receive full state subsidies through the incremental budgeting system. 146. Tuition. A substantial part of foundation school budgets comes from tuition fees (for example, 37. 5 percent at one of the business colleges). The amount of tuition fee per semester is autonomously determined by each school, with the highest reaching about 200 percent of the monthly average salary. Except in one case, tuition fees have almost doubled since the first year of operation. 147. Tax deduction is limited. According to the 1996 Personal Income Tax Code, students (or if relatives paid the tuition, parents, grandparents, spouses or siblings are also eligible) may deduct 30 percent of the amount paid to state institutions as tuition8 from their taxable income, irrespective of whether tuition is paid in private or public schools. What it means at the moment is that 30 percent of 91t applies only to the student's first higher education training. Annex 1 Page 37 only the monthly HUF 2000 "state tuition" can be deducted. Thus, this deduction is seriously limited because it is maximized at the level that state institutions charge. Private colleges do not pay taxes on tuition, but do on other entrepreneurial revenues. 148. In general, private institutions enjoy more independence and freedom in their finances and entrepreneurial activities (such as room-renting, special courses or training). However, this freedom may change once the new law is in force and state support may be based on recommendations by the FTT. Then, financial decisions will be based on rather subjective perceptions of the schools' overall strategy, and hefty tuition fees may not be helpful in gaining sympathy from experts sitting in the FTT or on its Financial Subcommittee. These types of fears were clearly expressed by leaders of private institutions. 149. State-financed students for 1997. Preliminary numbers by the MKM (only planned at this time) for state-financed, first-year students in full-time programs for 1997 show that an overall 6% decrease is expected in the number of state-financed places. This 6% decrease, however, is a result of an uneven proportional distribution of cuts among the different types of educational institutions: 2.5% in state, 6% in church and 46% in foundation higher education institutions. This distribution may be another indicator of the political influence church-owned institutions have via their owner, this time at the expense of the foundation institutions. 150. At present, public resources are limited given the overall fiscal deficit; fiscal conditions are tight. Thus, public institutions feel themselves underfunded, and there is a politically tense arena in which one may not expect substantial financial concessions to be given to private higher education. In fact, the public expectation is that the emergence of the private sector in higher education could relieve some of the burdens of the state budget. In this political situation, only minor financial incentives may be envisioned in the medium-term, including (a) a more transparent state recognition system which allows the establishment and growth of private programs and (b) some tax incentives which stimulate private investment into the system. In the long-term, however, appreciation of private investment in higher education needs further reinforcement by political actors and government officials. Priority needs and changes required to increase non-public resource mobilization: * very high social cost of public revenues; * increase state tuition fees (including a more equal dormitory fee system); * increase cost recovery from other sources to lessen dependence on public finance and direction (including incentives for reporting); * investigate the feasibility of a student loan system; * ease legal constraints on the development of private higher education, such as less bureaucratic and more transparent state recognition, * ease financial constraints on the development of private higher education, such as tax incentives stimulating private investment in HE, a coherent non-profit law. Annex 1 Page 38 BIBLIOGRAPHY Az Orszaggyuiles hatarozata a felsooktatas fejlesztesenek iranyelveirol (Resolution of the Parliament on the development of higher education). 107/1995 (XI. 4.) Resolution of the Hungarian Parliament, approved on October 24th, 1995. Felsooktatasi Felveteli Tajekoztat6 1996. (Higher Education Admission Bulletin). Ministry of Culture and Education. 1995. A Felsooktatasi Torveny. A felsooktatasr6l sz616 1993 evi LXXX. torveny, egys6ges szerkezetben az Orszaggyiiles 1996. julius 3-ai ulesnapjan elfogadott t6rveny rendelkezeseivel. (The Higher Education Law 1993/LXXX, with the Amendment approved by the Parliament on the 3rd of 1996). Fels6oktatasi Koordinaci6s Iroda, Budapest, 1996. Handbook on the 1996 Personal Income Tax Code, Budapest: Verzal Books. 1996. The Higher Education Law 1993. Budapest: Ministry of Culture and Education. 1994. Kissne Papp Margit."Nehany informaci6 az egyhazi felsooktatAsi int6zmenyekr6l," (Some information on church higher education institutions), Manuscript. Ministry of Culture and Education. 1996. K61ts6gvet6si beszamol6 (Budget Report). Budapest: Ministry of Culture and Education. 1991-1995. Kormanyrendelet a fels6oktatAsi intezm6nyek leteset6senek es megszfintet6senek eljarasi rendjerol. (Government Decree on the establishment and abolition of higher education institutions), Muivelodesi Kozlony (Cultural Bulletin) Vol. XXXIX. No. 26. September 18 1995. LadAnyi, A., Mennyisegi fejlodes es strukt(iralis valtozasok: a felsooktatas utja a felszabadulas utAn (Quantitative growth and structural changes: higher education after the liberation of Hungary), Budapest: Tankonyvkiad6-OktatAskutat6 Int6zet, 1989. Laporte, Bruno and Ringold, Dena. Trends in Education Access and Financing During the Transition in Central and Eastern Europe. World Bank, Technical Paper No. 361, 1997. A magyar fels6oktatas fejleszt6se 2000-ig. (The Development of Higher Education in Hungary until the Year 2000). Budapest: Fels6oktatasfejlesztesi Tarcakozi Bizottsag (Higher Education Development Inter- Ministry Working Committee). 1992 July. Polonyi, I., "A review of the economic parameters of higher education in Hungary," Manuscript, 1996. Reviews of national policies for education. Hungary. OECD report. Paris: 1995. Draft of the revision of and supplement to the 1993 Law on Higher Education, Ministry of Culture and Education, April 15, 1996. Setenyi, J. and Drahos, P. "MaganfelsooktatAs 6s privatizaci6" (Private higher education and privatization), Education, 1992 Winter, p.283-300. Schweitzer, Julian. "A maganoktatas eselyei Magyarorszagon," (Chances of private education in Hungary), Education, 1992 Winter, p.263-267. Annex 1 Page 39 Statisztikai Taj6koztat6. Felsooktatas. (Statistical Bulletin. Higher Education), Budapest: MKM. 1990/1991-1995196. Timar, J. "Munkaero-kereslet es kinalat, 1995-2010," (Labor supply and demand 1995-2010), Manuscript. November 1996. I ANNEX 2 Page 1 Mr James D. Wolfensohn President World Bank Dear Mr President, We write in support of the application of the Republic of Hungary for a loan from the World Bank to assist in the implementation of Hungary's higher education refonn program. In what follows we describe the background, principles, objectives and, finally, the strategy of the program. Letter of Sector Developmcnt Policy on Higher Edducation A. SOCIO-ECONOMIC BACKGROUND i. Hungary has experienced a significant transformation over the last few years: the basic ihstitutions of democracy has bccn established and a free inarket-based economy has started to emerge as a result of privatizationi, flourishing financial markets and, among other tlhings, a convertible currency. Thcse developments have, however, been accompanied by numerous conflicts and a deep econiomic-fiscal problems. Hungary may be considered a fairly developed country, but its per capita GDP is still less than a third of similar indicators in Westem countries. In the meantime, in the early 1 990s, the output of higher education was considcrable: rouglhly 10% of the age group gained a college or university diploma, and almost all those admittcd finished their education successfully. Likc other state-financed sectors, higher education is faced with the many cballenges of restructuring, as required by the economic situation and changing social demands. These deemands arc also becoming ever more specific, urging an increase in practically-oriented training programs. 2. Since 1990, IIungarian higher education has made significant progrcss towards becoming more responsivc and adeptive system, One of the main driving forecs of change was the rudical I ., .. ANNEX 2 Page 2 increase in the number of students admitted. However, this process took place spontaneously, principally taking into account what the higher education sector could offer much less attention paidl to social and cconomic needs. This higher education policy letter outlincs the meaqurcs needed to solve the problems of the next stage of developmnent. The goal is to extendI adaptability and responsiveiness from N stnrctural and quantitative perspectivc and at the same time increase efficiency, cstahlish the conditions of quanititative and qualitative improvements and insurc the financial sustainability of t.hc system. Our currcnt plans for rnecting these broad objectivcs are further specificd in the attached Institutional and Policy Matrix, it being understood that some details of the specific measures and timeframes foreseen therein, especially in later years, may changc on the basis of cxperiencc gained as refonn in the sector is implemented. B. OVERALL PRINCIPLE:S AND OBJECTIVES 3. Structural chanacs. The transformation of higher cducation must be accomodated to the demainds of a modem frec market-based society and economy if it is to facilitate Hlulngary's effort to join the European Union and satisfy the demand for a highly qualified work-force bearing in mind professional capacity and economic limitations. The aim of tlhc structur-al changes is to establish a multi-level, flexible sysem which enlables students to transfer from one level to the next. In this system the various levels (post-secondary vocational, college, unive:rsity, and Ph.D. programs) and modes (fill-time and part-time courses) will be coordinated. A future national credit system and, based on its principles, the subsequenit institutional credit systems will mnakc it increasingly possible to guarantee Transfer between the different levels and modes. 'Thc national credit system must also take into consideration the requircments of Furopeani integration. Tlhese structural changes will not imply a growtlh in the number of programs. On the contrary, hased on existinlg programs we arc going to dcfine broader fields of study- and narrow specialization will only begin at the postgraduate level. This reform will include the introduction of unified teacher training, as well as gencral anid compulsory in-service training for teachers. The role of pairt-time and distance Icarning will increasge, as will that of the role of extra-mural programs. These structural chaingcs play a key role il the success of higher cducation reforms, because integrated institutions with a wide variety of programs will be able more flexibly to respond to the changes of the labor market. 2 ANNEX 2 Page 3 They can also help to an incrcasc in mobility and their institutional management is likely to be more cfficient and professional. 4. Efficient use of resources, multi-source ilE revenues. Duc to the unavoidable state budget refonm associated with socio-economic tranisformation, the state-financed proportion of higher education and research will not kccp pace with the growiing number of students. It will be necessary to incrcase the ratio of non-state institutional revenues and to decrease state support for non-state higher education institutions. As the student loan program is implemenited, we cxpcct the share of opcrating costs financed by the beneficiaries to be about 20% by 2005. At the same timc, a more effective use of public resources will bc critical if public cost per student (related to per capita GDP, of which it is currently at 62%) is to decrease and approachl thc average OECD level of 50% (but no lower) by 2005. Thei normative financing system of highier education institutions must be completed and during this process thc norms comprising training and maintenance expenses must be introduced with incremental corrections. Institutions must enjoy a greater financial autonomy, which needs to go hand-in-haind with their growth of thcir non-public revenucs. For professional and economic reasons, the financial managernenit of institutions must improve significantly. In harmony with the principles of market economy, the state must play a role in guaranteeing neutrality, promote competition, and stimulate the market for education, takinig into account the economic and social needs. IThese, then, are the mlcans, by wvhich the state can regulate the allocation of state-funded student places. In order to instigatc more efficient operation of the higher education system, the present forms of management and maintenanice need to be renewed and employers must also be provided an opportuniity to assert their priorities. Changes will be introduced with appropriate guaranitees on the part of thc HETs (no further increase in per capita support, rcduction in funding). HEIs are expectcd to take on increasing rcsponsibility for their financial management together with their increased financial autonomny, including the responsibility for raising a larger share of inistitutional revenues from l non-budget sources. S. Incrcasina enrollment. equal access to higher.. Qducation. The swift transformationi of society has resulted in an increase in social inequalities, thereby further diminishing equal access to education for underprivileged groups. The differentiation of the fonnierly unified system of primary and secondary education and the decentralization of education policy has further increased the differences in the opportunities for educational participation of between elite and disadvantaged groups. The goal here is greater participation for lower socio-economic groups in 3 ANNEX 2 Page 4 Ihiglier education, and a morc open and transparent system of student support. One of the main goals of the higher education reform is to increase the intake significantly, but in proportion with social and labor market needs, The ratio of college students has to reach the same level as that of developed countries, which is on averagc not lower than 30% of the 18-19 age group. Significanit growth is especially justificd for shorter programs, broacer stLudy fields and non-state funded part time programs. To increasc the entrance of less well-off students illto higher cducation and lesseni the dependence of remaining in education on social background, a diffcrentiated student support system needs to bc established. At the same time inore emphasis must be placed on the selection of students o_ the basis of their excellence. 6. Setting standards for academic and intellectual excelIence, In the midst of economnic problems and chaniging expectations, higher education faces increasing challenges in maintaining quality and international recognition and in setting standards of academic, research and educational excellcnce, The continuing transformation of the higher education system should overcome these challenges, providc adequate funting for the sustcnance of a higher education system geared to long range social and economic: interests, recogilizc the professional autonomy of institutions, stimulate academic conmnunitics and individuals to produce output at an international level, recognize and set standards of excellence and improvc the quality of training and research. To ensure excellence, the role and significance of individual studcnt work must increase, which entails reducinig the number of compulsory classes. All this necessitates a new approach fiom faculty as well as the expedient development of background cducational services and infrastructure on the part of the lils (e.g. exparnding and modernizing libraries and other student facilities). As a means of ensuring quality in autonomous institutions, wc wishi to promote quality control within the institutions andl introduce clear standards and transparent practice in accreditation proccdures, which will also take cmployer's interests into account and which can be supervised and accounted for by the state. In research, higher education mnust make an increased effort to join the capacity of research institutes , 1to sttengthen co-opcrationi betweeni institutions in the areas of research and cducation and to emphasize applied research anid development. We place great importance on the expansion of international relations in the field of science and on participation in international research. FutLrc generations of rescarchers are essentially recruited froni the student population of HFIls, and a legal and finlancial infrastructure necds to be established that supports tlhis. Finally, we must tackle onc of the hardest felt problems of higher education - the disgracefully low salaries of teachers and researchcrs - by revising the present system of remuneration, introducing more flexible nonms of employment as 4 ANNEX 2 Page 5 well as a new system of requirements that induces enhanced performance by incrcasing class sizes and teaching requireinents (average weekly teaching periods). C. CHANGES IN LEGAL REGULATION AND FINANCING TO DATE 7. Since 1990, the year iimnediately following the collapsc of thc old regime, the reform of liungarian higher education has made significant achicvements in several areas. The Higher Education Act of 1993 guaranteed frecdom for education, scicntific research and the arts. It established the autonomy of higher education, regulated the legal conditions of employment of teaching staff, ma(de the system of competitivc contracts compulsory, and extended the levels of training to include the Ph.D. degree. It prescribed that students in higher education Imiust pay tuition and other fees, while regulating for the possibility of a full or partial tuition waivcr to promote equal access to higher education. The Act also establislied the Higher Education and Sciencc Council (in Hungarian FTT) and thc National Accreditation Committee (MA13). The FTT's role is to explore options for the solution of strategic problems in higher education, and to propose, debate and help implement policies which address these various problemls. rhe MA13 is rcesponsible for monitoring the quality of research and education nationwide. 8. Before the refonns, the financing of highler education was based on historical prerogativcs and institutional lobbying, and - as in other major publicly funded sectors - I instilutions were not required to plan their incomes and expenditures in a responsible and rational way. Lack of flexibility in budget line transfers and expropriationis of savings creatcd a situation where scarcity and excess went hand in hand. The new financing system, rewarding institutional performance, has its principles codified in law. The foundation of the system is normative financing, where nonns are calculated on the basis of the averagc per student training costs of the individual programs (defined by broad groups) snd bouilding maintenance expcnses. The level of funding each institution receives will depend on enrollmetnt figures and the actual nom atives. The norms reflect the approved costs of training, building maintenance, and rcsearch expenses as sanctioned yearly by the state budget, and their use, inter alia, will also contribute to lower unit costs. Another method of perfonnance-related financing is through a competitive grant system for research and for special programs (e.g. textbooks), a system which must be sustainable in the long-term.. S ANNEX 2 Page 6 9. In 1996, an Amendment to thc Act on 1Higher E:ducation was adopted by the Hungarian Parliament to provide the legal framework for the cstablishment of a more monodern structure and institutional operation for higher education, as well as to provide the means for realizing development plans at institutionial as well as govcrrnmental lcvcl. The Amendment creates the legal framework for the establishment and support of integrated institutions. Among the possible fonms of integration, thc Amcndmcnt details the organization, opcration and financing of the so- cal]lcd higher- edujcation associations, wlichl can be created for a temporary period of two years; it also supports all forms of instituitional modernization in terms ol both internal rationalization and external integration. The transformation of the institutional structure will be based on a continuously rcfincd institutional network plan, created by those involved in higher education. D. GOVERNMENTAL STRAI'EGY 10. in planning the higher edtucation modemnization project we aim to: (a) incorporate a higler proportioni of the age group in higher education, (b) in programis that arc flexible anid relevant to the changing economic and social needs, (c) rationalize the systen and make it more efficient, (d) have beneficiaries assume a greater share of the costs, while ensuring equitable access, while, without permitting the deterioration of the quality of the Hungarian higher education system. I1. lR es qtjjijipng thci system of hiher education. In orde- to foster a more flexible adjustmnent to labor market needs and easier transfer between institutions, short-cycle courses will be introdiuced. A multi-level system will be established, with several kinds of outputs. In the near fulture, short-cycle courses will be integrated into the framework of the four-tier system, pending I qualily-based sclection (witlh enhanced internal achievement standards), and state-finided priorities will bc shifted toward slhort-cycle training courses, together with an increase in state- funded places in this sector. YZ.. ..i~ansion. of_.enroll.Qntls: The objectivc is to maintain the present level of first year admissions and withini this to allow further state-financed expansion, mainly in short cycle programs. In the last few decades higher education has used highly selective entrancel 6 ANNEX 2 Page 7 requirements to keep admissions at an artificially low level ( less than 10%/ of the respective agc groups). Since 1991 the dccreasing selcctivity of admissions and thle increasing variety of programs has resulted in this proportion rising to 17%. The objective is to fuirther increase fliWl-time state- financed student numbers to at least 25% by the turn of thc contuiy and at least 30% by thc year 2005. (At the same time, Hlungaiy will expericnce a demographic decline of the collcge agc cohort: in 1990 there were 142,000 in the 18-year-old age group, in 1994 there was a peak of 190,000, while in 2000 the figure will be 139,000 and after 2005 it will remain at an alImost constant level of J 20.000-125.000). 'These goals can be achieved by maintaining the number of new entrants at the 1996 level (42,000). 13. Principles goveniiig the allocation _f state-financd student places, including lhe role of student choice. The objectives are twofold: transparency and coherence of the allocation of state- fiunded places in accordance witli state objectives. The preferences of the governnlent arc labor- inarket rcsponsiveness and greater student mobility. The ultimate goal is to reducc the intervention of the state in the allocation of student places amonig institutions and training programs. The objective is to allow institutions to competc for stidents, to allow students to choose institutions on the basis of their qualifications and interests, and to pay institutionis according to the number and type of studenits enrolled. In the futture, the FTT will make annual recommendations for the allocation of places according to clear and explicit govesnment priorities, for which both state- and nozi-state-funded institutions would then bid. The basic priorities of the state-financed enrollments will mainly be set according to studenits' interests and partly be set according to some forecasts (using assessments of labor market needls ajnd intemationial comparisons) of tdle distribution of graduates in different disciplines. As the labor market and the education market develop further, the weight attached to labor market needs will find an expression in studenit demand. 14. IMnrovemenls and changes_in the nonnati.v financing model : The oljective is to develop a system which is simpler, more transparent and, thanks to continuous refinemcnt, morc able to fulfill its roles (to generate efficicncy, productivity and flexibility). The next steps are: - the extension of nonrative financing to include ovcrhead costs; - the consolidation of the number of allocation units to seven; 7 ANNEX 2 Page 8 - the reduction of the differentiation in program financing between colleges and universities; - the integration of post-secondary vocational training into the normative finanicing. 15. Plans for the credit systen: The objective is to set up a more flexible and penncable training system allowing students to enter the system whilc a program is already running or leave it before the program is complete. The credit systetn will also be usecl to help thc integration of short cycle courses into the multi-level system. A Credit Council will be established, whose mandate is to elaborate a national crcdit system. The legal framework of the credit system will be created in 1998. In the same period, a credit systcm will be detemiined for the various part-time programs that is bascd on and is compatible with the credit scheme for full- time programs.. 16. Redefinition of academic requirenments. The objective is to revise the academic requiremenits cxpected of student, starting with the establishment of a unified and credit-based system of minimum requirements. The main purpose will be to reduce the number of contact hours to ensure more time for independent work. To facilitate this process, a new decree is imminent, which will introducc a new system of broader (lefinitions of ncademic requiremctits by discipline. Here introductory core courses will be defined and based on these the inumber of electivcs must increase. 17. Strengthening the strategic.Qlpof MOE. The objective is for thc Ministry of Culture and Education (MOE) gradually to decrcase its role in thc supervision of day-to-day opcrations at the institutional level and to strcngthen its palt in policy development, and the dcfinition, implementation and( supeivision of strategy at govemmental level. For this purpose, a new sub- section responsible for these tasks will bc cstablished by restructuring MOE's higlier cducation division ancl by redistributing tasks. Wc will organize appropriate training for those performing these new tasks. I8 Intermediary orzanizations The objective is for these organizations to increase their professional coordination and preparation functions at the expense of their representation and lobbying roles. The 1993 Act on 1J-ighcr Education created a number of umbrella organizalions, notably the FTT and the 1Hungarian Accreditation Committce (MA13), to advise on policy- making and make recommenidations to the Govemnment concerning development, funding and quality control for higher educationi. In the light of the experiences of the intervening years, the 8 ANNEX 7 Page 9 modifications of 1996 called for the rcstructuring of these bodics. New decrees issued this year have redefined the composition of both bodies and their sub-committees, as well as that of the Higher Education Development Fund (FEFA). The policy priorities for these and other newly created committees will be coordinated in accordance with the governnent's higher education policy to ensure harmonization of their various mandates. The restruCtured MAB will facilitate thc modernization and diversification of academic programns by speedinig up the accreditationi process, and will also propose mcasures that allow faculties and institutions greater freedom in starting new programs. The FTT is expected to make recommendations on the conditions for the allocation of state support, on performance indicators, models and objectives. The FIT has beeni set up in such a way that decisions or recommendations sbould represent unbiased and professional considerations rather than the intcrests of particular groups. 19. The role of sEILs The objective is significaltly to increasc both profcssional autonomy and financial authority and to augincnt management capacities and responsibilities in order to cope with growing demands. At the institutional level, govcrnmental regulations will need to endorse institutions with greater financial responsibility over their own resources. Correspondingly, this year's modification to the budget law removes all restrictions on the use of tuition fees, and the same law reduces the surtax on outside earned income from 13% to 5%. The three pilot institutions taking part in the first phase of the higher education investment programn will receive funding in less restricted special block grants. The pilot institutions will also be allowcd to carry ovcr excess funds at the end of the year without special permission. Satnctions will be imposed on those inistituttions which do not keep to their annual budget. If our experiences witl the greater financial autonomy given to the three pilot institutions is positive, and on the basis of the evaluation of those experiences, greater financial autonomy would be expected to be extended to all other institutions participating in the integration program. At the university and college level, the process of strategic planning will be institutionalized, using the detailed Institutional Development Plans developed under the preparation phase of the investment program as models. The Ministry of F-ducation is to oversee the development and introduction of management infornation systems and to coordinate the nascent initiatives in this area, with the goal of full developmcnt and installation of management information systemns in Hungary by the end of 1998. On the management training side, a document has been prepared 9 ANNEX2 Page 1ff detailing the terms of refercnce for the establishment of a lprofessional managcmcnt training program. 20. Institutional inteeration. The objectivc is to establish instittutions of an appropriate size and profile, whose flexibility allows tlhem to provide enhanced innovation and competition, as well as more efficient operation, a higlher level of achievemncnt, and a wider rangc of programs and courses for sttdents to choosc fron. Integrationi is essential if wc want to achieve the main objectives formulated in Section B. The amendment to the law states that wherevcr possible anld rational, llBIs should transform themnselves into multi-faculty universities by the end of 1998. After this date Parliament can decidc whether institutions which have not fulfilled the integration requirements should be integrated, restructured or handed over to a new owner. Ilche ultimate goal is to have 10-12 larger integrated universities and some smaller regionial higher education centers. A development fund has been created to support the initegration of both professional and economic activities and infrastructtire and to help establish the conditions necessary for their opcration. L.ast year's distribution of 1.5 billion IIUE was targeted solely at institutions in the process of integration, and in the next few ycars (levelopincnt support funds will mahnly be distributed among those applicants whose integration plans promisc well-founded 'inancial and professional advanitages and are in harmony with institutional network plans. Several institutions have alrcady started the process of strategic planning for integration lias. In the long run all applications for state funds must have a strategic plan. As well as FTTr, a wide range of employers will need to be involved in the evaluation of the strategic plans. Based on the 1996 amendment to the Law on Higher Education, a govermunicrt decrce has been issued containing the detailed rules of institutional integration so as to promote the transition to multi- faculty universities within the next two years. 21. Finance an d management: 'rhe main objectives are incrcasedi cost-effectiveness, mixed state and non-state financing, atnd in the area of operating costs a rise in uiscr fees combined witl a sensitivity to social background. Absolute state support for higher education will increase - reflecting the growth in the system - but public support will decrease on a per student basis. Private support per student will increase, both from beneficiaries and through private higher education. This increased efficiency in the use of state funds will be the rcsult of the above outlined priorities of development and must be accompanied by high quality. | To increase their ability to make firm plans, higher education institutions need to havc confidence in budget projections and they need to be guLaranutced that there will no lonser be 10 ANNEX 2 Page 11 fluctuations in state support of HEIs. Thc three pilot institutions participating in the investment program have bcen assured that no changes will be made to their budgets during the fiscal year once budget figurcs are rclcased, with the exception of Parliamentary or Govemmental directives. However, sanctions will be imposed on those institutions which do not keep to thcir legally binding annual budget described in the law on the Treasuiy System. Uniform investnment criteria must bc detcrmined for the whole higher education system. For the sclcction and evaluation of prospective candidates we intend to subject all capital investnieint projects in the scctor to the same efficiency criteria and procedures introduced through the higher cducation refonm and investrncnt program. This means that a single and rigorous set of rules will be applied to the public funding of all investment cxpcnditures. 22. Tuition fees and the system of student nrants. Tuition fces were first introdLiced in lwungary in the academic year 1995-96. The amendment to the law permitted an increase in tuition fees, and a Government decree issued in September 1996 introduced a differentiated tuition fee schemne to take effect in 1998. In the new system tliere are only two limitations set by a Government decree: the maximtum fcc at the individual level anid the minimum total of fec incomc at the institutionial level. Within this limit, the instituition is fi-ee to determine how much individual students should pay and to differentiate the level of tuition fees accordinig to scholastic perfommance. Tuition fees will increase in tandem with the introduction of a studeint loan scheme to reach about 20% of training costs by 2005. Thc student loan system mnust enable the needy students to finance their education. All die above applies to statc financed students, but the same amendment to the law introduced a new category, that of self-financed students. The tuition of self-financed students is determined by the institutions, on the basis of training costs and market demand. We munst makc it possible for stujdents to transfer between the two categories. It is vital to ensure equal access to higher education for all, regardless of socio-economic background. To that end, the system of student stipend allocation will be modified to target students who perforn adequately, particularly those that are needy. 23. Prjivate highir education: The development of the private, that is non-state and non- church sector of higher education is an integral and necessary conmponent of the govenmnent's higher education reformn program. First, development of private Ihigher education can bolster almost all the goals of the reform program, including responsiveness to changing social and 11 , ANNEX 2 Page 12 economic needs, more efficienlt use of resources, and increased non-public rcsource mobilization. Second, the sector duality would allow it to contribute to a healthy dynamism, partly by injecting some useful inter-sector competition, but mostly by making distinctivc con01tributions within a system in which each sector could focus on its own comparative advantage. Third, the private higher education sector would allow for expanded enxrollmcnts without concomitant increases in public expenditure. Non-state enrollments now account for about 5 % o. the national total. Wc intend to pursue the followiiig policies: - ensuring that public higher education does not crowd out private education. In this regard, we will increase tuition fees in the public sector as soon as the student loan program is in placc. - ensuring that the accreditation process is transparent, timely and fair for private institUtionS. - deregulating the prcscnt legal controls on private higher education, - ensuring that private education is increasingly privately financed. We intend to recluce public subsidics, at the same time making it casicr for the sector to gain access to other sources of income. Suclh mcasures inclucle a guaranteed loan for studcnts in private higher edutcation and the passage of a non-profit law to boost incomeic from private contributions. We believc that the strategic steps outlined here con2stitute a firm foundation for the comprehensive reform of higher education in Hungary. Dr. Magyar BAlint Dr. Medgyessy PNter Minis,ter for Culture an n Minister for Finance Fobruary2, 1998 12 ANNEX 2 Page 13 Minisiry of Firianeo Ropublic ot Hune,ery PnIltiaal So9'..r'trwy ct S¶dte Roger Grawe 14 Jlnmaiy, 1998 C ountq Diret*owr for DulEar )tV'r Mr. Grawrz As you may know. n^7,otiations for tho propossed Hig,h&: Fduuaion Relo1m ProjLct were hcld in Washington D.C., from D)ccember 15 to 1 , 1997, be.ntern the delgatiens of the Witnld Bank and the iovernmeni nf Ihe Rcpublic of 14ingaiy. On this occasion the delegation-, tigiced on thc draf. LoIan Agrcement, the two side letters thereui anid the onthor technical documcms of the Trojcct. Towever, the negotiations in respect of the Finaucial Covenants ((Article IV) of the Loan Agrement, renmined mconclusivo. J he nain reHuso of the 1unpgarisn ckI)gations objoction was that tle niw Yersion of Artcle IV, re-fleting fndamental change.s in iIic finanval management system of thb Project, was prewaiwd to th liungwian delegation fnr ilic first timc during the ncgotiations. Consequently the delegiiiion lad no authority to accept the. new linancial and repnrTitg arrangcments. Both delegations, thwserore, aged to refc Ibis ma&T to tho nmaagement mi nrdcz to rcsolve the issue satisfactorilv as soon as possible. The aim of this lett is to inform ynu uf the fIungarisn position uoncrning ite aibresaid issue nd no miiake our proposal th*reon. The new version of Article IV would bind the Borrower, intomalla, tD have the. financial manaement system for dte lProject evaluated by an appropriatc auditing body by Jwuc 30, 1998, tiunish to the Bank a report on such evaluation by July 31, 1998, review it with die fB mk and thoreaftcr alke all nruasures necessary to ensiur the Ie£ficint flow of funds foyr thie Projcet taking into considwation the Bank's views oTn (he mattor. I hesc additional iiew reqwrents, in oIr npiuion, seem to be unwaranted, espccially considerinS the fact dtt you institution is familiar with the lHungarian Treasury %ysLtm which was indeed developed in cooperation with youw cxperts, To our wA,g ANNEX 2 Page 14 I knowledge the World Bank hm, heen highly satisfied for mor than a doca41 with the aooount keoping and auditiag syastcm of the Nantiusul Bwi3k utfllugazy. I nrdmg a new, not preciaaly nrmsncuibed, financmg ranagen¶ent systa may postpone or even cadlanger th putting ilnQo cffut ,r ifhis quitc importan. Project And will surely add extra costs to thc project implomentationi. Rssj iipnn the foresornis, may we make the 1olIowing proposal. On tho Hungnrian sidc wC would be roady to submit to thG Croveuzitcut fi(l aceiptance the new version Of Article IV as negotiated dunng the discussions in Washington D.C. At the samu fimcwe suggesm thali this lonter and ynmir response consdtute supplements to the Minutes o1 Negotiations dated Dcember 19, 1997. This exchange of lettcrs would oumirrn Ilhat uporn thei ctrrent kriowlege sad informarlon of your institution, the prownt F7ungwi financial managcmnnt system for World B3asA luaus has beun deemed to be "ti Rfamtorv to the Bank, We would seBk your assurance that tho proposed audit of the financial management system vill not alTfc aniy udicr l3aTnk lnan tn Himy.ary and will not lead to changes in curront Hungarian legislation. I do hope that our proposal is satisfactory to you wnd w would highly apprrciatc your acutlwicte nr any nommenfr-s cn this matier. Your sincerely, LAszle6 Akar Ino vvoric anK tanK v.enter, wranite lower Tel: ([3- WTERNAllONAL RANK FOR RECONSTRUCTbON AND O-8VELOPMENT Szabadsag ter 5-7. 5th floor Fax: (36 A INTERNATuONAL DEVELOPcMENT ASSOCIATION H-1944 Budapest. Hungary NNEX2 Page 15 January 15, 1998 Laszl6 Akar State Secretary Ministry of Finance 1052 Budapest J6zsef nador ter 2-4. Dear Mvfr. Akar: Thank you for your letter of Januarv 14, 1998. 1 appreciate the circumstances under which the Hungarian negotiating team for the proposed Higher Education Reform project wished to refer the new Financial Covenants (Article IV) of the draft Loan Agreement to its authorities in Hungary. I am of course pleased that respective Ministries have taken the decision to submit to the Government the draft Loan Agreement including the new Article IV. With respect to the concems raised in your letter, I can confirm that the present Hungarian financial management system for World Bank assisted projects has been deemed satisfactory to the Bank. Based on our current knowledge and information, we do not anticipate that the proposed audit of the financial management system under the proposed Higher Education Reform project will affect other Bank assisted projects in Hungarv, except insofar as you see fit to make changes in that svstem yourselves to improve its management and functioning. Of course the new Financial Covenants will apply to all future Bank assisted investment projects but the implementation of future reviews would incorporate and build on the findings of the proposed audit to avoid expensive and unnecessary duplication. We would also not anticipate that the proposed review would lead to changes in current Hungarian legislation. As we discussed in the context of the World Bank Country Assistance Strate., we propose to work with your colleagues in Government to improve the implementation of intemationally accepted accounting, auditing, and procurement practices in Hungary so as to simplify wherever possible the procedures associated with World Bank loans. I expect that the proposed audit would be undertaken in the context of and in the spirit of this joint exercise. I look forward to initiating this broader activity in the months ahead. Finally, I confirm that our exchange of letters be considered as a supplement to the agreed Minutes of Negotiations for the Higher Education Reform project dated December 19, 1997. With best re-ards. Sincerely yours. ; Roger Grawe Countrv Director for Hungarv RCA :a. L2'Nul e41445 i: F.AX; t02J:O 7 7.S! IIIU UUtJI*U w dI&ju gaaiIs ~ ~-041-I QCj ULse lne Ia. .z- IVX NTERAT(ONAL CANK FOR RECONSTRuCTION ANO OEVELOPMENT Szabadsag ter 5-7. 5th floor Fax: (36-1) 302 INT!RNAI1ONAL DEVELOPMENTASSOCIATION H-1944 Budapest, Hungary ANNEX2 Page 16 January 15, 1998 Ldszl6 Akar State Secretary Ministry of Finance 1052 Budapest J6zsef nador ter 24. Dear Mr. Akar: Thank you for your letter of Januarv 14, 1998. 1 appreciate the circumstances under which the Hungarian negotiating team for the proposed Higher Education Reform project wished to refer the new Financial Covenants (Article IN) of the draft Loan Ageement to its authorities in Hungary. I am of course pleased that respective Mlinistries have taken the decision to submit to the Government the draft Loan Agreement including the new Article IV. With respect to the concerns raised in your letter, I can confirm that the present Hungarian financial management system for World Bank assisted projects has beer deemed satisfactorv to the Bank. Based on our current knowledge and inforrnation, we do not anticipate that the proposed audit of the financial management system under the proposed Higher Education Reform project will affect other Bank assisted projects in Hungary, except insofar as you see fit to make changes in that system yourselves to improve its management and functioning. Of course the new Financial Covenants will apply to all future Bank assisted investnent projects but the implementation of future reviews would incorporate and build on the findings of the proposed audit to avoid expensive and unnecessary duplication. We would also not anticipate that the proposed review would lead to changes in current Hungarian legislation. As we discussed in the context of the World Bank Country Assistance Strategy, we propose to work with your colleagues in Goverrnment to improve the implementation of internationally accepted accounting, auditing, and procurement practices in Hungary so as to simplify wherever possible the procedures associated with World Bank loans. I expect that the proposed audit would be undertaken in the context of and in the spirit of this joint exercise. I look forward to initiating this broader activity in the months ahead. Finally, I confirm that our exchange of letters be considered as a supplement to the agreed Minutes of Negotiations for the Higher Education Reform project dated December 19, 1997. WVith best regards. Sincerely yours. ,~ Rover Grawe Countrv Director for Hungarv RCA :4:1.. (NUI '34'1 ( XU .Z0( 477-6d91 Annex 3 Page I REPUBLIC OF HUNGARY HUNGARIAN HIGHER EDUCATION REFORM PROJECT POLICY AND INSTITUTIONAL MATRIX OBJECTIVE I: INCREASE HIGHER EDUCATION'S RESPONSIVENESS TO CHANGING SOCIAL AND ECONOMIC NEEDS SUB-OBJECTIVE MEANS ACTION 'tAKXN ACTION REMAINING Responsi- By bY when 1. Raise enrollment 1.1 Increase percentage of applicants admitted to Percentage admitted has increased Increase percentage gradually 9/04 rates to at least 25 % of some form of tertiary education from _ to _ between 1990 and to reach target. the age group 18-22 1996 years. . 1.2 Diversify HEI offerings to attract and serve --a. Expand short cycle to other HEls ongoing diverse interests and abilities a. Act LXI.' recognizes and HEls encourages development [7-(9)] b. Short cycle courses have been introduced in order to increase access (7/96) c. Private HE institutions accounted ------------------------------------for 10% of enrollment - (1996). .. 1.3 Reduce unit costs of education at HEls. (See --a. Implement first 3 IDPs HEls starting also Objective II.) a. Included in first 3 IDPs. (3/97) b. Develop second group of 9/97 IDPs with explicit cost HEIs 6/98 reduction objectives c. Develop third group of IDPs with explicit cost reduction HEls 6/99 objectives 1.4 Increase recovery of costs from students -a. Complete planning PM/MKM/ 9/97 who can afford to pay. (See also Objective III.) a. Tuition fees introduced (95/96) b. Monitor actions of HEls b. Differentiated policy adopted w/higher tuition permissible. ( 9 /96) Governmental Decree (1/97) delegated tuition fee-setting to HEIs within ---- ---- -- -- -- -- -- -- -- -- overall national norms. . 1.5 Remove cost of education as a barrier to -a. Ratify planned implement MKM/FM 7/97 needy students through scholarships and loans. a. Call for pre-savings plan by (See also Objective 111. government (9/96) b. Finalize plan and implement MKM/FM 12/97 _ b. Loan program being designed ltindertlie 7/93 -ligiher lEducation Lau (Act LXXX or 1993) as amedlidcd uln Jull 3. 1996 (Act LXI ol 1996) - hercinafltc rekcried to as "Act IXI Annex 3 Page 2 SUB-OBJECTIVE MMEANS ACTION TAKEN ACTION REMAINING Responsi- By when 2 A1lnta!e enrvollm ...... en.t.s 2.1 Allow s-udent demand to be the dominant a. LXI [Section 9B]2 a. Discontinue central efforts MKM 9/97 and financial support to factor determining enrollment by field and b. New interim plan drafted and to pre-allocate state-funded HEIs based on student institution agreed by FTT (3/97) for 1998 school places to HEls by single demand. year specializations c. Alternative medium term model b. Implement new model MKM 9/97 developed featuring student application c. Develop national secondary for state funded places based on school-leaving examination MKM 9/99 national examination (6/97) d. Fully implement new model MKM 1/03 2.2 Implement a norms-based system for -a. Reduce number of PM/MKM 9/97 allocating central funds to HEs. a. Normative funding adopted as basis categories from 14 to 7; for FY97 teaching budgets. (1996) integrate operating costs with b. Phase 2 refinements drafted (2/97) teaching norms c. Endorsed by PM/MKM b. Raise student:staff ratio to PM/MKM 9/99 10.5:1 and start reducing disparities between providers for the same degree c. Reduce categories to 4; PM/MKM 9/01 increase student:staff ratio to 12:1; eliminate disparities by provider for the same degree 2.3 Require institutional mechanisms for internal --a. Include in 2nd group of HEIs 6/98 allocation of funds to programs in demand. a. Reallocation described in some IDPs HEls Ongoing institutional plans (3/97) b. Implement b. Stated MKM agreement with objective In the re ised 7/9'3 Higiher Education Law 172-1 j. [he (imerrinient shall... dcterm ne the an anal lnoIi huer i Stalte Iina)1Ced stdei t Is n\ hc adIi tIed, ad LI lic Mi islet, o f CIul tor I: dItcation shal I... decide on the basis of tile standpoinit of the HI ighler 1 ducation and Research Coliliei the nbilelrbc of State III i lined stud(enits w%ho maI he adnll ittedl to Irst !ear in %ariouis Ie els oI dcication (and), i ii istrihttion aimong institUltiOns..... Annex 3 Page 3 SUB-OBJECTIVE MEANS ACTION TAKEN ACTION REMAINING Responsi- By when bility 3. Restructure 3.1 Strengthen students' capacity for critical a. Goals for reduction in student class a. Implement at first set of HEls Ongoing educational objectives, thinking and independent study by reducing hours established in first three IDPs IDPs structure, and content so student hours in class together with increased (6/97) b. Include reduced student HEls 6/98 as to respond more independent work. hours in second set of IDPs flexibly to changes in - labor market demands. 3.2 Establish a flexible structure of course a. Act LXI recognizes/encourages a. Appoint NCC and establish MKM 1/98 requirement that permits student mobility within development [7-(9)] NCCO and among programs. b. Some institutions have adopted a b. Prepare implementation plan MKM/Pilot 2/98 credit system HEIs c. MKM has committed to system. c.Start introducing credit MKM 4/98 d. Framework for the credit system system outlined (2/97) d. Issue new guidelines for MKM 4/98 qualifications requirements 3.3 Increase the flexibility and responsiveness of a. Act LXI recognizes and encourages a. Provide technical assistance OMB 10/97 course offerings within Hungarian HEls; in development [7/A] to OMB particular, increase the breadth of degree b. HEls designed new certificate and b. Approval of new programs OMB 11/97 programs, reduce the number of majors and diploma programs [see 1-4(a)] increase proportion of courses that are elective c. Short cycle courses have been c. Introduce in first 3 IDPs Pilot HEls 9/98 introduced institutions d. Expand to subsequent IDP HEls 9/99 and institutions thereafter 4. Develop more 4.1 Reconstitute central advisory bodies, a. Act LXI created framework for a. Amend FEFA and MKM 9/97 responsive governance, including FTT and its subcommittees, OMB, and reconstituting [76ff] Integration Decrees to clarify advisory, and FEFA. b. Act LXI: created 50% outside roles of FTT, FEFA management functions. representation on FTT [77] b. Provide technical assistance MKM 10/97 c. New bodies have met (6/97) for building capacity 4.2 Incorporate outside views -- especially of a. New regulations published in new a. Establish Local Quality HEls ongoing employers - in the direction of higher education. decrees (4/97) Control Committees or Supervisory Bodies w/50% outside representation b.New bodies meet 10/97 Annex 3 Page 4 OBRJECTIVE !!: USE RESOU'RCES MORE EFFiCIENTLY SUB-OBJECTIVE MEANS ACTION TAKEN ACTION REMAINING Responsi- By ____________ _ _ _______________ bility when 1. Provide means and 1.1 Provide greater financial authority to selected a. Comprehenisve financial agreement a. Implement pilot programs at MKM/PM/ 1/1/98 incentives for HEls to HEIs. signed by MKM/PM and pilot sites. 3 pilot HEls and expand to pilots & control expenses. (6/97) subsequent HEls with approved ongoing IDPs. 1.2 Move progressively toward hard budget a. Comprehensive financial agreement a. Implement pilot programs at MKM/PM/ 1/1/98 constraints and cease state funding of budget signed by MKM/PM and pilot sites. 3 pilot HEls pilots overruns. (6/97) b. Issue Ministerial Decree on MKM/PM 12/97 b. Act LXI: sanctions (including sanction for budget overruns r.structuring) for HEls that exceed c. Enforce strictly provisions of MKM/PM ongoing budgets [I OB] the Decree. 1.3 Permit HEls to retain those resources a. Comprehensive financial agreement a. Implementation of pilot MKM/PM/ 6/1/97 mobilized outside the state budget, and to signed by MKM/PM and pilot sites. programs pilots maintain bank accounts and use interest earned. (6/97) b. Expand to HEIs with approved IDPs. MKM/FTT ongoing 1.4 Transfer ownership and maintenance of to a. Act LXI: permitted HEIs to hold and a. Implement law and pilot MKM/PM/ ongoingI physical facilities to HEls. sell property [9/G(2)] programs pilots Annex 3 Page 5 SUB-OBJECTIVE MEANS ACTION TAKEN ACTION REMAINING Responsi- By bility when 2. Adopt a business-like 2.1 Plan and control systematically within HEls a. IDP procedures introduced at pilot a. Provide technical assistance MKM 10/97 approach to including: (a) strategic planning institutions (96/7) to HEls management. (b) IDPs as a basis for state allocation of b. Included in first set of 3 IDPs (4/97). b. Refine IDP processes HEls ongoing development and investment funds c. Involve more institutions in MKM 12/97 (c) business planning, including three year process projection of revenues and expenditures (d) implementation of financial controls 2.2 Ensure accountability to external stakeholders a. Draft performance indicators MKM 9/97 b. Finalize key performance PM 12/97 indicators for monitoring and acceptable format for consolidated annual reports. c. Initiate variance reporting by HEls/PM 1/98 HEIs on reduced set of performance indicators. d. Submit consolidated annual pilot HEls 12/98 financial reports to MKM/PM. 2.3 Create the infrastructure to support planning, a. Committee established for a. Implement systems HEls 9/97 management, and control. Information Strategy in Higher development at HEls Education (2 /97) b. Complete systems on FEFA 12/97 b. FEFA/MATE contract for systems schedule development (/96) c. Design overall MIS strategy MKM 6/98 c. National Office for Informatics d. Undertake business process at one pilot 12/98 Development created and full-time redesign based on requirements HEI Ministry level officer appointed analysis d. Overall implementation plan e. Develop student registration MKM 6/99 developed (4/97) system f. Develop physical facilities MKM 6/00 management system 2.4 Implement systematic training programs for a. Proposal for short-term training a. Engage technical assistance MKM 10/97 management staff on the new and expanded program drafted (2/97) to design training programs functions of HEls. b. Implement new training MKM 1/98 programs 2.5 Provide technical assistance to HEls in a. Agreed by MKM a. Allocate resposibilities to MKM 9/97 planning and management. b. Detailed TOR completed (6/97). PMU b. limplemilent MKM olngoinig Annex 3 -PaBge 6 SUB-OBJECTIVE MEANS fACTION TAKEN j ACTION REMAINING 1 Responsi- 1 By I l | I b~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ility Iwhen I 3. Economize on 3.1 Adopt a unified approach for allocation of a. Economic functions of FEFA and a. Regularize process and MKM/PM 9/97 investment and state funds through various funding agencies, FPI FPI merged into FPT (3/97) coordinate resources development secretariats. b. Reconstitute FEFA and MKM/PM 9/97 expenditures. MKM/PM policies 3.2 Establish and use standards, including least- a. Agreed by MKM a. Complete analysis by MKM/FEFA 12/97 cost criteria, for the design and selection of b. Criteria drafted (4/97) Standards Committee projects. c. Standards Committee established b. Adopt design standards MKM/FEFA 12/97 (6/97) c. Apply in all new investment FEFA 1/98 projects 4. Reduce administrative 4.1 Consolidate administrative functions between a. Act LXI provided for federations a. Revise integration decree MKM 9/97 expenditures per student and within institutions [12 and 59A-F] b. Launch operation as Szeged 9/97 b. "Higher Education Federation of integrated institution institutions Szeged" created c. Complete planning for full 9/99 c. Plans for administrative mergers at 3 sites consolidation included in first set of 3 d. Identify other candidates for MKM/ 3/98 IDPs (6/97) merger institutions d. Decree on integration issued (4/97) e.Include and implement in 3 HEls 9/98 subsequent IDPs 5. Reduce teaching 5.1 Establish policy for teaching loads for faculty. a. None a. Include in final IDPs Pilot HEls 9/97 costs per student b include and implement in lEts 9/98 subsequent IDPs 5.2 Shift enrollments towards low cost subjects a. Included in 3 IDPs. a. Implement first 3 IDPs. Pilot HEIs 9/97 b. Include and implement in HEls 9/98 subsequent IDPs 5.3 Increase overall average number of students -a. Included in 3 IDPs. -a. Implement first 3 IDPs. Pilot HEls 9/97 taught per teacher by reducing student class hours b. Include and implement in HEIs 9/98 increasing class sizes increasing teaching loads. subsequent IDPs 5.4 Target funding to post-secondary part-time, a. Included in 3 IDPs. a. Implement first 3 IDPs. Pilot HEls 9/97 distance, and college instruction. b. Govt. policy targets growth at b. Include and implement in HEIs 9/98 college level. subsequent IDPs Annex 3 Page 7 SUB-OBJECTIVE MEANS 1 ACTION TAKEN ACTION REMAINING Responsi- By bilitv when 6. Manage expenditures 6.1 Introduce professional management of student a. Included in 3 IDPs. a. Implement first 3 IDPs. Pilot HEIs 9/97 on student services. services b.Include and implement in HEls 9/98 more efficiently subsequent IDPs. 6.2 Increase cost recovery for student services. a. Included in 3 IDPs. a. Implement first 3 IDPs. Pilot HEls 9/97 b. Include and implement in HEIs 9/98 subsequent IDPs. Annex 3 Page 8 OBJECTIVE III: MOBILIZE NON-STATE RESOURCES AND CREATE A MORE EQUITABLE SYSTEM FOR FINANCING HIGHER EDUCATION SUB-OBJECTIVE MEANS ACTION TAKEN ACTION REMAINING Responsi- By _____________________ __________________________ bility w hen I .Mobilize additional 1. I Increase cost contribution from students a. Tuition fees introduced at nominal a. HEls-MKM agree MKM 9/97 private resources within through tuition fees levels (95) b. Tuition fees ceiling raised PM/MKM 6/99 public HEIs b. Government decree delegated setting further when access to student of tuition fees to HEIs within national loans becomes available guidelines (12/96) c. Tentative agreement of MKM/PM d. Differentiated policy adopted w/ higher tuition permissible (9/96) 1.2 Broaden the base for financing of HEls a. Increased institutional fund-raising a. Provide TA to strengthen PMU 2/98 included in first set of 3 IDPs (4/97) fund-raising in 3 HENs b. Hungarian/American Higher b. Include in second set of IDPs Education Fund created (4/97) HEls 6/98 2. Increase the 2.1 Reduce monopoly and unfair competitive a. Act LXI permits private HEls to a. Increase tuition fees in public MKM/HEIs 6/99 contribution of private base of the public sector complete for discretionary funds institutions as soon as student higher education as a distributed centrally [9H] loan scheme is introduced share of national higher b. Policy options prepared (6/97) b. Constrain public expansion education expenditure in areas readily served by MKM 6/00 Hungarian private sector c. Increase fairness for private HEls in accreditation process FTT/OMB 6/98 2.2 Make private education more independent a. Act LXI de-links accreditation from a. Increase legal autonomy of MKM 6/00 state support (7/96) non-state HEls through b. Policy options prepared (6/97) deregulation b. Revise law Parliament 6/00 2.3 Reduce public financing of private higher a. Policy options prepared (6/97) a. Decrease state subsidies MKM 6/99 education b. Make students in private MKM 6/99 schools eligible for guaranteed student loans c. Establish guarantee programn MKM/PM 6/99 for borrowing by private HEls (capital accounlt) d. Pass non piofit law% Parliament 6/98 Annex 3 Page 9 SUB-OBJECTIVE MEANS ACTION TAKEN ACTION REMAINING Responsi- By bility when 3. Provide selective state 3.1 Focus state subsidies on those with financial a. Discussion and tentative agreement a. Government and Student MKM/ SU 9/97 support of students on need and promise (6/97) Union commit in principle. the basis of finance need b. Evaluate of alternative procedures for establishing need. MKM/SU 9/98 c.Launch pilot to test MKM 9/98 procedures d. Evaluate, service and extend MKM 9/99 application - …-- - - - -- - - - -- - ----- 3.2 Establish government-subsidized, nation- a. Approved Governmental Decree a. Decide and implement MKM/PM 12/97 wide student loan program calls for creation of "compensatory b. Ratify and implement MKM/PM 12/97 measures" with tuition. (9/96) c. Develop pilot program MKM ongoing b. Govt. calls for Pre-savings plan (7/96) c. Principle of student loan system accepted (6/97) Acronyms: OMB Hungarian Accreditation Association FEFA Higher Education Development Office HEI higher education institution FPI Higher Education Grants Office IDP institutional development plan FTT Higher Education and Scientific Council MKM Ministry of Culture and Education SU Student Union PM Ministry of Finance Note: figure in brackets. I1. refer to the Higher Education Law of 1996. Figures in parantheses. (. refer to dates I Annex 4 Page I REPUBLIC OF HUNGARY HIGHER EDUCATION REFORM PROJECT DESIGN OF THE LENDING OPERATION 1. The lending instrument and project design have been chosen to achieve strategic objectives for reform of Hungary's higher education system. The choice of interventions has been determined both by technical and economic considerations (see Annex 16), and by strategic concerns. In developing the operation, seven major issues have been examined. The following paragraphs discuss those issues and outline the conclusions that have been reached. 2. Timing of Reforms. Whether to require completion of reforms as a preconditioni for Bank support or to pursue these reforms during the implementation of the project has been an important strategic choice. Among the reforms that might have been required as preconditions for the loan were (a) complete merger of institutions (both legally and organizationally); (b) introduction of a credit and credit transfer system; (c) substantial reduction of required hours in class; (d) merger of academic departments; and (e) implementation of modern administrative and budget systems. The use of loan funds to finance facilities and in other areas might have been delayed until such basic reforms were substantially planned or even in place. This strategy was rejected and the alternative of gradual or staged change was adopted for four reasons: 3. First, an important objective of the project is to change the culture that has dominated Hungarian higher education for over 40 years. Requiring structural reforms before financilg improvements in the system poses two risks: (a) rejection of the loan because of the onerousness of such changes compared with the relatively comfortable ways of the past; and (b) certain legal and structural changes might be made de jure but the de facto operation of institutions might not change substantially. 4. Second, Hungary generally has followed a more measured and gradual approach to chalnge which reflects the politics, culture and history of the country. This pattern contrasts sharply witl that in many other Central and Eastern European countries 5. Third, the structure of a phased project would provide the Hungarian government and the Bank with continuing leverage to monitor and ensure achievements and reforms. 6. Fourth. requiring these and related capacities as preconditions could be self-defeating. An important part of the change strategy in Hungarian higher education is building the capacity of the system. Loan funds are needed to build this capacity, viz., technical assistance, management training, new administrative computing and management information systems, etc. 7. Implementation of a Student Loan Program. The development of student-financed highler education is constrained by households' very limited of financial assets, and by underdeveloped and incomplete financial markets. Focusing the project on the development of a student loan system would have allowed increasing ceilings on tuition and would have yielded greater cost recovery from beneficiaries and consequently less reliance on the public sector for finance. However, a study of the feasibility of developing a student loan program revealed that this option has very limited potential. The commercial banking system is relatively underdeveloped and has little experience in the production of consumer loans. Developing the institutions and procedures for efficiently originating and servicing loans that are relatively small, poorly secured and long Annex 4 Page 2 term will take several years. In addition, the demand for student loans may be very limited in the short tern. High inflation has forced lenders to charge very highi nominal interest rates. These rates make servicing student loans very costly, especially during the initial years. Innovative lending instruments would have to be developed to make student loans an attractive option. Otherwise one would have to await the restoration of macro economic stability and lower interest rates. The project will support the development of innovative lendinlg instruments and the creation of a loan guarantee scheme to encourage private lending to students. However, the dlemand for student loans is not likely to exceed a quarter of the costs of instruction; other sources of funding -- primarily public revenues -- must continiue to play a major role in the finanicinig of higher education in the near future. 8. Project Focus. The project has been designed to address the issues in highier education comprehensively, rather than through a narrow project focused oln one or two elements of the system. The piecemeal approach was rejected because there really is a "system" of higher edJucation, withi most major parts interrelated. To focus on only one or two aspects would have failed to provide adequate incentive to the organization being changed; and thus limited the likelihood of success even in the more limited area of attention. An alternative would have been to focus efforts on selected fields of higher education. Selective targeting of fields was rejected because restructuring is needed in all fields and the HEI must be dealt with as a whole organization. 9. Support for All HEIs vs. Concentrated Assistance. In order to achieve sufficient leverage for the multiple reforms sought at HEIs, and to address a reasonable share of the requirements, it was decided to provide a minimum critical mass of assistance for each institution. About eight integrating HEls are expected to receive an average of $25 million each rather than the funds being disbursed more evenly across all institutions. In the past all institutions were eligible for support through Government finance or World Bank programs. However, this option was rejected for the proposed project in the interest of providing sufficient minimum size of assistance, since capital investment requirements are huge at most HEls. It was also considered that some of the natural resistance to reforms within the academic community could be more readily overcome if the improvements in the physical environment were great enough. An estimated 6-10 integrating institutions are expected to participate in the project. If an average of 4 institutions are included in each integrating institution, 24-40 of the current 85 or roughly half of public HEls would benefit directly from project investments. 10. Choice of Lending Instrument. The lending instrument adopted for preparation was a sector investment project with strong attention to defining and monitoring sector policy and promoting institutional change. Direct investments in reforming HEls would be conditioned oni completion of acceptable institution development plans. An adjustment operation would permit quick disbursements to the central financial authorities for achievements in policy change and implementation. However, this alternative provides no direct financial incentive for many institutions making the difficult reforms. Moreover, the government has access to other larger adjustment operations and currently has no balance of payments need for a quick disbursiig operation. A specific investment operation would have provided specific investments for HEls, but would not have facilitated monitoring of policy implementation. The conclusion was that the project required both an adjustment component and an investment component. A hybrid was considered, but the investment requirements were so sizable that the balance remaining for an adjustment component would not have been sufficient to be of interest to the government. Annex 4 Page 3 11. Single Large Operation vs. Series of Smaller Operations. At the start of project development, a single, relatively small operation, was planned with the possibility of a second and third phase project. The disadvantages of this approach are the lack of incentive for changes implicit in the small project amount (it was difficult for some HEls to take the project seriously at $50 million). the uncertainty of realization of additional phases, and the high administrative cost of developing and processing three distinct projects. During pre-appraisal, however, the Government requested a single large project with three distinct phases. This was considered more suitable because the reforms will take a decade or more to implement fully, the larger project demonstrated a long term Government commitment to the reform, it provided greater incentive for HEIs to participate in competition for project funds, it economized on processing costs and still permitted checkpoints of progress before drawing on funds for a subsequent phase. 12. Top down vs. bottom-up approach. Exclusive reliance on either a top-down or bottom-up approach would not achieve project objectives. Overall policy measures can only be implemented at the level of the HEI. Assistance to HEIs exclusively would have meant inefficiency in implementation of several reform measures, which are best applied across the board. Therefore the project has both elements, including reforms of various policies at central level , and major policy and operational initiatives at each integrating HE]. I Annex 5 Allocation of State-Funded Student Places Basic Principles Students * Starting in school year 2000 potential students qualify for state funded places through a unified national examination' for entrance to higher education.' * Qualified students apply for fields of study and institutions of their choice. Central Authorities * The state determines the total number of statefinanced places it will support by level. * During a transition period of four years the state allocates the total number of new state-financed places according to broad fields based primarily on student demand and broad labor market trends with existing capacity taken into account as a limiting factor on the pace of changes. Student choice would assume an increasing role in the allocation with labor market projections playing less important role in the allocations over time. The number of fields would be about 25 in academic year 2000, declining to about 5-6 by academic year 2003. - Ultimately, the state ceases to pre-set state-funded admissions by field, with the following exceptions. The state reserves the authority to establish quotas for: * a small number of fields in which it is the main employer, or are very high cost -- based on broad labor market trends. * the total number of state supported places HEIs in the Budapest area. * The state uses positive incentives to attract students into fields deemed in the public interest, e.g. fine arts. * The state collects, analyzes and reports regularly information on labor market trends to help inform student choices of fields of study, including tracer studies of recent graduates. * The state sets no limits on the number of non-state supported students that institutions can admit. HEIs * institutions compete for admission of state-funded students * Institutions continue to decide on own admissions procedures, criteria and standards based on the results of the unified national examination. Allocation of state-financed places through the national examination means that institutions cannot continue current practices of filling available places with state-funded students by lowering standards. This could be the same as the planned baccalaureate examination; it need not be a separate examination. 2 The equity implications of the national examination need tobe studied in parallel with the design of the examination. Means to mitigate inequitable consequences, e.g. to certain regions or income groups, would also need to be studied and adopted. For example, regional quotas might be established. Annex 6 Page 1 REPUBLIC OF HUNGARY HIGHER EDUCATION PROJECT Private Higher Education Policy Statement The government herein states its commitment to devise and implement public policies aimed at the growth of a private sector in higher education. The establishment of such a sector is an integral component of the overall higher education reform we are undertaking. This statement sets forth why we support such growth and how we intend to achieve it. I. Background and progress to date The Hungarian higher education system has since 1990 developed the noni- state funded sector in higher education, which by now accounts for about 10% of the student numbers. There is, however, a split between the church and private sectors. In June 1997 an agreement was signed between the Hungarian Government and the Vatican guaranteeing for catholic students the same financing as state-funded students. This agreement is extended to all religious higher education institutiolns, but at the same time subjects them to many of the same controls. This statement deals exclusively with the latter group, the secular private HEls. Alongside invigorated church-run higher education, the establishment of secular private higher education institutions ("foundation colleges") in the 1990s indicates a supportive government role. Supportive measures included promulgating the legislation that allowed pioneering institutions to be launched and protecting these institutions from discriminative regulations. We have provided foundation institutions (including church institutions) essential material support during their infanicy. Currently, 5% of Hungary's students study in these 5 private institutions. 2. Rationale We realize that a well-functioning private sector in higher education provides a number of benefits to the system and to society. These are the following: * first, and most broadly, the development of a truly private sector helps achieve the government's general goals (e.g., more efficient use of resources; lower unit costs; state budget reform); * second, a vibrant private sector will allow for expanded higher education enrollments without increased public expenditures. * third, by setting an example of flexibility, whiclh creates competition for the generally less adaptable state sector * fourth, a truly private sector serves as a link between employers and the higher education system, and thus each party can spur the other to enhanced performance. Annex 6 Page 2 3. Policy objectives The government therefore sets the following primary objectives: * to increase the HEIs responsiveness to the labor market, * to reduce the public cost of higher education through increased enrollments and enhanced private education. These two objectives are achieved by increased enrollments, particularly in less expensive college-level education, at the vocational level, and in professional in- service training, that is, on programs that are responsive to the job market and do not require vast capital or othier investment. The long-term goal is to increase the share of the prival:e sector from the present S % to 20 % of student numbers. 4. Policy measures There are three elements to the government's strategy to achieve the above objectives: 1. Easing regulations: * that is, reducing government interference with the private sector, e.g. nominations for administration and staff. 2. to promote sector neutrality, expressed as: * equal, that is, noni-discriminating treatment in accreditation processes; * enabling the private sector to compete for development and research funds on an equal footing; e enabling he private sector to compete for state supported students; * equal access to student loanls by private sector students. 3. providing financial incentives: * the policy of the government is gradually to decrease public subsidies for the private higher education sector; * at the same time providing incentives for greater outside financing; * provide support for initial establishrnent, but not for ongoing operations; * allowing private higher education to charge higher tuition fees than the legal maximum for state supported institutions; * extension of the student loan scheme to private higher education students; * non-profit regulations stipulate the tax deductibility of private support for these institutions; * there will be an opportunity to support the privatization of certain public institutions. Annex 6 Page 3 5. The private higher education sector and the Reform Program. Part of the program's sources related to the strategy of higher education is earmarked for the reform of the entire system, thus directly or indirectly it affects tile private sector too. If private institutions decide to integrate, funds for this purpose may be available for them. They may also participate in the Management Trailinig and the Management Information System sub-components of the project, and the government is ready to negotiate with interested institutions and work out the details. (For greater specificity on means and projected impact, an Action Plan is included as an addendum.) Annex 7 Page I REPUBLIC OF HUNGARY HIGHER EDUCATION REFORM PROJECT INSTITUTIONAL DEVELOPMENT PLANS SZEGED UNIVERSITY A. Assessment of Problems and Opportunities 1. Szeged institutions reflect the following problems characteristic of all Hungarian colleges and universities: (a) highly specialized and lengthy academic programs; (b) limited student mobility across both programs and institutions; (c) large numbers of required classroom hours (25 to 35 hours per week); (d) low student to faculty ratios (7.7:1 in all Szeged institutions and 9.4:1 in JATE--the largest university); (e) very low academic salaries which induces both a brain drain and remaining faculty to work multiple jobs; (f) a tradition of tight government restrictions on finances, a lack of incentives to raise private funds and lack of transparency in newly emerging enrollment-driven formula financing; (g) a lack of national and local strategic planning; and (h) an absence of good planning and cost data. 2. Component institutions of the proposed Szeged University have positioned themselves as leaders nationally in addressing these problems. Szeged is thinking competitively and trying to position itself as an integrated institution (with programs ranging from two-year post secondary vocational to postgraduate Ph.D.) that will design and implement programs to fit Hungary's developing and changing labor market. B. Mission Statement 3. Five institutions constitute the proposed Szeged University (SZU): (a) Josef Attila University or JATE (5,750 students); (b) Albert Szent-Gyorgyi Medical University or SZOTE (1,950 students); (c) KEE College for Agriculture and Food Industry or SZEF (630 students); (d) Liszt Ferenc Conservatoire or LFZF (162 music students); and (e) Juhasz Gyula Teacher's Training College or JGYTF (2,600 students). The mission of the integrated SZU is to deliver postgraduate, graduate and short-term training programs in the liberal arts, science, medicine, agriculture and food engineering, and teacher training. SZU is primarily a regional institution for the majority of its programs and a national institution in many of its advanced level programs. C. Objectives of the Institutional Development Plan (IDP) 4. The objectives of SZU's IDP are to: (a) detail the problems and opportunities for SZU; (b) outline a plan for academic and administrative integration: and (c) document the highest investment priorities. The IDP lays out a two-phase organizational integration plan which Annex 7 Page 2 culminates in 1999 with institution (Szeged University) with 13 faculties, and elimination of individual rectors and establishment of a single senate. D. Means and Distinguishing Features SZU's IDP sets forth a strategy for increasing the flexibility of the academic degree structure by (a) increasing the number and proportion of short-term degree programs; (b) shifting resources from low demand to emerging new programs (e.g., from medical doctors to newly emerging, interdisciplinary programs like medical physics); (c) implementing a credit and transfer system within SZU institutions; (d) reducing required classroom hours 15 to 20% (depending upon the discipline) and correspondingly increasing individualized study; (e) implementing an academic reform strategy that is driven by enrollment performance of the various units, a 5% decline in academic staff over the next 5 years with a corresponding 20% increase in student numbers; (f) effecting a 25% decrease in administrative staff through institutional consolidation; (g) creating an on-going structural mechanism for strategic planning headed by the new integrated SZU president and a strategic committee of the senate; (h) introducing a budget reallocation mechanism driven by strategy directions and an internal allocation formula based on enrollment; and (i) defining organizational responsibility for both planning and reallocation below the central administration at the faculty and departmental group levels--which will become the basic cost centers. 5. Particularly distinguishing characteristics of the Szeged IDP are as follows. First, a very explicit internal budget reallocation formula (enrollment-driven) that has been widely shared within the institution and endorsed by the senate. Second, a funding mechanism that sets aside 10 percent of new funds coming to the institution under national normative funding as a pool to buffer the rigidities of an enrollment-driven formula and to serve as an investment pool for strategic directions. Third, the use of space utilization data and standards as the analytic basis for justifying the need for additional classroom space. The utilization standards used (35 weekly hours for lecture rooms and 25 weekly hours for laboratories) are on the high side of U.S. space standards but are achievable. E. Investment Proposals 6. SZU's IDP includes a three-page investment plan table with cost estimates and funding sources identified. While many projects are self-funded, top priority projects from which Hungarian government (FEFA) and World Bank loan funds are identified as follows: (a) Structural reform of academic system (i) Computing systems and infrastructure to implement credit and transfer system: $500,000 requested from FEFA (ii) Construction of a new Study and Information Center to seat 1,000 students and as an electronic substitute for current class/oral transmission of Annex 7 Page 3 information:$15,000,000 requested from World Bank, Town of Szeged and SZU (b) Efficiency improvements: (i) Construction of fiber optic lines between centers: $400,000 requested from FEFA (ii) Construction of Student Service Center for centralized student services, larger classrooms and other centralized administrative functions: $7,000,000 from World Bank, Town of Szeged, and SZU (c) Administrative systems: (i) Purchase of hardware and software for personnel, financial and student systems: $796,000 from FEFA F. Strengths 7. SZU's IDP reflects an unusually high level of commitment to institutional integration and resource reallocation within the institution. It is also more explicit than other institutions' planning efforts to consolidate and change its academic program structure. The level of specificity has improved greatly over several drafts. The primary strength of the SZU IDP. therefore, is that it represents the leading edge of higher education reform in Hungary. The primary ingredients for significant change are present at SZU: recognition that change is necessary; a high level of commitment by member institutions; motivation based on a sense of a competitive advantage in leading out with change; and data systems in various stages of development that will provide the informational infrastructure to manage change. Cost simulations with limited data, proposed organizational changes and a very specific budget reallocation mechanism are presented. SZU has communicated its intent to integrate widely among member HEIs. Two versions of the draft IDP in its entirety were distributed to all senior faculty; a newsletter summarizing integration plans was more widely distributed; about 50 faculty are currently involved in working committees in different areas implementing IDP planning; and SZU leadership conducts regular briefings to the senates of all member HEI senates on the status of IDP plans. G. Issues 8. Enrollment growth. The SZU plan is based on the assumption that enrollment will grow by 20%. This growth is expected to be driven by two factors: (a) the current and projected excess demand of qualified applicants to admission places; and (b) the attraction of proposed new programs, most of which are shorter college and post secondary. SZU's financial assumption on enrollment is that support for students admitted to new government funded programs will be financed by reallocation of currently authorized places. Any additional enrollment growth is assumed to be self-financed. The plan should document its basis for assuming that growth can be finance with user charges. It should estimate the amount likely to be charged and report its reasons for expecting students to be willing and able to pay these rates. Annex 7 Page 4 9. Degree structure. The proposed new academic programs are planned to have a broader, more flexible curriculum base particularly in the beginning years. This would ensure greater inter-program mobility and also allow larger average class size. However, many of the proposed degree programs appear to maintain a tradition of narrowly defined, specialized fields. The plan should indicate the measures that are being taken to produce a more flexible curriculum and report the expected effect on enrollments and mobility among programs of study. 10. Academic planning. While the goals of cooperation and consolidation have been set forth, the plan for academic consolidation is much more gradual than other components of the IDP. The planned mechanism to achieve academic restructuring is the budget reallocation method adopted coupled with projected enrollment growth patterns. The two combined will provide the direction and leverage for change. More planning needs to take place, however, between parallel university and college level faculties and departments. 11. Branch HEIs. Some legal issues with respect to the rights of branches of other HEls to join SZU and ownership of land (sports fields and military barracks) need clarification and resolution. Annex 7 Page 5 KECSKEMET COLLEGE A. Assessment of Problems and Opportunities 1. Kecskemet institutions reflect problems characteristic of all Hungarian colleges and universities as summarized in the Szeged University IDP summary. Kecskemet is particularly challenged by a physical development plan that must reconcile split site development and planning around changes in the structure and requirements for teachers. Kecskemet institutions see themselves in an area of potential growth (close to Budapest) and are willing to launch relatively radical academic forms to give them a position of strength in training for a changing labor market in Hungary. They see their willingness to make these changes as a competitive strength. B. Mission Statement 2. Three founding colleges, joined more recently by a fourth, and the primary associated institution constitute the proposed Kecskemet College: (a) Kecskemet College of Education or KETIF (790 full-time students); (b) Kecskemet College of Mechanical Engineering and Automation or GAMF (1,430 full-time students); (c) College of Horticulture or KEEKFK (383 full-time students); and (d) the International Ceramics Studio. Kecskemet College is a regional college committed to expanded educational opportunities for the region at the pre-university, post secondary vocational, and college level of training in diploma and short-term programs in teaching training (kindergarten and primary levels), horticultural, engineering and automation, management, ceramics and postgraduate teaching training through an affiliated Pedagogy Institute. C. Objectives of the Institutional Development Plan (IDP) 3. The Kecskemet IDP outlines 11 strategic goals over a five year period and sets forth plans to achieve them. These goals cluster around the following areas: (a) full administrative and academic integration including a commitment to better planning and centralized management; (b) enhancing student success through centralized, comprehensive student support services; (c) establishment of a new Common College responsible for initial, general education across faculties; and (d) strategic expansion of academic programs into informatics and business. D. Means and Distinguishing Features 4. Clearly the most innovative and distinctive means of achieving both academic integration and greater flexibility for students in training programs is the proposed "Common College" or "Common Training Institutes" where all matriculated students would receive their common or general education classes from faculty assigned to this college. "Institutes" or quasi-departments Annex 7 Page 6 withirL the Common College include: Foreign Language and Communication Center; Institute of Social Sciences; Institute of Creative Arts; Institute of Human Development; Institute of European Studies; Institute of Management and Business Studies; Institute of Further Education; Cultural and Technology Transfer Center; Institute of Information Technology; and Institute of Physical Education, Recreation and Sports. These Institutes are being formed from duplicative, and unique units in the three constituent colleges as well as newly proposed units (e.g., the Institutes of European Studies, and of Management and Business Studies). 5. Administrative consolidation and efficiencies are outlined through identification of overlapping functional units with staffing levels identified. Planned nonacademic staffing levels in the 'three colleges are projected to decline by about 13% (242 to 212) over the next four years which would bring non academic to academic staff ratios down from the current 1.39:1 to 0.9:1 by 20Ci 1. This reduction, however, is driven in large measure by increasing academic staff without correspondingly increasing in non academic staff. 6. Academic consolidation plans are reasonably detailed for the stage of planning at Kecskemet. An overall redundancy chart as well as appendices for each institute describe consol'idated organizational structures for these faculties. Overall student to faculty ratios are shown moving from the current 15:1 to 20:1 by 2001. The means of achieving both higher S/F ratios and diversifying training to meet emerging labor market needs is an aggressive enrollment growth strategy in the range of 60% over the next four years with 26% increase in academic staff. E. Investment Proposals 7. The connection between and justification for the investment plan and the academic strategy outlined in the IDP needs to be strengthened. The investment plan outlined in the body of the IDP is very general in the body of the report and in the Annexes. In addition, financial plan summary tables, while containing both capital and operating budget figures, do not adequately draw the connections between academic and investment plans. In terms of capital expenditures, it appears from Annex IV (page 27) that the highest priorities are for development of student hostels at the Homokbanya Barracks (HUF 160,000,000 in 1997 and HUF 269,000,000 in 1998). Reconstruction of others buildings and infrastructure in these former Russian Army barracks for academic purposes is also planned beginning in 1998 but how the academic plan is driving these renovations is not yet entirely. F. Strengths 8. The principal strengths of the Kecskemet College strategy are (a) its innovative "Common College" restructuring to integrate duplicative programs in the three colleges that allow greater student flexibility in preparing for a choice of and transferability among more specialized training programs; and (b) that academic planning has evidently occurred at the faculty/departmental level which bodes well for successful implementation. Annex 7 Page 7 G. Issues 9.Linking the IDP and investment priorities. The investment priorities that have been outlined need to be linked to the IDP and the rationale for setting priorities needs to be made more explicit. 10. Enrollment growth. Projected full-time student growth in teacher training needs to be re- examined in light of labor market projections and studies conducted by the FTT's work on projected growth by field of study. With the number of state-financed, first-year admissions holding constant at 42,000 for next year and with the overall reduction in places for teacher training, Kecskemet planning must either assume that projected substantial increases in this field will be self-funded or reduce the projections. While reduction of the projections would not impact substantially the justification for facility needs, it will mean reassessing efficiency targets. Similarly, the projections of rapid growth in enrollments in public health, medical technology, and distance education in agriculture need to be defended more thoroughly. 1 I.Branch HEI. The College of Horticulture's status as a branch of the Horticulture University in Budapest presently limits its participation to a federation member only rather than full integration. As is the case in Szeged, the legal status of branches needs to be clarified and resolved to allow the Horticulture College to proceed with full integration planning. 12.Regional center and distance education. Kecskemet College's role in the region and its cooperation with other smaller institutions offers an interesting model for further development. The Technical College has develop centers east and northeast of Kecskemet with technical secondary schools. Building and extending programs to smaller institutions in the country is an area of planning that should be pursued further. 13. Degree structure. While there is expressed interest and intent to broaden degree structures, most of the new programs proposed in the IDP reflect quite narrow fields of specialization. An important issue here, and at all HEIs, is the perception that the labor market requires such specialization. Are there other obstacles to reform in this area and what needs to be done to overcome them, if there are? Annex 7 Page 8 DEBRECEN UNIVERSITY A. Assessment of Problems and Opportunities 1. Debrecen institutions reflect the same basic problems characteristic of all Hungarian colleges and universities and listed in the Szeged IDP summary. Although Debrecen University (DU) was once an single university complex and even though the constituent institutions have developed several cooperative programs in recent years, the institutions have been more of a federation, in terms of the state of their planning, than the other sites. Federation thinking and politics have forestalled much detailed planning on both academic and administrative consolidation. Physical dispersion of member institutions also poses more of a challenge than it does ait some other sites. 2. DU serves a large geographical region and has an important economic development, as well as educational role. Its history and its breadth of offerings are both a strength and potential weakness. While the strengths are obvious, the weakness may be in the difficulty of developing focus and integrated, selective priorities. Federations tend to produce plans that distribute benefits broadly rather than selectively. A very encouraging sign in the IDP is the programmatic focus on molecular life sciences. Another opportunity explored to some extent in the IDP is the increased use of distant teaching and branches in the region. B. Mission Statement 3. Five institutions constitute the proposed Debrecen Urniversity: (a) Debrecen University of Agriculture or DATE (955 students); (b) University Medical School of Debrecen or DOTE (2,520 students); (c) Debrecen University of Reformed Theology (243 students); (d) Kossuth Lajos University or KLTE (9,902 students); and (e) Debrecen Section of the Ferenc Liszt Musical Academy (241 students). The Nuclear Research Insititute of the Hungarian Academy of Sciences is an associate member. The mission of the integrated DU is to deliver a broad range of postgraduate, graduate and short-term training programs in the liberal arts and science, medicine, agriculture and teacher training. DU serves as the educational and research center of the large eastern region of Hungary and beyond for the majority of its programs and national institution in many of its advanced level programs. C. Objectives of the Institutional Develolpment Plan (IDP) 4. DU's IDP outlines a plan to: (a) integrate the Debrecen institutions; (b) make the structure of DU's academic programs more flexible and responsive to the labor market; (c) develop an consolidated and more efficient management system; (d) increase non-state resources; and (e) use existing resource more efficiently. Annex 7 Page 9 D. Means and Distinguishing Features 5. Substantial progress has been made in recent months in integrative thinking and planning both academically and administratively in what will be the third largest university in Hungary. DU's strategies to achieve their objectives are as follows: 6. Reorganize academic programs by: (a) shifting from emphasis on M.S. to B.S. and to shorter-term post secondary certificate programs, allowing students shorter options and more flexibility at beginning year to decide and to transfer; (b) adding new programs attractive to developing labor market; (c) reducing or phase out older programs with low student demand by means of a newly created Academic Program Committee of the Senate; (d) increasing use of distance education; and (e) creating an investment fund for new programs. 7. Expand credit system and normalize teaching loads. Expansion of the current unit or credit system in some programs will allow greater transferability, definition of teaching loads and further reduction in required class hours. Required classroom hours have been reduced 15 to 30% in different areas and a goal has been set for a further 10% reduction. A teaching load policy has been defined as 11 class hours per week for teaching assistants and assistant professors and 6 hours per week for associate and full professors. 8. Quality improvements. Emphasis here is placed on improving libraries and on developing a research strategy and plan. 9. Efficiency (or cost reduction) improvement have been proposed by (a) enrollment growth with lower than proportional growth in staff; (b) academic program consolidation via three models-- (i) interinstitutional programs, (ii) formation of institutes, and (iii) mergers of departmental libraries into the planned new library; (c) administrative consolidation estimated to save approximately MHUF 36 through 20% reductions in financial services, buildings maintenance and services personnel; (d) increasing S/F ratios; and (e) building new administrative computing systems. 10. Non-state resources increased principally through tuition-based program expansion and through partnerships with the developing private sector. 11. Some of the distinguishing features of DU's IDP are its emphasis on building on strengths through a developmental focus on molecular life sciences; its considerable attention and analysis of labor market needs; its detailed projections of enrollment, staff and finances; and the advanced stages of physical planning and consolidation through its acquisition of the Kassai Street Campus property. Annex 7 Page 10 E. Investment Proposals 12. DU's top investment priorities: (a) The construction of a Life Science Building ancl Library Estimated total cost: MHUF 3000; non-state portion MHUF 123 (b) Introduction of new programs/facilities at Kassai Street Campus (classrooms, healtl science education center and faculty of law) Estimated total cost: MHUF 910; non-state portion MHUF 190 (c) Development of a Regional Center (Rural/landscape Development and Distance Education). Estimated total cost: MHUF 400; non-state portion MHUF 60 (d) Development Program of now(Environmental Studies, Music Center, etc.) Estimated total cost: MHUF 1043; non-state portion: MHUF 100 (e) Construction of ports Facilities: cost: MHUF 50; non-state portion: MHUF 53 F. Strengths 13. The IDP reflects considerable progress in Debrecen's thinking of itself as a loose federation to real integration. Substantial analyses have been made with respect to labor markets of the region and their role generally in regional development. DATE, DOTE and some faculties at KLTE have planned and implemented credit systems. The faculty of sciences at KLTE have limited core curricular requirements to 50 to 70% depending on major and a target of 25 to 30% of elective classes in each curriculum has been set. Class contact hours have been reduced from 15% to 30% over the last five years; and teaching&hour policies have been adopted. G. Issues 14. Links between the IDP and investment priorities. The criteria used to establish investment priorities should be made explicit and should be linked to the IDP. 15. Enrollment. The Debrecen IDP projects different enrollment growth scenarios and makes a strong case for strong enrollment growth. An important policy issue raised is whether pilot integration sites should be given a preferred position in the allocation of state-funded positions. Since many of the efficiency targets are dependent upon strong enrollment growth, continuing monitoring of enrollment rates and modification of plans is important. Projected growth in DATE], for example, runs counter to decisions being made on reductions in the field of agriculture at least for state funds. 16. Degree structures. As in the case of other sites, the proposed new degree programs reflect a high degree of specialization. DATE, for example, had one degree program (agricultural engineer) with 16 specializations until 1995 when additional degree programs began to be introduced, each with specializations. The principal issue here is whether, in the intermediate Annex 7 Page I I and long run, the labor market will require less specialization and more broadly-based, flexible training. 17. Budget reallocation. The reallocation model developed by KLTE needs be more fully discussed, modified and prepared for implementation. 18. Academic planning. The Academic Program Committee and the new system proposed and planned for implementation later this year represents a good, operating level strategy to begin the difficult task of consolidations. The plan, however, needs a much broader discussion and understanding among faculties. Annex 8 Page I REPUBLIC OF HUNGARY HIGHER EDUCATION PROJECT MANAGEMENT INFORMATION SYSTEMS DEVELOPMENT Assessment of the situation 1. General agreement exists concerning the need of Hungary's Higher Education Institutions (HEIs) for four types of computerized administrative support systems, namely - in order of priority - (i) financing, (ii) student registration, (iii) research registry, and (iv) premises management. Currently, HEIs employ individual computer systems for financing and student registry, but the systems are generally considered aged and rather makeshift. The prospects for upgrading these systems to a level that would be adequate to meet the increasing and rapidly changing needs of aggregate data management are very limited. 2. The Government has tried to address the need for new management information systems (MISs) at HEIs through several FEFA initiatives. Under the major one of these FEFA projects, server and network hardware and software totaling about $1 million were procured for six universities under the World Bank's Human Resources loan, and a locally. i.e., FEFA, funded effort under the acronym KEFIR' was initiated to develop packaged software for a financial management and a student registration system. However, the FEFA funding proved inadequate, even for a full-scope financial management system, the development of which, therefore, had to be broken into two phases. To date, only the first phase has been implemented. No resources were left to procure the development of the student registration system. As a consequence, the six universities covered by this earlier project were not able to use the hardware procured from the loan in 1995 for running KEFIR as the investment had intended, though they obviously did not let the equipment sit idle.2 The development of phase 1 of the financial management portion of KEFIR commenced in June 1996 and currently continues. Through another FEFA-funded initiative, development of a research registry system for HEIs has been contracted and is said to be near completion. This is a system that would allow an HEI to record the disciplines it researches and the areas of specialization of the academic staff, as well as provide an overview of the research carried out under grants. In addition, FEFA funds efforts toward acquiring the specific computer equipment for MIS and other informatics requirements of HEIs. 3. Both the phase I financial management and the research registry system developments were carried out--after a tendering process -- by MATE Rt. (Hungarian Telematics Co.), a company managed, owned and staffed at least partly by academic staff KEFIR stands for Korszeru Elektronikus Felsooktatasi Informatikai Rendszer, or Modem Electronic Information System for Higher Education Institutions. 2 For example, the Budapest University of Economics integrated the server they received into the country-wide student admission system which the University operates on behalf of the Government. Annex 8 Page 2 of the Technical University of Budapest, the same HEI which was designated as the first host site for the financial management system.3 While project management and product acceptance are under the purview of committees that include other HEls, the closeness of thie contractor to the principal of the procurement has given rise to concerns by outsiders about conflicts of interest, and this is in addition to the operational problems faced by the developers due to the unresolved situation with phase 24 and other contractual issues related to making the product operational in HEIs. However, it appears that the Ministry of Culture and Education (MOE) together with FEFA and MATE are currently in the process of finding a solution to all open issues, including (a) completion of the financial system's development, (b) establishment of the framework and resolution of the resource needs for adapting the system to individual HEls, including installation, (c) achievement of a similar solution for the research registry software, and (d) initiating the development of the student registration system, a point that is entirely separate from the issues with MATE. This overall solution may in future include the creation by MOE of a public (non-profit) company that would subsequently distribute, adapt, and further develop the various standard MIS packages for Hungarian HEIs including KEFIR. 4. During the KEFIR procurement with its attendant delays, pressure naturally built up at HEIs to consider alternatives in view of their unsatisfactory existing MIS systems. However, as of now, the national level (MOE, FEFA, Informatics Association for Hungarian Higher Education) seems to have reconfirmed the original concept of single "home-grown" solutions, i.e., in this case, the software developments by MATE. Recent considerations, backed up by a detailed audit of the financial system development under K]EFIR, appear to have alleviated concerns about the suitability and flexibility of this software, the commercial viability of the project, MATE itself, and the software platform used (ORACLE). MATE would reportedly provide for alternative data base management system products, a fact which would ensure that competitive purchasing of equipment and system software would be feasible for the HEIs. In contrast, the trial of a commercial software package for financial management carried out by the Budapest University of Economics ended without success. At present, the MATE software not only looks attractive in terms of cost, but it could also ensure a single solution for the HEIs with corresponding economies of scale and the potential for a much-facilitated national level interface for the individual HEI systems. Conversely, commercial or other alternatives currently appear prohibitively expensive or time-consumiing. This World Bank project, therefore, assumes that the participating HEIs would implement the financial and research 3 The second designated institution to receive the financial system, i.e., the so-called reference site, is the Kossuth Lajos University in Debrecen. For the student registration system, the host site would have been the Janus Pannonius University in Pecs, while the J6zsef Attila University in Szeged was designated as the reference site. These four "pilot" sites for KEFIR received somewhat larger sums from the $1 million loan funds than the two remaining sites which were the E6tvbs L6rand University and the University of Economics, both in Budapest. 4 The problems here seem to be that the system would not be complete and useful without the functionality to be developed in phase 2, and that resolution of the phase 2 contract was envisaged as part of the phase I contract negotiations in early 1996 (but remained pending at the time of the appraisal mission in May/June 1977). Annex 8 Page 3 registry software packages developed by MATE, and that a single solution would be procured or otherwise acquired under the aegis of FEFA for the student registry and premises management components as well. The project strategy includes two checkpoints in the form of two studies within the first 18 months, which would allow verification of the single package approach, or, if necessary, modify the course of the MIS component. Objectives and issues to be addressed 5. The need for a strategy. Initiatives such as the KEFIR and other FEFA projects have benefited from the combined wisdom of the managerial and technical committees that were consulted in their identification and realization. However, a dedicated analytical effort was lacking to establish policies and a comprehensive strategy for information systems in Hungarian higher education. An MIS strategy for higher education would clarify questions such as the types of data that are needed locally versus nationally to support management and policy development, the appropriateness of supporting single versus multiple MIS software packages, and the scope for identifying process and structural simplifications at HEIs through further studies. Without some strategic directions, it would remain difficult to determine the most effective allocation of resources, and to gain a national level perspective on the data to be collected and stored. The first major MIS task under the project would thus be the elaboration of policies and a strategy for higher education MISs in Hungary. 6. Support to the integration process. The project would provide the tools for the participating HEIs to manage themselves more efficiently and effectively by financing the procurement of servers, network, and workstation equipment, the adaptation and implementation of application software, and the training of technical, administrative and management staff. One of the key elements of the integration of HEIs under the project would be the consolidation of administrative and management functions and the resulting efficiency gains. Modem information technology can assist through more efficient work processes and structures. The development of user requirements for KEFIR has already led to the identification of process improvements, but additional gains or a corroboration of the MIS approach could be derived from an in-depth process review and development of user requirements5 for one of the integrating HEIs by an experienced and impartial international consulting firm. 7. Complementing the physical renewal efforts. Civil works financed under the project (administrative facilities, libraries and teaching facilities, such as the informatics 5 Requirement studies include a comprehensive enumeration of the business processes (whether mandated or desired) of an organization, the identification of current organizational responsibilities for decisions, actions or consultation, consideration of alternatives for redesigning processes for efficiency and simplicity, and elaboration of the necessary structural changes. Typical technical outputs of a requirements analysis are general workflow diagrams for the agreed ideal solution, a first level (i.e., coarse) data definition, the interactive functions which the MIS should support and the reports it should generate, as well as the additional information technology requirements (hardware, software, staff, training, time) for realizing the system. Annex 8 Page 4 classrooms of the integrated HEIs) would all receive up-to-date wiring for telephones and Local Area Networks (LANs) as part of the construction investments. A commensurate eifort is required in upgrading network, library computing, and informatics classroom equipment for the same buildings, and replacing that part of the existing information technology of the integrating HEIs that is insufficient or outdated. This would also achieve a much-needed increase in internal computer networking capacity of the participating HEIs. 8. Capturing national level benefits. Virtual universal recognition exists in Hungarian Higher Education of the need for, and the corresponding benefits that would come from, national level access to certain data from HEIs. Indeed, current discussions under the lead of MOE point to a central computer facility for higher education that would include the aclmissions system operated by the Budapest University of Economics, that in the future would also serve as a possible clearing house for registered students and a center for consolidated budget and expenditure data for the total system of Higher Education. While investments under the loan would be dedicated to the participating integrating HEIs, it would be fully consistent with the project's MIS objectives to allocate funding towards "central" hardware and to application software development, and to augment this funding with some investments in networking between the center and the HEIs. Implementation components 9. The following list is basically chronological, although some tasks would repeat themselves as new HEIs come into the project. In these cases, specific starting times with any one participating HEI would be determined by the readiness of Institutional Development Plans (IDPs) and Capital Investment Plans (CIPs). Table 7-1 presents the overall investment estimates, while Table 7-2 distributes these estimates over the expected six years of the loan. A. Specialist in the Project Management Unit (PMU). This specialist would assist the required vetting by FEFA of the investment proposals for MIS implementation by participating HEIs. He or she would advise on procurement related to MIS and the computer equipment for new buildings, or on combining the procurements for several HEIs. The specialist could also assume additional functions in the PMU. The position might be suitable for local hiring, and is contained in the estimates for PMU operations costs. B. Strategy Study on HEI and National MIS Needs. The result of the study would be advice on policies regarding HEI MISs and a national level MIS. The study would answer questions on: (a) the specific data which HEI MISs would need to incorporate in order to support efficient management and resource use, (b) data that would be needed on the national level for the same purposes, and for supporting the development of more effective government policies, (c) the identification of factors (aggregated data or correlations) that could define the efficiency of individual HEIs and the same for the country as a whole, (d) the interface requirements between the various systems (finance, student registration, etc.) and between an HEI and the national level, (e) additional MIS needs of medical and other specialized faculties, Annex 8 Page 5 (f) needs, if any, for different versions of financial software (e.g., a "light" version for smaller HEIs), and (g) advisability of single solutions such as KEFIR versus enabling competing solutions. The study would include an assessment of the need for a business process redesign and requirements analysis of integrating HEIs. If such a need were confirmed, the study would produce the terms of reference for activity H below. The strategy study should ideally be carried out by a consulting firm with international experience. About 3 weeks in the country and a total of 40 staffweeks out of the technical assistance category of funding are estimated, at a total cost of $300,000. The task should be carried out in the first half of 1998. C. Procurement of MIS Computer Equipment for HEIs. Procurement of computer equipment for the 8 to 9 integrating HEIs would include servers, operating system and database software, workstations, printers, and any network equipment and software needed to combine these into a system. For each HEI, the configuration should be sufficient to run all planned MISs, such as for finance, student registration, research registry, and premises management. The requirements would differ depending on the size of the institutions, but based on cost projections from the MATE software developers the estimates assume an average of 40 workstations. In the assumed scenario of a single solution based on the MATE package, the HEIs that are ready and eligible to receive funding under the loan, in consultation with the provider of the MATE software, would prepare detailed equipment lists, giving consideration to the computer facilities they already have and would need given their size and requirements, in consultation with the provider of the MATE software. Previously procured equipment such as for Szeged and Debrecen might be reused and thereby reduce overall costs somewhat, but the scope for such reuse is considered negligible. Any procurement would be contingent upon a guarantee that the adaptation process of the financial management system for the specific HEI could be launched (see task D below) and that the customized software would be ready for installation at the time of delivery of the server(s). For each participating HEI, the estimates assume $300,000 total, comprising $100,000 for the server(s), $100,000 for workstations and printers, $50,000 for standard software, and $50,000 for network equipment. This translates into a total estimate for 9 project HEIs of $2.7 million funding from the loan. D. Implementation of KEFIR Financial Software at HEIs. This task would include the adaptation of the general user requirements of 1996 (which guided the software development contract with MATE) to the needs of each HEI, corresponding adaptation of the application software, installation and initial on-site support, and training in the use of the software for technical, user and management staff of the HEI. All these services would be provided by the entity commissioned to adapt and distribute the financial management software to Hungarian HEIs, at this stage presumably MATE. The estimates derive from MATE and are for average integrated HEIs. Due to the linkage between MATE and the Technical University of Budapest, local funding would need to be employed for this component. The estimate is $200,000 equivalent per participating HEI, or $1.8 million total. Annex 8 Page 6 E. Development of a Student Registration System. For this task, the specifications of 1995 would need to be updated. The revised specifications should also accommodate future features of Hungarian Higher Education such as course credits and student tuition fees (or appropriate linkages to the financial system). The estimate assumes a one time amount of $600,000 for development including the elaboration of revised specifications and user requirements, and $100,000 per participating HEI for adaptation, implementation, initial support and user training. The total estimate for the task thus amounts to $1.5 mnillion which can be financed from loan funds provided the tendering addresses firms without commercial linkage to universities or other public entities involved in the World Bank project. F. Implementation of the Research Registry System. This task would comprise the completion of development of the related MATE software, followed by adaptation, implementation, initial support and training at project HEIs. For the same reasons as given under the task for financial software, it is assumed that all funding would be local. Since development of the software is being finished with existing funds (pre-project), only the implementation costs per HEI apply. Estimated at $50,000 equivalent per site, the total for 9 HEIs would be $450,000. G. Development of a Premises Management System. This would not only comprise a property inventory for each HEI, but would also function for the scheduling of class and conference rooms. As a contractor would need to be selected competitively, funding could be through the loan. The task's size and nature would make it suitable for national competitive bidding (NCB). Hungarian firms would not only have an edge in understanding the requirements of this application system, but the NCB approach would also foster the furthering of such in-country capability. The estimate is $200,000 for the development effort, and $30,000 for the implementation at each site, for a total of $470,000. H. Requirements Analysis for an Integrated HEI. Subject to confirmation by task B, a detailed requirements analysis and business process redesign should be carried out for at least one of the participating integrating HEIs. This task would serve as the second checkpoint -- the first having been taskB -- for ensuring that the KEFIR effort would be capable of supporting the expected reorganizations and efficiencies resulting from integration. For reasons of impartiality, the task should be carried out by a competitively procured, internationally experienced, consulting firm. An obvious HEI candidate to serve as the client or principal for the task would be the Szeged federation, unless this HEI would have to install new financial software earlier due to pressing needs. In the latter case, the federation in Debrecen could be a candidate for the study. The estimated costs are $500,000 (60 to 70 staffweeks plus expenses), financed from the loan's technical assistance allocation. While this is listed only as task H, an HEI candidate for it should be secured as soon as possible, and work could be started immediately upoIn completion of task B. I. Verification of the Requirements Analysis. This would be a relatively straightforward comparison of the results of taskH against the requirements of two subsequent HEIs in the project. The findings from tasks B, H, and I, might lead to Annex 8 Page 7 a redesign of some or all of the investment tasks of the MIS component of the loan. Achieving this possibility is the very purpose of these tasks which would thus serve to alleviate the risks inherent in the MIS implementation plan (i.e., the risks due to the single solution dating from 1994/95), and strengthen the confidence for the selected approach. This task would probably be handled as part of, or addendum to, the contract for task H The estimated costs are $100,000 per HEI, or $200,000 total. J. Procurement of Informatics Equipment for Teaching and Research. The investments under the project in new and refurbished buildings including telephone and LAN pre-wiring, would require commensurate renewal in PABX, networking. library informatics, and computer classroom equipment. This would ensure that information technology that is clearly obsolete or insufficient would be replaced and upgraded. In most cases, the investments would support joint facilities of the integrating universities. The investments would also lead to a generally improved computer networking and workstation environment for the participating institutions, an outcome that would in turn widen the access to the new MISs.6 Project HEIs would have to furnish detailed capital investment plans and related justification (e.g., obsolescence, or new services such as in the libraries) which would be approved through the general vetting process defined for this project. Based on the draft implementation plans already produced by the Szeged, Debrecen, and Kecskemet federations, the non-MIS related information technology upgrade needs are estimated to range from $700,000 to $1.2 million per project HEI. The average allocation is assumed as $1 million per HEI, distributed roughly as 50-70% for information infrastructure (backbone, network equipment, departmental workstations/PCs, web servers), 10-20% for library upgrading (servers, CD equipment, electronic libraries), and 20-30% for teaching and research equipment (mostly workstations/PCs, e.g., computer classrooms). The total funding requirements for 9 HEIs would thus amount to $9 million of loan funds. K. Investment in National Level Application Systems. This task would provide funding for modest efforts to aggregate data from HEIs at the national level. The estimates include funding for the development of central MIS software that would interface with the HEI's finance, student registration, research registry, and premises management systems, and thereby provide consolidated figures supporting national decision making. This component is estimated at $1 million. A second component would provide up to $1 million funding to MOE or a subcontracted institution (such as the Budapest University of Economics or a new public company) for computer equipment to operate a national level system. Finally, about $500,000 is estimated to effect the required improvements in wide area 6 Apart from the fact that these "infrastructural" improvements would allow a more widespread and efficient access to the MiSs of the HEIs and that in some cases procurement could be combined, there is no other linkage to task C. This subcomponent would simply enable an upgrading of the information technology supporting research and teaching so that obsolete equipment can be replaced when the new construction becomes available. Annex 8 Page 8 networking at the center and the interconnected HEIs. Funding from the loan for this subcomponent would thus amount to a tota]l of $2.5 million. Table 7-1 -- MIS Component Cost Estimates by Task and Funding Category Cost Estimates ($'000 equiv.) Procurmt. Local Loan Loan Method Funding (TA) (Equipm.) A. PMU Specialist (incl. in PMUestimate) B. Strategy Study on MIS for HEIs 300 QCBS C. Computer Equipment for MIS 2.700 ICB D. Financial System Implementation 1,800 Govt. E. Student Registry DevelopmentlImpl. 1.500 ICB F. Research Registry Implementation 450 Govt. G. Premises Mgt. System Dev./Impl. 470 NCB H. Requirements Analysis for One HEI 500 QCBS I. Requirements Verification for 2 HEIs 200 with H J. . Informatics Equipmt. for Teaching/Res. 9,000 ICB K). National Level Application Systems 2.500 I&NCB Totals 2,250 1,000 16,170 MIS Component Total 19,420 Legend: ICB International Competitive Bidding NCB National Competitive Bidding QCBS Quality-Cost Based Selection of Consulting Firm Annex 9 Page I REPUBLIC OF HUNGARY HIGHER EDUCATION REFORM PROJECT MANAGEMENT DEVELOPMENT Background I . Management of HEls in the previous political regime was concentrated at the ministry level and was highly political in its character. Professional management capabilities at all levels in the higher education system constitute a limitation on the development and implementation of both administrative and academic reforms. In addition, the introduction of new intermediate bodies between the MOE and HEIs, such as the Higher Education Scientific Council (HESC), to perform important national-level functions requires training at both policy and staff levels. A variety of training programs tailored to these audiences would provide the following benefits: D raise the quality and objectivity of national-level plans and policy initiatives, as well as the review of institutional plans and proposals; * improve the administrative and business practices of HEIs making them more efficient, providing services heretofore lacking, and building confidence on the part of Ministries that will allow greater measures of financial autonomy; and * improve the quality of administrative processes and levels of understanding both within HEls and between HEIs, the government and the public. Objectives and Principles 2. The primary objective of management development programs within the project is to raise the level of professional administrative competence in higher education. Principles to guide the achievement of this objectives include * tailoring programs to specific needs of different audiences; * designing programs to meet immediate needs for producing planning and management products or documents essential to the reforms; * designing programs which broadly address the development management skills and expose Hungarian administrators to leading models of reform internationally; * building in-country training capacities; and * coordinating the development of new programs with existing and planned programs of OECD and other agencies of the European Union. 3. The matrix on the following page provides an overview of both the audiences and types of training programs outlined to meet these objectives. Annex 9 Page 2 MANAGEMENT TRAINING TYPE OF TRAINING National Type Bodies Target Groups Reform Continuing Degree Fellowships Twinning Size Products Education Programs Abroad Partners Ministry of Education Policy level 2 X X X x Staff 10 X X X X FTT: Board 15 X X X Staff X X X X FEFA: Board 15 X X Staff 10 X X X X HAC: Board 15 X X Staff 3 X X X X Sub lTotal 70 INSTITUTIONS HEI (Integrating) X Rectors/Directors 10 X X Vice Rectors/Dir 30 X X X Seniior Admin 50 X X X Faculty Heads 200 X X Senate members 100 X X x Student leaders 30 X X Sub Total 420 HEI (internal integration) X Rectors/Directors 5 x x Vice Rectors/Dir 15 X X X Senior Admin 30 X X X Faculty Heads 50 X X Senate members 30 X X X Student leaders 15 X X Sub Total 145 Private! HE] Directors 5 X X Senior Admin 20 X X Dept Heads 20 X Sub Tctal 45 New Entrants to Admin Senior staff 20 X X X X X Young entrants 30 X X X X X Sub Total 50 Total 730 Annex 9 Page 3 Target Groups 4. Various national bodies, both at the board or policy level and at the professional staff level, will benefit from various types of training opportunities. Since many of the board and staff functions (HESC, HAC and NCC) are relatively new in Hungary, exposure in theory and practice to these functions in other settings would be invaluable in gaining a vision of the role and functions to be performed. 5. Integrating sites. HEIs currently designated or which will participate in the next rounds of integrating sites need both management training and implementation assistance. These audiences would benefit particularly from reform-specific product training ranging from developrment and refinement of IDPs, to curricular planning. 6. Private HEIs. All appropriate training opportunities should be open to private HEI's as a means of strengthening Hungary's private HEIs sector and of promoting interaction and learning between the two sectors. In addition, special training seminars should be targeted to private HEI in areas such as marketing and assessment. 7. Non-integrating HEIs. Many efficiencies and better practices are achievable in non- integrating sites. Participation along with other audiences in the variety of types of training outlined should be open to these HEIs as well as designing special programs targeted to their specific needs. 8. New entrants. The human resources strategy for staffing national agencies and HEIs in Hungary is both to train existing personnel and recruit new entrants. New entrants here are divided between more senior level staff coming from the ranks of academic staff of HEIs and younger persons recruited from college and university graduates or from other sectors of employment such as government or the private sector. In the short-run, recruiting academic staff who may wish to make a career change into administration may provide a badly needed pool from which to select capable administrators who would need training but not necessarily additional degrees. 9. Other special audiences might also be targeted around important policy issues. For example, as the Hungarian government begins to focus on the structure and policies of research in the higher education sector and the Academy of Science, training seminars or study tours to countries that have dealt with similar transformations would be very valuable. Types of Management Training 10. Reform Policies and Products. These training modules would focus on specific policies and products that are a part of the planning and implementation of refcrms and investments in Hungary, as follows: Annex 9 Page 4 * Policy papers * Strategic/mid-range development plans * Business Plans * Institutional Development Plans (IDPs) * Capital Investment Plans * Performance indicators * Space planning and utilization studies * Faculty workload analyses * Academic plans * Resource reallocation models 11. The typical format of this type of training is to select teams from national bodies or HEIs to receive training on, and actually develop a particular product. The team is introduced to the concepts underlying the product and is then tutored throughl its development. Instruction sezsions are separated by sufficient time for the team to develop further the product at their home institution or agency, including collection and analyses of data, writing drafts, and consu,ltationwith appropriate authorities. The length of these modules varies with the product under development. Development of Institutional Development Plans (IDPs), for example, is projected to occur in six training sessions over a period of about a year. 12. Continuing education. This type of training reflects classic modes of management training for existing practitioners, i.e., seminars or workshops on particular topics. Training modules will range from short-term (half-day) to longer-term (three-day) and some may even be linked to a series of increasingly advanced treatments of the topic. Topics for continuing education include the following: 3 Role and functions of policy intermediary and policy boards * Needs assessment methods - Planning methods * Financial management * Conducting policy analyses * Enrollment modeling and projections * Quality assurance programs * Administration of research and development contracts * Team building and supervision * Estate and facilities management * Adult and distance education * Analytic methods for student data bases * Analytic methods for human resource data bases * Private fund raising * Technology transfer * Building relations with the private sector 13. For example, new HESC Board members may participate in a half-day seminar on the role and functions of intermediary bodies overseeing higher education. Another example is a series of Annex 9 Page 5 workshops for vice rectors or other administrative directors responsible for the acquisition and administration of research funds in HEI. 14. Fellowships and study tours. Experiences abroad in the form of fellowships or study tours are valuable components of management development. These components would be designed to give participants exposure to best practices at varying levels depending on the audience. For example. FTT staff would visit state- and national-level higher education coordinating agencies to learn how these organizations develop plans, review new program proposals, and conduct policy studies. Fellowships can provide more in-depth experiences through longer-term stays with one organization. 15. The foci of fellowships and study tours should include the following areas: Fellowships: * Planning and policy development at the national level * Management of integration at HEI * Accreditation processes * Policy analysis and data management at HEI * Student loan systems Study Tours: * HEI facilities management * State- and national-level planning and program reviews * Financial management at HEI * Performance indicators * Distance education * Quality assurance 16. Twinning. Partnerships between individual colleges or universities abroad are common at many Hungarian HEIs. The Teacher Training College at Kecskemet, for example, is partnered with Darby in the U.K. through a three-year grant from the TEMPUS program. Darby is a U.K. integration site and provides a very useful case of integrating. Other such twinning relationships would be useful through visits, exchanges of personnel experienced in selected management areas, systems work, etc. 17. Technical assistance. The project will finance many forms of technical assistance (TA) as part of project implementation. Much of this TA will be of great training value to those participating in the HEI or agency receiving the assistance. While TA is not formally a part of tile management development component of the project, some TA could be leveraged into broader training opportunities through selectively broadening participation by persons from other HEI and/or through workshops where Hungarians who have benefited from TA can share those experiences with otherPriorities 18. Priorities need to be set given the extent and complexity of audiences and types of training experiences. Top priority should be given to the development of products and policies key to the overall reforms and targeted toward integrating institutions and national reviewing bodies. Annex 9 Page 6 Training of board members and policy-level personnel and staff at MOE, HESC, NCO and FEFA is critical to the successful implementation of reforms. Equally important is the training of administrators and key senate leaders in integrating institutions. 19. Final priorities would be set by the Advisory Board, but the following Reform Policies and Product training, are expected to receive high priority: * Policy papers * Institutional Development Plans (IDPs) * Academic plans * Strategic/mid-range development plans * Capital investment plans * Performance indicators * Space planning and utilization studies * Resource reallocation models 20. Of the many continuing education modules to be scheduled, highest priority should probably be given to the following: * Role and functions of policy intermediary and policy boards * Needs assessment methods * Financial management * Quality assurance programns * Team building and supervision * Estate and facilities management * Adult and distance education * Analytic methods for student data bases * Analytic methods for human resource data bases 21. There are some existing management training programs in the form of in-country conferences/seminars, exchange and other visiting programs through various European Union progranms such as TEMPUS, and other important international programs which provide leading academic staff to other higher education systems. The management training programs outlined here are designed to complement rather than duplicate these existing efforts. They should be designed with this objective in mind. Administration of Management Training 22. Advisory board. To assist the PMU in setting priorities, designing appropriate training modules and identifying resources, an Advisory Board should be appointed by the Minister of Education and be composed of the following: Annex 9 Page 7 Deputy State Secretary, Ministry of Culture and Education Minister of Finance (or designee) President, Conference of Rectors President, Conference of Directors Two representatives from other international training organizations, viz., Higher Education Support Program of the Open Society Institute IMC (International Management Center) Three HEI representatives (one from a university; one from a college; one from private HEI sector) Representative from private industry with experience in corporate training 23. Project management unit. Overall responsibility for implementation of the management training program rests with the PMU director on advice from the Advisory Board. The PMU should let contracts for development of priority training programs and of continuing education modules as soon as technical assistance funds are available (January 1998). During this same period, requests should be issued for proposals on fellowships and study tours as one package and for twinning either with them or separately. Details on the terms of these RFPs are contained in terms of reference in the Project Implementation Plan. 24. The Minister of Education should appoint members of the Advisory Board by October 1997 in order for them to become familiar with the program as outlined, offer advice for its modification and refinement, advise on priorities and review RFPs. 25. Cost estimates for management training subcomponents are contained in cost tables of the project. Staffing 26. Requirements for staffing management training will vary depending on the type of training. Training for specific Bank project related products should be designed and guided by a combination of international experts and Hungarians, often in a team teaching mode. As the curriculum is refined and as the level of Hungarian experience with these products increases, in- country expertise should become predominant, thereby reducing costs and creating the basis of an on-going, stable program. Teaching staff should be selected on the basis of their knowledge of the specific policy or product to be developed, their ability to work interactively and flexibly with working groups environments, and their capacity to assist in the production of the product desired. Annex 9 Page 8 Evaluation 27. Three types of assessment of the management training component will occur: (a) participant evaluation of each course module for the purposes of instructor performance and structure and value of the module; (b) formative evaluations of the whole range of program components in 1999 as a part of the general evaluation of the project at Phase II to assist in any reshaping of program components; and (c) a combined formative and summative evaluation will occuI- in 2001 just prior the project's general evaluation before Phase III to determine which compionents have been most successful and ought to be continued and which should be phased down or discontinued. Annex- 9 Page 9 Deputy State Secretary, Ministry of Culture and Education Minister of Finance (or designee) President, Conference of Rectors President, Conference of Directors Two representatives from other international training organizations, viz., Higher Education Support Program of the Open Society Institute IMC (International Management Center) Three HEI representatives (one from a university; one from a college; one from private HEI sector) Representative from private industry with experience in corporate training 23. Project management unit. Overall responsibility for implementation of the management training program rests with the PMU director on advice from the Advisory Board. The PMU should let contracts for development of priority training programs and of continuing education modules as soon as technical assistance funds are available (January 1998). During this same period, requests should be issued for proposals on fellowships and study tours as one package and for twinning either with them or separately. Details on the terms of these RFPs are contained in terms of reference in the Project Implementation Plan. 24. The Minister of Education should appoint members of the Advisory Board by October 1997 in order for them to become familiar with the program as outlined, offer advice for its modification and refinement, advise on priorities and review RFPs. 25. Cost estimates for management training subcomponents are contained in cost tables of thle project. Staffing 26. Requirements for staffing management training will vary depending on the type of training. Training for specific Bank project related products should be designed and guided by a combination of international experts and Hungarians, often in a team teaching mode. As the curriculum is refined and as the level of Hungarian experience with these products increases, in- country expertise should become predominant, thereby reducing costs and creating the basis of an on-going, stable program. Teaching staff should be selected on the basis of their knowledge of the specific policy or product to be developed, their ability to work interactively and flexibly with working groups environments, and their capacity to assist in the production of the product desired. Annex 9 Page 10 Evaluation 27. Three types of assessment of the management training component will occur: (a) participant evaluation of each course module for the purposes of instructor performance and structure and value of the module; (b) formative evaluations of the whole range of program components in 1999 as a part of the general evaluation of the project at Phase II to assist in any reshaping of program components; and (c) a combined formative and summative evaluation will occur' in 2001 just prior the project's general evaluation before Phase III to determine which components have been most successful and ought to be continued and which should be phased down or discontinued. Annex-10 Page 1 REPUBLIC OF HUNGARY HIGHER EDUCATION REFORM PROJECT STUDENT LOAN SCHEME 1. During appraisal it was determined that a task force of high level representatives of the groups affected by the loan program should be formed to guide the design and implementation of the student loan program. Detailed terms of reference were submitted to the Government for acceptance as a condition of effectiveness. 2. Background. The Hungarian Higher Education Reform Project will finance the development of a national student loan guarantee program. A guarantee program is needed in order to enable households to finance some of the cost of higher education through borrowing from commercial banks 3. Increasing the share of costs recovered from beneficiaries is a high priority for three reasons. First the cost of public funds is very high. The Hungarian tax system is highly inefficient in generating revenues. Tax compliance is poor and a large part of the economy escapes taxation. The burden of taxation falls primarily on foreign enterprises, and formal sector workers; small businesses and employees of small firms escape a large fraction of their tax liability. Estimates of the dead weight loss due to taxation are as high as 70 percent of tax receipts. Therefore reducing the burden on the state budget of higher education finance by recovering costs directly from beneficiaries is a high priority. 4. Second, higher education institutions need to diversify their sources of funding in order to achieve greater autonomy. At the present time higher education institutions obtain about 85 percent of their revenues from either the ministry of education or other tax-finance institutions. (The remaining 15 percent is obtained from the sale of goods and services, and from the rental of real estate.) 5. Third, financing higher education (which is largely a private good) entirely from public funds is highly inequitable. Students in colleges and universities come from households that are much wealthier than the average Hungarian family. A background study prepared as part of project preparation revealed that the asset holdings of the families of college and university students are more than three times those of the average Hungarian family. Therefore public financing of higher education redistributes income and wealth from the poor to the rich. Under central planning, workers were rarely paid for having greater skills or higher productivity. However, the emergence of competitive markets for skills has allowed larger wage differentials to appear in recent years. The value to the individual of a higher education is certain to increase as the market for skills spreads and deepens. Moreover, many of these households would be able to contribute significantly to the cost of higher education without undue hardship. 6. Design Criteria for a Student Loan Program. During preparation of this project several tasks have been carried out in order to inform the design of a student loan AnnexI1 Page 2 guarantee program. First, the commercial banks have been presented with the suggestion that they originate and service education loans. Two of the largest commercial banks have expressed an interest in doing so. However, they recognize the need to secure these loans. A direct guarantee by government has been rejected by both the banking industry and the Ministry of Finance. The banking industry prefers instead to have a legally autonomous, semi-private agency provide a guarantee of repayment. The banks believe that such an institution would provide the most credible assurance of the ultimate recovery of such loans. The Ministry of Finance has also rejected the suggestion that the government establish a lending institution for student loans on the ground that government is poorly positioned to manage the allocation of consumer credit or to pursue the routine recovery of loans. 7. A second study has investigated the financial feasibility of student loans. This study has focused primarily on a proposal put forth by the Hungarian federation of Student Unions that would allow parents to save toward the cost of higher education through special savings accounts. This proposal includes a suggestion that the earnings on such savings should be granted preferential treatment under the personal income tax. Thie Student Unions have also lobbied for the subsidization of the interest paid on education savings accounts. An analysis of the savings capacity of the average household has revealed that such a "pre-savings" plan would typically finance no more than 130 percent of the cost (including subsistence) of one year of higher education. The Ministry of Culture and Education has proposed a pre-savings plan for implementation in 1997, although the Ministry of Finance has opposed the feature of the proposal that makes it attractive to families: contribution to the accounts of a state subsidy on interest. A small student loan program has also been proposed in this study, but the requirements for its im]plementation have not yet been worked out. 8. A third study has examined the likely capacity of graduates to repay the loans. Except in the cases of rapidly expanding fields -- such as translation services, accounting and business management -- the salaries currently being offered to new graduates would not allow them to repay a conventional, level payment loan. The inability to repay an education loan is due primarily to the very high inflation premiums imbedded in nominal interest rates. (The rate of inflation in recent years has exceeded 20 percent a year, leading to nominal interest rates of more than 30 percent.) Long-term, fixed-interest rate loans would also present enormous financial risks to students during a period of rapid economic change and unpredictable inflation. These findings suggest the need for innovative financial products that allow frequent adjustments in payments to reflect actual inflation rates and to permit either graduated or income-contingent payment on the loan. These financial products are not familiar to much of the commercial banking systeem and therefore must be carefully marketed. The use of an income contingent repayment scheme administered under the social insurance program or income tax is also under discussion. 9. Remaining Issues. Further work is needed in several areas before a student loan scheme can be launched. First, the guarantee mechanism must be specified and a legal Annex 10 Page 3 entity identified or established to administer it. The most appealing option is to create or identify an existing independent agency with well defined authority to collect bad debts. The guarantee agency would accept responsibility for collection only after the originating bank had exercised due diligence in seeking payment. The loan guarantee might not cover the entire outstanding balance - perhaps only 90 percent - in order provide incentives to the commercial bank to exercise due diligence in originating loans and to work aggressively to recover the loan. A secondary guarantee might be provided by the government to ensure that the guarantee agency is able to meet its obligations. This facility might assume responsibility for collection of defaulting loans after the guarantee agency has pursued extensive remedies. The loss to the guarantee agency might be set at a fraction of the outstanding debt, as well, in order provide it with incentives to pursue collections aggressively. The primary guarantee might be financed from a fee imposed on the borrower at the time a loan is originated. 10. Second, agreements need to be reached on who should have access to guaranteed student loans. Data from other countries with student loan programs suggests that default rates tend to be much larger for vocational training courses and non degree study programs. The targeting of assistance and the likelihood of repayment could be increased by limiting access to students of colleges and universities. Limiting access would also help to ensure that funds are distributed to those whose financial requirements are greatest. In addition, the program might restrict access to students who have successfully completed a year of study or who have maintained marks above a specified minimum, since successful completion of the educational program is a positive factor in the likelihood of repayment of the loan. 11. Third, responsibility for screening students for eligibility and capacity to repay needs to be assigned. Most student loan guarantee programs rely on the educational institution to certify the student's eligibility based on standard needs assessment criteria. The certification then provides the lender with the assurance that it has access to the guarantee. The lender assesses capacity to repay the loan. The use of income tax returns or parental statements of income and wealth does not appear in Hungary to be a reliable means of establishing the family's ability to meet the cost of higher education from its own resources. Therefore the risks that are being shouldered by lenders are greater than in most student loan schemes. 12. Fourth, the borrower's obligation to repay the loan needs to be developed as fully as possible. These loans are not secured by a pledge of property but rather are character loans. Therefore student loan programs typically rely on an elaborate application process to identify persons who might be contacted in order to trace a borrower who has absconded. In addition, the approval of the loan is often accompanied by a required training in the responsible use of consumer credit and the legal measures that lenders may employ to secure payment. Educational institutions also provide students with information on the cost of providing the education, the subsidies that are being given, the sources of these subsidies and the economic value of the education in order to heighten the borrower's sense of moral obligation to repay. Some student loan programs also Annex10 Page 4 operate courses for graduating borrowers in order to emphasize to borrowers their obligations and to remind them of the sanctions that may be applied in the event of default. These efforts are likely to be especially important in the Hungarian setting in which many families have very little experience in using credit. 1]3. Fifth, the access of the lender and the guarantor to enforcement instruments needs to be agreed. These instruments include the authority to seize personal and real property, attach wages and salaries, claim social insurance benefits at the source, or affect adversely access to other forms of credit or to professional licenses. The possibility of using either the tax withholding or social insurance contributions systems to effect payment should also be considered. 14. Sixth, the allowable uses of the funds and the mechanism(s) for disbursing the loan need to be defined. Most disbursements from the loan may be made directly to the educational institution, for example. The allowance for living expenses may be disbursed vweekly or monthly to limit the possibility of misuse of the proceeds. The range of allowable expenditures needs to be chosen. The proceeds of many loan programs can only be used to pay direct educational expenses; others may be used to pay for living expenses or to purchase assets needed to attend school or pursue a course of study. Some programs allow students to use the proceeds of the loan to purchase a vehicle or furniture. The acceptable uses of funds and the amounts that can be spent under each category also need to be agreed. Cost and Benefits of a Student Loan Guarantee 1:5. Rough estimates of the costs and benefits of a student loan program have been prepared. In 1996 the cost of producing a year of higher education ranged from US$5000 tc, US$9100. Tuition charges, when fully implemented, are expected to recover about a third of these costs, or between US$1650 and US$3050 a year. Student living expenses in 1996 at university dormitory and canteen were approximately 180,000 HUF (US$ 1250) a year. Therefore, the total cost to a student would then have been between US$2900 and US$4400 a year. These costs represented between 1.0 and 1.5 times the average income of a working class family. 16. If a working class family were to save 10 percent of its pretax income for the eight years prior to enrollment of a child in university and these savings paid interest at the rate of 8 percent a year, then the student would matriculate with reserves of 575,000 HUF (US$4050) -- enough to meet expenses for about one year. Savings accumulated during four years of study (including interest earned) would add 245,000 HUF (US$1700) to the fund. In order to meet the remaining costs of higher education, the student would need to earn or borrow a total of about 900,000 HUF (US$6250) over an average of four years. Therefore, if he or she does not earn any of the funds required to meet the costs of being a student, a total debt (including accrued interest) of approximately US$8390 would emerge at the end of four years. This debt, if repaid over a [l 5 year period at 10 percent interest, would require an annual repayment of about AnnexI1 Page 5 160,000 HUF (US$1120) a year. In recent years a graduate from a higher education institution might expect to earn a salary of between 700,000 and 800,000 HUF (about US$4400-5000) a year immediately following graduation, rising to about 1,200,000 HUF (US$7500) by mid career. Under the assumptions used in this scenario, financing a higher education with a student loan would have been an attractive financial proposition, leading to a net increase in income of less than 50,000 HUF a year initially and rising to a gain of about 500,000 HUF a year by mid career. (All of these calculations are in real terms and reflect the structure of relative wages that prevailed between 1990 and 1995; technological advances, economic liberalization and globalization of markets are expected to increase the differences between incomes of secondary schools leavers and graduates of higher education institutions in the future). 17. Demands on the Guarantee Fund. If one assumes that a third of students enrolled in higher education were to finance half of the private cost of attendance with a guaranteed student loan, then about US$90 million would be required each year in loans. If the default rate were similar to that observed in very well run programs elsewhere (IO to 15 percent) and the average loss on a bad loan were 40 percent of the original amount of the loan, then the annual loss would be 4 to 6 percent of the initial amount or roughly US$3.5-5.0 million a year after the system becomes fully mature. This amount should be offset against the reduction in public expenditures on higher education that a student loan program would make possible. Recovery of a third of the cost of higher education would have reduced public expenditures by about $128 million in 1996. In as much as the cost of mobilizing public funds is estimated to produce a dead weight loss of about 70 percent of revenues, this saving is worth more than US$227 million in private consumption. Therefore the net economic gain from the introduction of a student loan program would be in excess of US$220 million a year. In addition, a well designed student loan program would ensure that a significant fraction of the burden of higher education finance would fall on beneficiaries rather than the general taxpayer. This would result in far greater fairness in the distribution of costs and benefits. 18. Specifically, a high level task force representing the participants in the program (Ministry of Culture and Education, Ministry of Finance, students, lenders, higher education institutions and a guarantor) will be formed to pursue consensus on the various complex issues outstanding. The progress of the Task Force will be reviewed closely by the Program Manager. Staffing will be provided by Hungarian experts on student finance, supplemented by technical assistance from international experts. The goal is that within 12 months of the first meeting of the Task Force the overall design of the program and its implementation will be completed. HUNGARY Annex 11 HIGHER EDUCATION REFORM PROJECT SUMMARY OF TECHNICAL ASSISTANCE _ _ _ _ _ _ __Quantity by Year ___________ Unit 1 2 3 4 5 6 Total Estimated o Development and Implementation _ _Budget ]lloctionState- I Funded Enrollment Places International Consultants _ p-month 9 9 18 331 National Consultants __ _ p-month 24 24 18 66 307 Nomative Funding _____ _ _ _ Intemational Consultants p-month 2 2 2 _6 112 Tultion Policy I International Consultants p-montr-h 6 - 6 115 National Consultants p-month 12 12 58 Targeting Student Support International Consultants p-month 6 6 = _ 12 220 National Consultants p-month 9 9 18 83 rivate Higher Education International Consultants p-month 2 2 2 _ _ 6 112 National Consultants p-month 6 6 6 _ 1 8 84 ntemational Advisory Panel =__ International Consultants p-month 4 4 4 4 4 4 24 1130 National Consultants p-month 2 2 2 2 2 2 9 44 Subtotal 64 64 52 8 6 6 195 2594 nstitutional Development (Hungarian Accreditation Committee) Intemational Consultants _ p-year 2 2 4 454 National Consultants p-year 2 2 4 165 alional Credit Office International Consulants I r_ _ p-month 11 9 _ 20 367 National Consultants p10 1 ____ 20 853 TT(Higher Education & Science Council) International Consultants p-month 2 8 27 National Consultants p-year 2 3 3 3 3 3 28 731 Subtotal 28 26 3 3, 3 3 66 2596 anagement Information Systems trategyRequirement Analysis sum * 1080 oftware Modules for HEIs sum 4940 | | i [Subtotal 6021 anagement Development I DeYlopment/Delivery of 2-3 day seminars sum * 1290 winning Programs sum * 4623, Subtotal ______=___ 5913 tudent Loan Program einfition of LegaVOperational Framework __ |_ sum - - 1443 Project Management |roject Managem p-years I p-year 6 6 6 6 6 6 36 1883 El Federation Offices p-year 2 4 61 8 a a 36 1576. Subtotal 8 10 18 14 14 28 72 34591 El Archiectural Densigns &Super - 13387 Total 35412 Note The PMU would conduct lending and oversee delivery of technical assistance in all areas except architectural designs w which is to be don a directly by HEls. Terms of referenc for TA in these areas are part of the Project Implmentation Plan. Annex 12 Page I REPUBLIC OF HUNGARY HIGHER EDUCATION REFORM PROJECT PROJECT IMPLEMENTATION ORGANIZATION: FUNCTIONS AND RESPONSIBILITIES 1. The Ministry of Culture and Education (MOE) would be responsible for directly implementing all project components and for ensuring the achievement of Project Development Objectives. The Project Director would be the Deputy State Secretary for Higher Education. To facilitate overall Project management and monitoring, a Project Management Unit (PMU) would be established directly linked to the Office of the Deputy State Secretary for Higher Education (see Chart I attached). The Deputy State Secretary would officially delegate authority for Project management to the PMU Manager and the staff of the PMU. A. Project Management Unit (PMU) 2. A PMU would be established and would be maintained during the six-year Project implementation period. The PMU would be headed by a Project Manager, and staffed with about six persons overseeing the development and implementation of policy reforms, and of investment components. The Project Manager would be directly accountable and report to the Deputy State Secretary. The PMU staff would work closely with the relevant MOE departments and HEIs involved in project implementation. The PMU's responsibilities would focus mainly on: (i) overall coordination of Project implementation among entities within and outside the MOE, and monitoring achievement of development objectives and physical and financial Project targets; (ii) monitoring of policy and institutional development aspects, and tendering and supervising all technical assistance under the Project; (iii) overseeing the IDP development process and implementation and CIP development process; (iv) oversight and supervision of the MIS and management development components of the Project; and (v) liaison with the World Bank. 3. The specific responsibilities of the PMU under each of the above areas would be: (i) Coordination and Monitoring of Project Development and Implementation Targets (a) report regularly to the Deputy State Secretary on the physical and financial progress of the project, and propose the resolution of pending issues; (b) prepare quarterly project progress reports, highlighting issues and recommendations for action, and reporting on actions taken; submit progress reports to the Bank, no later than three weeks after the end of each quarter; Annex 12 Page 2 (c) act as clearinghouse for all project issues requiring attention of top management of the relevant ministries, intermediary organizations, and the Bank; maintain ordered project files; (d) maintain updated project implementation schedules (project management software), preventing slippages and delays in achievement of targets; (e) maintain a PMU operating budget, including local travel to ensure a close working relationship with HEIs; (f) conduct an initial project launch workshop with all project beneficiaries and interest groups, and periodically keep such groups informed through reporting or seminars; and (g) manage, administer, and supervise the preparation activities envisaged under the PPF loan advance, in particular, technical assistance and the tendering for the competition for architectural designs for selected CIPs. (ii) Oversight and Monitoring of Policy Reforms and Institutional Development (a) oversee and monitor the implementation of the agreed policy and institutional reforms as stated in the policy matrix, as well as achievement of the project's development objectives according to agreed key performance indicators; (b) oversee technical assistance to support the development of sector policy reforms and their implementation by HEIs and the MOE; (c) tender, lead evaluation of bids/offers, and supervise all technical assistance contractors envisaged under the project, ensuring that all "deliverables" are completed in a qualitative and timely fashion; and (d) prepare reports for the scheduled assessments of Phase I (September 1999) and Phase II (September 2001) of the Project, according to agreed targets and milestones to be achieved respectively for each phase. (iii) Oversight of IDP and CIP Development and Implementation (a) in close cooperation with the MOE, draft the standard Letter of Invitation (LOI) and terms of reference for the competition for final architectural designs; organize the evaluation of proposals and contract avvard [note: the designs for the first three CIPs is expected to be financed in part through the PPF advance from the Loan] Annex 12 Page 3 (b) actively participate in assisting HEIs in the preparation of IDPs/CIPs, and providing and/or contracting the needed expertise to assist HEIs develop institutional, systems, and business plans; (c) ensure completeness and quality of the IDPs/CIPs, in accordance with agreed criteria for content and format during the proposal preparation process; and (d) review IDPs/CIPs for content and quality before submission by HEIs to the FTT and FEFA Board for their approval, and oversee their timely implementation (iv) Supervision of MIS and Management Development Components (a) oversee the implementation of the MIS component of the Project, including the tendering for all software-hardware and technical assistance for the specific activities identified under this component; coordinate with FEFA the review and approval of MIS modules for funding with Loan resources; and (b) tender and oversee all training, fellowships, and study tour activities for the management training component. (v) Liaison with World Bank (a) coordinate the inputs of entities involved in implementation of project activities, and liaise with the World Bank; and (b) ensure that World Bank Guidelines for the Use of Consultants are followed, and obtain clearances for all tenders, evaluation reports, and contract awards according to Loan Agreement requirements; (c) ensure that an annual audit of project expenditures is completed, and that the National Bank of Hungary submits to the Bank the audit report no less thani six months after the completion of each fiscal year. 4. The PMU would be staffed with the following individual consultants: Project Manager; Deputy Manager and higher education policy specialist; technical assistance and management training specialist; management information systems specialist; and two or three junior analysts. The proposed project Loan would finance the contracting of such consultants as well as the operating costs of the PMU. 5. Critical and essential to the success of project implementation would be a close working relationship between the PMU and FEFA. The MOE would ensure good cooperation among the PMU and FEFA, as well as with other departments of MOE, the FTT, and the HEIs. To promote communications and the sharing of knowledge, the MOE would regularly host presentations to report to stakeholders on the progress achieved in project implementation, and would address any current issues that would Annex 12 Page 4 benefit from participant input. The PMU Manager and FEFA Secretariat Director would be responsible for requesting prompt resolution of any issues from the Office of the Deputy State Secretary. B. Higher Education and Science Council (FTT) 6. The FTT is an advisory body that provides policy guidance and advises on strategic decisions and sector priorities for the MOE. Under the Project, the FTT would be responsible for reviewing IDPs submitted by the HEIs which have complied with the legal requirements for "Integration", and would recommend their approval to the Ministry of Education. The FTT, through its Secretariat, would assess compliance of IDP proposals with agreed criteria on content and format of IDPs. [The FTT approval of IDPs for HEIs is a requirement before consideration by the FEFA Board of the corresponding CIP grant.] To facilitate the work of the FTT and develop its professional capacity, the Project would finance staff training and short-term experts, as well as incremental staff to be provided under the Ministry's budget. 7. The main Project responsibilities of the FTT under the proposed project would be to: (a) advise on specific elements of the reform of higher education, such as introduction of the credit system, new enrollment allocation models, normative financing, accreditation of new programs, diversification of funding, student loan financing, and the development of private higher education (b) conduct analyses and studies to support its advice on reforms (c) provide comments and suggestions for the "integration" plans of HEIs (d) review and recommend approval of IDPs in terms of consistency with overall strategic directions and medium term development criteria. C. Higher Education Development Programs (FEFA) 8. FEFA is an intermediary organization established under the first World Bank- firnanced project in human resources development to allocate funds for equipment to HEIs on a competitive basis. Under the proposed project FEFA would recommend grants for inviestments for specific capital investment plans (CIPs) supporting "integrating" HEIs. The Board of FEFA consists of 15 persons, and is chaired by the Deputy State Secretary for Higher Education. To facilitate the work of the FEFA Board to review and approve CIPs, the Board would appoint a Technical Subcommittee which would include civil works experts to evaluate the CIPs according to agreed criteria, and make recommendations on award of grants for civil works investments. The Subcommittee would submit its recommendations to the FEFA Board for endorsement of the specific HEI grants. Members of the Subcommittee would include representation from the Annex 12 Page 5 Association of Hungarian Architects and from the Investment Department of the MOE, and other expertise as needed. FEFA would recommend CIPs for approval by the Minister of Education. Once the grant is approved by the Minister, FEFA would enter into grant agreements with beneficiary HEIs. 9. The main Project responsibilities of the FEFA Board would be to: (a) appoint and supervise a technical Subcommittee to evaluate CIPs according to agreed criteria for content and detail, and recommend specific CIP grants for award to HEIs (b) publicize the criteria and requirements for the CIP proposals and grants (c) announce the requests for proposals for CIPs (d) finalize the criteria for evaluation of CIPs, with Bank approval (e) propose the award of grants to HEIs, for the Minister's approval, and arrange for the publication of results (f) finalize the general conditions of contracts between FEFA and HEI for implementation of CIPs and use of grants D. FEFA Secretariat 10. The FEFA Board is supported by a Secretariat responsible mainly for technical support and financial management. The FEFA Secretariat would be responsible under the Project mainly for: (a) supervising the administration of contracts for goods, works. and services related to civil works, and for making payments against these contracts financed under the Project as approved by the MOE; (b) establishing separate project accounts and administering Loan disbursements, and national budgetary allocations for the Higher Education Institutions Investment Program component of the Project; and (c) maintaining project accounts according to international accounting standards. 11. The FEFA office would collaborate with the Treasury and the National Bank of Hungary (NBH) in processing disbursements and keeping track of project expenditures, funds, costs, and would provide monthly reports of project expenditures to the PMU. The PMU would work closely with the staff of the Secretariat to facilitate project financial monitoring. The FEFA Office would continue to finance its traditional activities i.e. equipment for HEIs through competitive tenders. To facilitate the additional work generated by the proposed Project, the FEFA Secretariat would fill its current job openings with staff qualified to oversee the complex and large construction contracts. Annex 12 Page 6 12. The main Project responsibilities of the FEFA Secretariat would be: (a) provide logistical support to the FEFA Board, as needed, in the process of review and approval of CIPS (b) advise potential beneficiary HEIs about the availability and conditions/criteria for allocation of funds according to agreed CIP criteria (c) develop standard bidding documents to be used by participating HEIs for ICB and NCB for procurement of works financed under the Project; provide guidance in the use of Bank-approved documents and oversee HEI compliance in the procurement process (d) prepare agreements between the HEIs and FEFA for CIP grants (e) oversee the implementation of the CIP investment programs (f) monitor contract expenditures and process payments against contracts for goods, works, or services financed under the Project; prepare progress report and submit to the PMU, on physical and financial progress on the procurement of goods and works. (g) prepare financial progress reports on total project expenditures financed by both the Loan and National Budget (h) maintain separate project accounts according to international accounting standards, and make records readily available to MOE inspectors, national auditors, and Bank reviews. E. Higher Education Institutions (HEIs) 13 Integrating HEIs would be the primary beneficiaries of the Project. The participating institutions would prepare the IDPs and CIPs on the basis of guidelines issued by the FTT and FEFA Board, respectively. Interested HEIs may receive assistance through the PMU for preparation of these various plans. Consequent to the award of funds, HEIs would be committed to the implementation of the IDPs and CIPs. HEIs would also be responsible for their direct tendering of final designs and civil works, in coordination with the PMU and FEFA, in accordance with agreed bidding procedures. HEiIs would also be responsible for supervising directly and through subcontractors the construction phase. HEIs would be obliged to monitor their own implementation plans an(d prepare regular progress reports on policy and institutional integration matters for the PMU and on civil works implementation for the FEFA Office. Annex 12 Page 7 14. HEIs would be responsible for the following actions: t (a) establishment and staffing of a "Federation Office" to coordinate and oversee the development and implementation of "integration" plans and of IDP/CIP proposals. (b) preparation of IDPs/CIPs proposals; complete the IDP/CIP proposal review process together with the PMU to ensure content and quality requirements before official submission of proposals; submission of IDPs/CIPs to the FTT and FEFA Boards, respectively (c) obtain all required approvals for integration proposals from the institutional councils (senates) (d) assume full responsibility for on site implementation of IDPs, and for monitoring and reporting of implementation of policy reforms and institutional changes according to IDP commitments (e) enter into contracts with FEFA for the implementation of CIP grants; conduct tendering according to World Bank Guidelines for construction, and enter into contracts with architectural firms and construction contractors; supervise construction and commissioning of buildings, equipment, and furnishings; process all contract payments through FEFA according to agreed procedures. (f) report to FEFA implementation of civil works and to the PMU on all aspects of project implementation. n:\hungary\highed\anx 1 O-rv.doc ANNEX 13 Page I REPUBLIC OF HUNGARY HIGHER EDUCATION PROJECT PROCEDURES AND CRITERIA FOR INVESTMENT SELECTION Priorities. The proposed project would finance mainly the implementation of integrated institution development plans, particularly capital works, at participating HEIs. The purpose of the investment funds is to support the objectives of the project, specifically efficiencies through administrative and/or academic rationalization of HEIs, greater relevance of program design and greater non-public resource mobilization. Specific investments that can be demonstrated to support those objectives would be eligible for financing. Consequently the following areas would be accorded high priority in evaluation of proposals: (a) Consolidation of administration and support services (b) Consolidation of faculties, and grouping of departments into larger units (c) Rationalization of teaching programs, including design of broader (i.e. less specialized) degree and certificate programs consolidation of core courses across departments and faculties; introduction of elective subjects; reductions in weekly class contact hours for students; increases in average class sizes; (d) Continuing education, retraining, up-dating (e) Use of distance teaching (f) Expansion at non-degree level (g) Program diversification for market economy (h) New allocation mechanisms for reallocating norms-based budgets to priorities within HEIs. 1. The physical investments needed to implement the above, would include: (a) Development of information technology systems and capacities (b) Development of consolidated administrative facilities (c) Development of library facilities (d) Development of networking capability (e) Development of student dormitory spaces (f) Renovation or construction of larger teaching spaces Procedures 2. Proposals for funding would have to pass several stages of review before final award of funds, namely: ANNEX 13 Page 2 (a) Preparation of institution development plans (IDPs) by interested, institutions; if they need assistance in this process they could apply to the PMU for technical assistance; (b) Internal evaluation by the institutional councils at the applying institution; The senate of the HEI would review and approve the overall IDP; (c) Review by the PMU and approval by the World Bank; (d) Evaluation of overall institutional development plans by the FTT; (e) Approval by the Minister of Education of the IDP; (f) Preparation of capital investment plans (CIPs) by the HEI; (g) Approval of CIPs by the institutional council; (h) Review by the PMU and approval by the World Bank; (i) Evaluation of CIPs and preliminary designs and costing by the Technical Subcommittee of FEFA and then by the FEFA Board; (j) Approval by the Ministry of Education based on FEFA's recommendation; (k) Selection of design firn for civil works through normal competition, as administered by the HEI; (1) Submission by the HEI of final designs to FEFA for financing; (m)Evaluation of final designs by the FEFA Technical Subcommittee and then by the FEFA Board; (n) Prior approval by the Bank of the proposed award and draft contract; (o) Approval of FEFA's recommended awards by the Minister of Education; (p) FEFA enters into an investment contract with the agreeing to finance the capital projects and specifying the objectives, tasks, end results, financing and conditions, including implementation of specific reforms; (q) MOE enters into an investment contract for civil works according to agreed procedures; and (r) The specific steps in the process are shown in the flow chart on page 5 of this Annex. The specific steps in the process are shown in the attached flow chart and in the Project Implementation Plan. Criteria 3. Guidelines and criteria have been established to promote the achievement of project goals. Three sets of criteria would be followed, viz. (a) criteria by which institutions would be eligible to apply for project funds; (b) evaluation criteria for project selection and (c) criteria for project approval. These criteria serve to ensure that loan and preject funds would be directed towards the achievement of program objectives. 4. Eligibility Criteria. Basic conditions for application for project investment funds would be the following: ANNEX 13 Page 3 * In support of the Government's policy of integration of fragmented institutions, the basic condition for access would be a decision by Parliament to recognize the institution as an association under Section 12/A of the Higher Education Law of 1996 as an interim step towards becoming a multi-faculty institution. However, in recognition of the efficiency gains to be realized in institutions that do not integrate, a HEI could be eligible for financial assistance on the basis of a specific plan for internal integration, i.e. academic rationalization. Such assistance would be awarded during the second and third phases of the project on a competitive basis, would have to demonstrate efficiency gains at least equal to those of integrating institutions and would have to meet the same other eligibility criteria stipulated below. These amounts would be limited to a cumulative total of $30 million and $10 million for any one HEI. * The HEI must present an overall IDP showing a self-assessment of strengths and weaknesses, long term objectives, and mid-term targets, plans for academic rationalization, specific efficiency gains to be realized and detailed plan for administrative and/or academic integration. - The HEI must present a capital investment plan (CIP) based on a least cost approach and demonstrating a reasonable cost/benefit analysis by comparing costs of investments to planned efficiency gains. - The IDP and the CIP must be approved by the institutional council(s) of the HEI(s). 5. Content of Applications. The specific content of an IDP and a CIP are shown in the Project Implementation Plan. 6. Evaluation Criteria. Both IDPs and Capital Investment Plans would be evaluated in terms of four criteria. These are spelled out in detail in the PIP and summarized below: (a) Relevance or Significance: i.e. the extent to which the plans and investment proposals address the priority issues and support the priority actions established in the Government's Letter of Development Policy for the Higher Education Sector and the Policy Matrix. (b) Effectiveness: i.e., the extent to which the proposal is well designed to achieve its objectives. Means and actions to achieve each goal should have been clearly specified, and all the necessary inputs should have been identified and provided. The application should include specifically (i) a clear strategy for achieving efficiency gains, (ii) an effective strategy for academic restructuring, (iii) a workable internal budgetary reallocation mechanism, and (iv) a reasonable strategy for increasing non-state revenues. ANNEX 13 Page 4 (c) Feasibility: i.e. the extent to which the proposals could be implemented as planned. This must include assurances that (i) a strong level of commitment and support exists on the part of the HEI, (ii) the planned inputs would be available as and when required; (iii) the necessary organizational units would be in place and properly staffed to carry out the work; (iv) sources have been identified and confirmed for counterpart financial contributions; (v) increases in recurrent costs produced by the IDP and CIP would be within the capacity of the HEI to manage; and (vi) the key risks to successful implementation have been identified and strategies adopted to minimize them. (d) Efficiency: i.e. the extent to which the proposal investment could be implemented at reasonable cost. This means that (i) the norms and standards are within acceptable levels; (ii) using standard accepted methodologies of calculation, a least-cost approach has been followed, or cost/benefit analysis has been done which shows that the projected quantitative benefits of the project far outweigh the costs; and (iii) sufficient counterpart financing has been arranged to reduce public costs. 7. Approval Criteria. There are no pre-set quotas for distribution of funds by HEI, or by type of expenditure. This is because the quality of proposals cannot be known in advance. The proposed sector reform program covers all areas of higher education. However, to ensure that funds are concentrated to make an impact, but that a few large institutions do not garner the lion's share of the project resources, a floor has been placed on assistance for each integrating HEI of $5 million, and an upper limit has been placed on access to investment funds. No integrating HEI may claim more than $30 million of the funds for equipment and civil works. (This excludes funds for systems development and management development.) No single HEI may receive more than $10 million for internal academic consolidation out of a total of $30 million reserved for this purpose in phases 2 and 3. PROCEDURES FOR SELECTION OF INVESTMENT SUBPROJECTS Annex 14 Preparation of institution * 1 development plans (IDPs) ~ Institutional councils review and v t approve A ~~~~~~~~the overall IDP. apply to the PMU for Screening technical assistance by the PMU Review and approval by v the World Bank PMU Evaluation of overall institutional A(00, development plans A by the FTT _ pproval of the IDP b apply to the PMU for by the technical assistance Ministry of Education v~ Preparation of capital investment Approval of the plans (CiPs) _ CIPs by the by the HEI u institutional Screening by the PMU council Review by the World Bank Evaluation of CiPs & Approval by the Ministry Evaluation of CIPs and preliminary designs of Education based on 4- by the 4 and costing by the FEFA's recommendation FEFA Board Technical Subcommittee of FEFA Selection of design firm Submission by the for civil works through HEI of final designs Evaluation of final normal competition, as to FEFA for financing designs by the administered by the HEI FEFA Technical Subcommittee Evaluation by the FEFA Board FEFA enters into an Approval of FEFAs World Bank investment contract recommended 4 review of FEFA with HEI awards by the awardidraft contract Minister of Education Annex 15 Page I HIGHER EDUCATION PROJEC T Summary of Implementation Schedule 1995 1919 1998 1999 2000 _ 2001 1D Task Name Duratlon 2|03 2034 01 02 10 j -ot 102 a3 iQ 1 oi3104 1 HIGHER EDUCATION PROJECT. HUNGARY Id 2 COMPONE i.rl Policy andnormative rramework 750d I Feb 20 98 3 White paper and Pollcy Statement on Higher 250d _ May 16 97 Education Setting up and work ol Task Force 1 9 Feb 14 97 S Draft documents review by World Bank 80d Mar 28 0? 6 Documents finalized Od Apr 20 97 7 Policy document reviewed and accepted by the 20d May is 97 Government_ a Decrees on higher education Issued (modifIcatlons 96d Mar15 97 of the law) 9Hungarian Accreditation Committee (published) Od * Nov1 96 10 Higher Education and Science Council (FTT) Od* a 11 Higher Education Developmenl Fund (FEFA) Od Mar 10 97 12 Integration Oecree Issued Od Mar S g97 13 Development and adoption of new normnative 26id Nov 1 g97 flnancng plan 14 Pait I (Agreed between MinFin and MinEd.) Od * Nov 1 96 15 Part II. Od Nov 1 97 16 Students enrollment allocations 1 54dM ~~ ~Mar 14'91 17 Preparatory stage 115d( Jan 17 97 18 Discussions with World Bank 70d - Feb 14 '97 s Policy paper adopled Od | Mar 14 97 20 Data collection system developed 196d Feb 20 98 W~~~ Feb 20'98 21 Technical assistance obtained and working 196d1 Feb 20*98 22_ Equipment specificalion. purchase and insllnment 156(| -_ Feb 20 . 9 I - -- __ .... .. .. _ ... ._. __ . . _ _ . ..... ..... _ _,b 20 19 Annex 15 Page 2 HIGHER EDUCATION PROJECT Sumnmary of Implementation Schledule task Narne 1995 1 `1998 1999 j 2000 j 2001 ID task Name Duration 21 03 04 01 0I2 033104 Qj 0 oH 2 1°3IO4Ji L--Q1 4 -: J92 N9t]92L 23 Curriculum changes 271d ' Jan 14'98 24 Accepiance by the Accreditation Committee on an 271d 11111111111 intermittent basis _ __s_rs__e 38 Restructuring Intermediary Institutions (FrT, FEFA, 165d Nov 24 i98 MAD ___ 39 HEI Flnanclal authority program 206d _ Apr 1597 40 Coopers & Lybrand studies 120d Dec 13 96 41 Agreement between HEIs. MOE and MOF signed Od * Apr 15 97 42 Student Credit system 395d . Jan 2 '98 43 Law of Higher Education issued Od . * ~~~~~~~Jul 1 *96 44 Credit Working Group functioning 306d Jan 2 98 45 Framework for the credit system developed 87d Mar 3 97 46 Nalional conference on ECTS held id ; | ~~~~Mar 26 -9r 47 Establishment National Coordination Otfice Od * Nov 1 '91 43 Decree defining the system issued 30d n Dec 31 sr7 49 Development of private educatlon 85d _ May 30 97 50 Consultants working 1Od |Feb 14 '91 51 Policy paper deseloped and adopled by Ihe 30d Governmenl nMy 30 97 52 Merger of Central Administrative Units 91d V Mar 10 '97 53 Four new curatona to adjudicate funds created Od Nov 1 '96 54 Funding mechanism reviewed 76d Feb 14191 55 MOE adopted dectee merging economic units of FPI OdM and FEFA"* Mar10 97 56 NEI Economic Analysis M22d Mar 30 '91 Note conditions * bo appraisal negotiationis Page3 DISK-EC2tfR(Vltf)tJANKU n JN(;ARY\llEOUCAT\WEsll.\A tJX 12MVP ~~~~~~~~~~~~~~~~~~~~3DS@C,._R... )l. .)IN\ I-CR\ _iDjC w tt. ..JN _? _ -._ _, ._ Annex 15 Page 3 IlIGllER EDUCATION PROJECT Summary of Implementation Sclhedtule 1995 1997 1998 1 999 2000 20061 ID Task Name _ 0__ DuraIon 02 03 04 01 02 03 -Q 10 QJ02 a 1 0 r I I02Th- 4 91 10Qj041U1 19?bi 1 a 57 Wotid Bank consullants' work 22d Mar 30 97 56 Report and recommendations submitted Od N i. . 59 COMPONENT 11. Project management and Implementation 660d . Oct 11r97 structure_ 60 Project Preparation Team working Id Apr 10 '95! 61 Draft structure developed. ncl governance. functions Od Fb 24 97 and scope of duties (completion) :_Feb_24____ 62 Project management concept reviewed 10d Apr 14 '97 63 Overall preliminary project schedules prepared 10d Apr 14 97 64 Overall preliminary budget prepared 7d . | Apr 11 '97 65 Consultant to prepare details of the projed management 35d g Jun 30 97 structure hired and workng_ __ 66 Consultant's recommendations submitted to GOH and Od Jun 30 '97 We 67 Management and implementation arrangements Od*Jul14'97 approved by GOH and WB 68 FEFA Ad Hoc Committee established" Od * Jul14 '97 69 Prolect Coordination Unit 134d : Oct 17 '97 70 PCU established by decree of MOE as a separate 10d Apr 28 '97 . ~~entily -- _ _____ _ _______ | Apr 2b 9 71 Consultant to manage the PCU on behalf of MOE 20d f May 12 97 selected and contract awarded' _May_12_91 72 Offices allocaled /rented 39d Ju4 '97 73 Equipment purchased and installed 40d - Sa Sep 30 '97 74 Staf.f hired and trained 40d [jSp3 9 75 Systems developed and hinaflzed (by consultant) 79d r- Oct 17 97 7 6 PC U tully operational Od * Oct 17 '91 77 COMPONENT WI Project financing 568d ~~~~~~~~~y Jarn s 98l Note conditions lor appraisal -negotaltions Page 4 tJtSK@fC21RcbwoF^t i AI)t'ANKUIft)NLiARYQIIf)t IHAI WVAlIt ft AfJtA t.111f _ _ _ _ .. .- .. _ . - . . - _ -_ ... .. ... . _ . . . ... . .~~~~~~~~~~~~~VV Annex 15 Page 4 HIGHER EDUCATION PROJECT SuminarY of lmplei1mentation SchIeduile I I ig5 L f9 997 -.---- ----_ 200_j 20 199 00 L 2O 0t |0 task Name Duration Q2I3I4Oi 102 0304 QlQ2I :14 I j 1 T 1o4 78 Japanese grant functional 52w Nov 1 97 79 Project Prepatatlon Facility 132d Aug 5 97 so Need defined 20d Feb28'97 81 Draft budget prepared 25d flmay997 U2 Request le1ter signed by the Minister of Education Od i * ~~~~May 30 '97 83 PPF: approval process by WB 10d IJun19'91 84 PPF approval process by MOF and MOE 20d Jul 22 '97 aS Special account opened 40d _Aug 5 '97 86 Bank selected (National Bank of Hungary) 30d [Jul 22 '97 87 PCU signatories appointed by MOE Od Jul 22 92 a8 Special account opened Od *Jul 22 '97 89 PPF deposit rnade Od Aug 5 '97 90 PCU current account: Od 91 Current account opened Od Jul 25 '97 92 World Bank loan 568d ~~~~~~~~~~Jan 5 '98 93 Project preparalion and development 282d Dec t 96 94 Pre-appraisal 10d 9 Dec 13 '96 95 Project appraisal 5d May19 '97 96 Loan negotiations 5d Jul2l'97 9 7 . Board presentation Od Sep 1'97 98 Loan Agreement signed OdOct 13'?, 99 Loan effeditve Od*Jan98 _____________________________________________ _ .__________________ - - . - . .- .-- - - - . - - --- - ________._.J._. _ Annex 15 Pagc 5 HIGHER EDUCATION PROJECT Summary of Implementation Schedule 11996 1 i99 1998 1999 2000 2001 _tD_ Taskl Name ___ ___ Durallon 02103 |Q4 0U 02 0Q3 IQ4 0fQ4 oi T 1 ( 1 |r-34 li -L-1D o 02T 3 11122 | 0 I I i04 100 COMPONENT IV. Higher educatloslsitutions 1543d 101 Inslitutions (aFeas) selected 20d f Feb 26 6 102 uInstional Development Plans 282d l Mar 21 97 103 lDP teams appointed 40d EJ Apr 24 '96 104 IDP plans developrment 270d Mar 12'9r 105 IDP Draft Plans subnilied 10d Mar 29 '9 106 Fornal Integration 1373d 107 Letter of intent to fomn federation and University Od * Sep 26 96 18 Itcalktmet 433d Sep 1 99 109 HEI Federation Formed Od Jan 2 '98 110 Kecskemel University established Od* Sep1 99 111 Szeged 522d TJani 2 '00 112 HEI Federation Formed Od Jan 1 '98 113 Szeged University eslablished OdJan 2 00 114 Debrecen 261d Jan 2 99 V V ~~~Jul 1'99 115 HEI Federalion lormed Od Jul 1 '98 116 Debrecen Universily eslablished Od Jul 1 '99 117 Reorganization and integration of common systems 695d (finance and accounting. pioctiieinent, supporl I !; I Aug 31 99 Note conditions * lot appraisal " negotiatiots Page 7 DISK@EC2l iR@WORlt-i)lANKnlIUNGARY\I lrIJCAI Wlill\FANtIX l2 PAp Annex 15 Page 6 HIGHER EDUCATION PROJECT Summary of Implemcntation Schedule _ . 1995 1995 1 iggy997 1998 1999 2000 2001 ID Task Name Duration 02 |Q3 IQ4 011I21031l4Q10 IQ20 I3 I04 a1 Qa 02 104 01 |o lIs Reorgani:ation of acadei;n programs t304d 119 Credit tiransfer system 434d =, Aug 31 '96 120 Development of new programs 1304d continuous effort. recriented towards ~~~~~~ --Snstudent choice, deferring of -. 121 Revision of curricula 1304d specialisalion. introduction of 11 uiuins.ai r - post-secondary, college and other - - -_ - 122 Developme; t of distance education. i304d ,orogram s, using a variety of methods ~..aam~.&.sj~-i,and forms 123 Equipment and facilitles 1043d -~Dec 29 '00 124 New equlipment purchased and installed 104w ! Dec 29 95 12S Additional facilities constructed or renovated 1043d H Dec 29 00 125 COMPONEWr V. Management training and development 258d _ __ _ : _ ~~~~~~~~~~~~~~~~~~~~~~Mat 26'98 127 Concept of Ihe component developed 8d | Apr 10 97 126 Concept discussed and approved 30d p May 22 97 129 Terms osf Refewnce f consultants produced and 30d Jul 3 e9r ap~IprovedJu3'9 13O Consullants selected, contract negotiated and approved 50d Sep 11 97 131 Consultants working: programs, policies and 20w organizational framework developed Jan 29 '98 132 Management development and training system: Od implementation starts Mar 26 9J Note conditions h for appraisal negotiations Pagea DISK@EC2HR@WORLDBANKI IUNGARYtIIIEDUCAT%WI it fLANNt4K 2 MPP Annex 16 Page 1 REPUBLIC OF HUNGARY HIGHER EDUCATION REFORM PROJECT CONDITIONS FOR PROJECT PHASES Conditions for Start Conditions for Phase 2 Conditions for Phase 3 End of Project Policy Objective (Year 0) (End Year 2) (End Year 4) (End Year 6) (December 1997) (December 1999) (December 2001) (December 2003) 1. Rationalize allocation 1. MOE and FTT agree to 1. Detailed design of the system National testing used effectively I. Size of per student grant of state-funded places so proposed new allocation method in completed, including decisions on in determining grant allocations determined for various fields that student choice is a Annex 5 based on (a) awarding "Questions to be Clarified" in to second cohort of entering using actual cost data as starting determining factor grants to students by broad field Annex 4. students point based on results of a national 2. Higher Education Act modified 2. New allocation method fully examination , and (b) student and new regulations issued as operational choice of HEI. necessary to accommodate new 2. MOE discontinues detailed method allocations to HEls effective in 3. National tests ready for use in School Year 98 determining grant allocations for students entering system in School Year 2000 2. Improve norms-based MOE decides to: I. Maintenance of previous changes 1. Number of financing I, Increase student-staff ratio financing I. Reduce number of normative 2. Increase student staff ratio basis categories reduced to 4 basis of normative to 13:1 categories from 14 to 7 of normative from 8.7:1 to 10.5:1 2. Increase student staff ratio 2. Begin to finance on the basis 2. Integrate "operating costs" into 3. Eliminate college/university basis of nornative to 12:1 of credit system the normative model-- disparity for same degrees in 3. Eliminate college/university starting in 1998 economics and law; begin phase out disparities for same degree in all of differences in other fields fields 4. Complete study on rationalization of medical, agricultural higher education, policy decisions taken 3. Install credit system 1. MOE establishes NCC 1. New decree issued by MOE Credit system implemented and rationalize curricula 2. MOE establishes and staffs the pursuant to 96 Law on nation-wide NCO establishment of the credit system 2. New decrees issued by MOE on guidelines for defining qualifications requirements . Annex 16 Page 2 l ii:: :-Conditions for Start 7 Co'nditions for Phase 2 Conditions for Phase 3 End of Project :PolicyObjective: (Year0) (End Year 2) . (End Year 4) (End Year 6) * .tti ffiEx 0 V f; (December 1997) (December1999) (December2001) (December 2003) 4. Achieve greater Agreement signed between MOF, Agreement revised on the basis of Extension of greater financial All HEls have full financial financial authority for MOE and three pilot HEIs experience and extended to new authority to other HENs authority HEls: _ HEls participating in the project 5. Establish student loan Government prior to project Complete detailed design, enact Review initial experience and program effectiveness establishes Task required legislation, establish expand access to guarantee to Force to design and evaluate guarantee agency, and initiate all students in accredited higher student loan guarantee program guarantee program on a pilot basis education institutions under agreed terms of reference for a group of low risk students _____ 6. Target student support Government, by project Complete evaluation of alternative Allocate at least 75% of the subsidies on most needy effectiveness, presents proposal procedures for identifying financial student support subsidy on the and termns of reference, acceptable need. Begin to allocate no less than basis of financial need to Bank, for a study of procedure 75% of the student support subsidy for targeting the student support on the basis of need. subsidy on needy students 7. Increase private Government agrees to reduce by Informn HEls that coverage of costs Reduce normative coefficient Maintain training normative at resource mobilization end of year 6 the share of average through the training normative is to 90% of previous year's 80% of previous year's average instructional costs financed by the going to be reduce gradually to 80% average costs costs training normative to 80% of the of the previous year's actual costs previous year's average actual cost of instruction of instruction Acronyms: MOF Ministry of Finance FTT Higher Eduction and Research Council NCC National Credit Council HEI higher education institution NCO National Credit Office MOE Ministry of Culture and Education SY school year Annex 17 Hungary Higher Education Reform Project Monitoring Indicators I. Ensure Responsiveness to Changing Social and Economic Needs Quantitative Indicators: I . Hungarian and OECD enrollment rates, as a proportion of age cohorts, over time. 2. Comparison of (i) student applications, (ii) enrollment allocations and (iii) number of students admitted by field of study. 3. Enrollments in non-state HE1s, both church and non-church. Qualitative Indicators: 4. Description and analysis of new or changed degree programs over the reporting period, with particular emphasis on creation of broader. more flexible degree programs and deferment of specialization 5. Status of review and revision of qualification requirements 6. Status of implementation of the credit system 7. Functioning of new system of allocation of state-funded student places 8. Analysis of annual norms-based funding formulae and allocations to HEls II. More Efficient Use of Resources Quantitative Indicators: 9. Trends in recurrent cost per student, and the share of total for the various componenits * including teaching costs, administrative and overhead costs, support and service costs; and other costs (e.g. research, etc.) 10. Student: staff ratios (full time equivalents) and their determinants: * student weekly contact hours, * class sizes, * faculty teaching loads * faculty costs. Qualitative Indicators: 11. Evidence of application of norms, standards and criteria in investment project selection 12. Effective operation of new systems at the HEI level, e.g. institutional, strategic, capital investment, annual budget planning and financial management systems. III. Mobilize Non-Public Resources and Create More Equitable Financing Quantitative Indicators: 13. Total expenditures on higher education 14. Proportion of total expenditures financed by the state. 15. Public support as a percentage of Hungarian GDP 16. Amount and percentage of total expenditures of public institutions raised from private (i.e. non-HEI budget) sources by type (i.e. sale of services; tuition and fees; rental of facilities and equipment; outside research funding, etc.) 17. Number of students paying tuition in public HEls and ranges of amounts 18. Percent of total public higher education expenditures goinig to non-public institutions Qualitative Indicators: 19. Extent to which lower income students are enrolled in highier education 20. Existence and use of practical means tests to identify students in financial need. Annex 18 REPUBLIC OF HUNGARY HIGHER EDUCATION PROJECT Supervision Plan FY 1998 Timing Staff Weeks Staffing Spring 1998 18 weeks Bank Resources (18 weeks) of which: - Task Manager (4 weeks) - Operations Assistant (3 weeks) - Consultant on Higher Education (3 weeks) - Desk Reviews of IDPs, TORs (8 weeks) Fall 1998 18 weeks Bank Resources (18 weeks) of which: - Task Manager (4 weeks) - Operations Assistant (3 weeks) - Consultant on Higher Education (3 weeks) - Desk Reviews of IDPs, TORs (8 weeks) Total FYI 998 36 weeks Fall 1998 18 weeks Bank Resources (18 weeks) of which: - Task Manager (4 weeks) - Operations Assistant (3 weeks) - Consultant on Higher Education (3 weeks) - Desk Reviews of IDPs, TORs (8 weeks) Spring 1999 18 weeks Bank Resources (18 weeks) of which: - Task Manager (4 weeks) - Operations Assistant (4 weeks) - Consultant on Higher Education (4 weeks) - Desk Reviews od IDPs, TORs (6 weeks) Total FY1999 36 weeks FY2000 Fall 1999 12 weeks Bank Resources (12 weeks) of which: - Task Manager (3 weeks) - Operations Assistant (3 weeks) - Desk Reviews of IDPs, TORs (6 weeks) Spring 2000 12 weeks Bank Resources (12 weeks) - Task Manager (3 weeks) - Operations Assistant (3 weeks) - Desk Reviews of IDPs, TORs (6 weeks) Total FY2000 24 weeks Annex 19 Page 1 Repubic of Hungary Higher Education Reform Project Staff Appraisal Report Schedule of Procurement Arrangements Date: October 29, 1997 Contract Implement- Total Cost Procurement Advert- Responsible Award ation (lJSSOOO) Method isement Ulnit Expected Period GENERAL PROCt1REMENT NOTICE: 11/16197 Bank/PMU PROCUREMENT WORKSHOP: 01198 Bank/PMU WORKS: ICB (New Construction): 1. Szeged University (I tender) 27.5 ICB 10/98 SU/FEFA 02/99 02/19-02/01 2. Debrecen University (I tender) 18.5 ICB 11/98 DU/FEFA 03199 03/99-01/01 3. Phase 2. Site A ( I tender) 22.0 ICB 05/99 Us/FEFA 10/99 10/99-12/01 4. Phase 2. Site B (I tender) 10.0 ICB 07/99 Us/FEFA 11/99 11/99-12/01 5. Phase 3, Site D (I tender) 22.0 ICB 07100 Us/FEFA 11/00 11/00-03/03 6. Phase 3, Site E (i tender) 10.0 ICB 08/00 Us/FEFA 06/01 06/01-01/04 SubJotal (6 ICB lenders): 110.0 NCB - REFURBISHMENT AND BUILDING TANSFORMATION 1. Szeged University (I tender) 1.0 NCB 02/98 SU/FEFA 05/98 05/98-1(/99 Kecskemet University (3 tenders) 2. Transformations: Mech.Eng. College/ 4.0 NCR 10/98 KU/FEFA 01/99 01/19-12/00 Lang. Inst/Common Campus Improvements 3. Dormitories Transformation 3.1 NCB 03/98 KU/FEFA 06/98 06/98-03/()( 4. Teacher Training College 4.9 NCR 12/98 KU/FEFA 03/99 03/99402/01 PHASE 2 5. Phase 2, Site B (2 tenders) 4.0 NCO 03/99 Us/FEFA 05/99 05/(9-12100 6. 2.0 NCB 07/99 Us/FEFA 09/99 09/99-061()( 7. Phase 2. Site C (4 tenders) 4.9 NCB 04/99 Us/FEFA 06/99 06/99-()7/01 8. 4.9 NCO 12/99 Us/FEFA 03100 03/00-04/02 9. 4.8 NCB 04/00 Us/FEFA 07/00 07/00-03()2 10 4.9 NCB 07/00 Us/FEFA 10/00 10/00-09/02 PHASE 3 I1. Phase 3. Site E (2 tenders) 3.7 NCR 03/00 Us/FEFA 06/00 06/00-12/01 12. 3.2 NCR 05/00 Us/FEFA 08/00 0X/()- 11 13. Phase 3. Site F (4 tenders) 4.9 NCB 11/00 Us/FEFA 02/01 021()1-04/03 14. 4.9 NCB 04/01 Us/FEFA 07/01 07/01-09/0)2 15. 4.9 NCO 09/01 lJs/FEFA 12/01 12/01-12/0(3 16. 4.9 NCB 01/02 l)s/FEFA 04/02 04/02-03/0)4 Subtotal (16 NCB tenders): 65.0 Design and Supervision: 1. Szeged University 2.0 QCBS 02/98 SU/FEFA 05/98 05/98-1OAu)O 2. Debrecen University 1.2 QCRS 03/98 DU/FEFA 06/98 06/98-10/00 3. Kecskemet University 0.4 QCBS 02/98 DU/FEFA 05/98 05/98-101()0 4. Site A 1.5 QCBS 03/99 Us/FEFA 08/99 09/99-10/(01 5. Site B 2.0 QCBS 03/99 Us/FEFA 08/99 09/99-10/01 6. Site C 1.5 QCBS 03/99 Us/FEFA 08/99 09/99-1/1() 7. Site D 2.0 QCBS 03/00 Us/FEFA 08/00 09/00-10/02 8. Site E 1.5 QCBS 03/00 Us/FEFA 08/00 09/(N)-1(0/02 9. Site F 1.3 QCBS 03/00 Us/FEFA 08/00 09/00-10)/02 Sublotal (9 design competitions) 13.4 TOTAL WORKS: 188.4 _ _ _ 1 Annex 19 Page 2 Contract Implement- Total Cost Procurement Advert- Responsible Award ation (USSOOO) Method isenment tJnit Expected Period GOODS: Equipment and Furniture for Subprojects 14.9 NBF Ongoing Uniiversities On1gOi ng 06/98-06/02 MIS Software and Hardware: 1. Phase I Sites 4.3 ICB 05/99 Us/FEFA 01/99 02/99-05/99 2. Szeged 0.45 IS 06/98 Us 08/98 (9/98 3. Debrecen 0.3 IS 07/98 Us 09/98 1(0/98 4. Kecskemet 0.3 IS 08/98 Us 10/98 11/98 5. Phase If Sites 4.3 ICB 05/01 Us/FEFA 01/01 02/()1-()5/0(1 6. Site A 0.45 IS 06/00 Us 08/00 09/0( 7. Site B 0.3 IS 07/00 Us 09/00 1(/() 8. Site C 0.3 IS 08/00 Us 10/00 11/()() 9. Phase 111 Sites 4.2 ICB 05/02 Us/FEFA 01/03 0)2/03-05/03 10. Site A 0.45 IS 06/02 Us 08/02 09/()2 11. Site B 0.3 IS 07/02 Us 09/02 10/02 12. Site C 0.3 IS 08/02 Us 10/02 11/02 Subtotal MIS: 15.95 Offlce Equipment: 1. Institutional Development 0.04 NS 03/15/98 PMU/FEFA 05/15/98 0)6/98 2. Student Loans 0.1 NS 03/15/98 PMIU/FEFA 05/15/98 0)6/98 3. Student Loans 0.05 NS 06/15/99 PMU/FEFA 07/15/99 ()8/99 4. Szeged University 0.2 IS 03/15/98 PMU/FEFA 05/15/98 06/98 5. Debrecen University 0.15 IS 03/15/98 PMU/FEFA 05/15/98 06/98 6. Kecskemet University 0.1 NS 03/15/98 PMU/FEFA 05/15/98 06/98 7. University A 0.2 IS 09/15/99 PMU/FEFA I 1/15/99 12/99 8. University B 0.15 IS 09/15/99 PMU/FEFA 11/15/99 12/99 9. University C 0.1 NS 09/15/99 PMU/FEFA 11/15/99 12/99 10. University D 0.2 IS 09/15/01 PMU/FEFA 11/15/01 12/0) 11. University E 0.1 NS 09/15/01 PMU/FEFA I 1/15/01 12/01 12. University F 0.05 NS 09/15/01 PMU/FEFA 11/15/0 1 12/0)1 Subtotal Office Equipment: 1.44 Materials: 1. Student Loan Program: Year 2 0.08 NS 03/99 MOE/PMU 04/99 05/99 2. 0.06 NS 06/99 MOE/PMU 07/99 08/99 3. 0.06 NS 09/99 MOE/PMU 10/99 11/99 4. Year 3 0.08 NS 03/00 MOE/PMU 04100 05/1)0 5. 0.06 NS 06/00 MOE/PM U 07/00 08/00 6. 0.06 NS 09/00 MOE/PMU 10/00 11/0() 7. Year 4 0.08 NS 03/01 MOE/PMU 04/01 ()5/()1 8. 0.06 NS 06/01 MOE/PMU 07/01 08/01 9. 0.06 NS 09/01 MOE/PMU 10/01 11/()1 10. Year 5 0.08 NS 03/02 MOE/PMU 04/02 1)5/0)2 11. 0.06 NS 06/02 MOE/PMU 07/02 08/02 12. 0.06 NS 09/02 MOE/PMU 10/02 11/0)2 13. Year 6 0.08 NS 03/03 MOE/PMU 04/03 1)5/03 14. 0.06 NS 06/03 MOE/PMU 07/03 08/03 15. 0.06 NS 09/03 MOE/PMU 10/03 11/0)3 16. Project Managemenit ($0.13/year over 6 year) 0.8 NS 01/98 PMU 02/98 0)2/98-0)6/0)3 Subtotal Materials: 1.71 STOTAL GOODS: 34.0 SERVICES: Policy Development & Implementation: 1. Funding Mechanims 1.2 QCBS 06/98 MOE/PMIJ 1)/98 I1/98-1(/()() 2. Subsidies / Private Higher Education 0.4 QCBS ()3/99 MOE/PMU ()7/99 08/99-07/1)1) 3. International Advisory Board: Semi-Annual Mtgs of Panel Experts (four 0.2 IC 02/98 MOE/PMU 03/98 03/98-06/103 person-weeks per year over six years) Supervisory-Advisory Services (12 p-weeks 1.0 IC 02/98 MOE/PMU 03/98 03/98-067/0)3 per year over six years) Institutional Development: 4. National Credit Office (NCO) 1.4 QCBS 09/98 MOE/PMU 12/98 12/98-12/00 Annex 19 Page 3 Contract Implement- Total Cost Procurement Advert- Responsible Award ation (tJSSOOO) Method isement tJnit Expected Period 5. H igher Education & Science Council (FTT) 0.8 QCBS 03/00 MOE/PMU 0615/00 06/00-05/02 6. Training - HEls Development Offices/MAB 1.2 QCBS 06/00 Us/PMU 1(/00 11/00-(16/03 7. Accreditation (MAB): Intemational Experts (2 persons for 2 years) 0.4 IC 01/98 MOEtPMU 02/98 02/98-)/1()( National Experts (2 persons for 2 years) 0.2 IC 01/98 MOE/PMU 02/98 02/98-01/00 Management Information Systems: 6. Strategy Analysis Requirements 1.0 QCBS 07/98 MOE/Us 08/98 09/98-12/00 7. MIS Systems Development (Financial) 2.2 QCBS 01/99 MOE/Us 05/99 06/99-12/01 8. MIS System Development (Registry&Admin) 2.6 QCBS 06/99 MOE/Us 10/99 W1/99-06/02 Local university MIS logistics experts 0.2 IC 01/99 Us 02/99 02/99-06/0)3 Management Development Training: 9. Reform Policies and Products 0.6 QCBS 07/98 MOE/PMU 04/30/98 05/9-09/100 10. Continuing Education Modules 0.7 QCBS 12/99 MOE/PMU 04/30/0(0 05/00-04/0)2 1 1. Fellowslhips and Study Tours 1.9 QCBS 12/01 MOE/PMU 04/30)/02 05102-12/03 University Twinning Partnerships: 12. Szeged University 0.6 FBS 06/98 Us/PMU 09/98 Ongoing 13. Debrecen University 0.5 FBS 06/98 Us/PMU 1)9/98 Ongoing 14. Kecskemet University 0.5 FBS 06/98 Us/PMU 09/98 Ongoing 15. Site A 0.5 FBS 06/00 Us/PMU 09/00 Ongoing 16. Site B 0.5 FBS 06/00 Us/PMU 09/00 Ongoing 17. Site C 0.5 FBS 06/00 Us/PMU 09/00 Ongoing 18. Site D 0.5 FBS 06/02 Us/PMU 09/02 Ongoing 19 Site E 0.5 FBS 06/02 Us/PMU 09/02 Ongoing 20. Site F 0.5 FBS 06/02 Us/PMU 09/02 Ongoilng 21. Student Loan Program 1.8 QCBS 06/98 MOE/PMU 08/15/98 09/98-04/0Il Project Preparation Facility 1.1 [PPFI [10/971 PMU 11/30/97 10/97-03/98 22. Project and Sector Management: (each over six project years) Project Manager 0.7 IC 03/98 MOE/PMU 04/98 (04/98-06/03 Higher Education Policy Expert 0.2 IC 03/98 MOE/PM U 04/98 04/98-06)03 Higher Education Training Expert 0.2 IC 03/98 MOE/PMU 04/98 04/98-06/03 University MIS Systems Expert 0.2 IC 03/98 MOE/PMU 04/98 (04/98-06/03 Junior Analysts 0.4 IC 03/98 MOE/PMU 04/98 04/98-06/03 Federation Offrice Managers (9 sites) 1.0 IC 03/98 MOE/PMU 04/98 04/98-06/03 TOTAL SERVICES: 26.2 INCREMENTAL RECURRENT COSTS: 1.4 NBF TOTAL PROJECT COSTS: 250.0 Procurement Methods: ICB: International Competitive Bidding NCB: National Competitive Bidding IS: International Shopping NS: National Shopping QCBS: Quality-Cost-Based Selection Process for consulting firms FBS: Fixed Budget Selection IC: Individual Consultants NBF: Non-Bank Financed Implementing Agencies: Us: Universities MOE: Ministry of Education PMU: Project Management Unit FILE: N:\hungary\highed\GC20\anx-1 7gc.doc Annex2O Page I REPUBLIC OF HUNGARY HIGHER EDUCATION REFORM PROJECT ECONOMIC ANALYSIS 1. The World Banks' Country Assistance Strategy for Hungary attaches highest priority to activities that will (a) restore macro economic stability; (b) accelerate employment growth; (c) facilitate accession to the European Union; (d) promote private sector development; (e) increase the efficiency of public sector investments; and (f) develop human resources. 2. The proposed Hungarian Higher Education Project will assist Hungary in reforming its post secondary training institutions, colleges and universities. These reforms will enable Hungary to provide a better quality higher education to up to 50% more of its young people, stabilize public spending on higher education, and ensure that the costs of providing the education were more equitably distributed. More specifically, the project will increase the capacity of the higher education system by half, stabilize or reduce its total cost, improve the quality and relevance of learning outcomes, and distribute the costs of education in a more equitable manner. These reforms will over time reduce the burden on the state of paying for higher education; speed the adjustment of the skills of workers to the requirements of an out-ward oriented, market economy, promote the development of a demand-driven, market economy; increase the efficiency of the higher education system; and contribute to the further development of the skills of Hungary's workers and citizens. In addition, the proposed project will promote reform of the structure of the curriculum and of teaching methods in order to increase graduates capacity to function effectively in a rapidly changing economic environment. Background 3. These extraordinary opportunities to improve efficiency exist primarily because of post war higher education policies that forced the break-up and dispersion of Hungarian colleges and universities. These policies were implemented in order to minimize the possibility that higher education institutions might become centers of political discontenit. In addition, following World War II the authority to grant the Ph.D. degree was withdrawn from the universities and transferred to newly formed academies of science. The higher education system that emerged was made up of small, highly specialized teaching institutions, scattered widely around the country, and the scientific academies. Even after nearly a decade of democratic government and a fifty percent increase in college and university enrollments, more than half of Hungary's 87 public institutions of higher education enroll fewer than 1500 students. Despite rapid expansion of higher education during the transition period, only 12-15% of the population aged 18-22 years is now enrolled full time in any form of post-secondary education. Moreover, the break up of the universities and the promotion of small, highly specialized teaching program Annex 20 Page 2 yielded the most unaffordable higher education system in Europe. The average cost per student of higher education represents 74% of per capita GDP. 4. The Higher Education Project confronts the three most important sources of inefficiency in the Hungarian colleges and universities. First, it address the inefficiencies that result from very small scale operation of administrative and student services. By creating federations of smaller higher education institutions, it is possible to operate administrative systems such as payroll, accounting, student records and stores management at far lower cost. By integrating services such as student housing, food services, transportation, laundry services, cleaning, safety and stores it is possible to reduce costs still further. 5. Second, the project allows for more efficient use of instructional resources by enabling colleges and universities to exploit economies of scope and scale in teaching. The isolation of teaching institutions has limited the size of introductory classes and service courses to the number of students matriculated in a particular degree program. The reform will produce multi-faculty universities and colleges in which related degree programs can draw on one another for instruction in foundational topics and development of basic skills. A course credit system will be introduced to allow programs to account for courses taken and to facilitate the transfer of credits from one program or institution to another. The opportunities for exploiting scale economies in teaching are especially great in such areas as mathematics, communications skills, linguistics and behavioral sciences. In order to exploit these opportunities, institutions will also need to increase the number of classrooms that can accommodate large lecture classes. 6. Third, the reform program will facilitate the introduction of cost-effective teaching methods. The Hungarian higher education system relies heavily on lectures to transmit knowledge. Students are required to spend an average of about 29 hours in class each week; in medical schools, students are expected to spend between 42 and 46 hours in class each week. At the same time, students are not required to read extensively or to pursue independent study or research. The transition to a system of instruction that demands greater effort and initiative from students is blocked by an acute shortage of appropriate space. The reform project will finance construction and equipment of libraries, computer laboratories and study areas in which students might pursue their studies independently and without supervision. This innovation will be accompanied by a reduction in hours in class of 20 to 50%. The reform will not only reduce the amount of academic staff time required to teach each student, but will also help to develop further students' skills in ability to manage a variety of information resources and to synthesize and construct meaning with these resources. 7. The proposed project will also create a more equitable system of higher education finance. At present 90% of all students attend either a public college or a public university. With reform, tuition charges and academic fees will be gradually increased in order to recover approximately 20% of the cost of instruction directly from benefiting students. The reform of higher education finance will be implemented gradually since Annex )O Page 3 households have not been expected to pay for higher education and therefore have not accumulate savings in order to meet these expenses. In addition, the traumatic economic events that have accompanied the transition from a centrally planned to market economy have eroded whatever savings households had accumulated. The project will support the development of a student loan program, guaranteed by an independent student loan guarantee agency Analysis of Project Alternatives 8. The project concept being proposed was chosen from four broad alternatives. The Hungarian higher education system must for political and economic reasons expand dramatically in the near future. The adoption of democratic political institutions has made the public's demand for equitable access to higher education impossible for political leaders to resist. The nation's college and universities must open their doors to those who are qualified to enter and who might reasonably expect to gain from the experience. The integration of the Hungarian economy into the economy of Western Europe will raise economic expectations while pitting the Hungarian work force against a labor force that is on average much better trained. Hungary must raise the qualifications of its labor force by ensuring that 25-30% of its youth are provided with a post-secondary education. 9. The No-Change Counterfactual. The base case scenario is the counterfactual defined as the system of higher education that will prevail if no reforms in public higher education policy were to be introduced. This option implies that the growth in enrollment demanded by the society and economy will be met by an education system exhibiting the same structure and pursuing the same operating policies as at present. In addition, sensitivity analyses have explored an alternative counterfactual in which the compression of academic salaries that occurred during the 1990s due to high inflation is assumed to be reversed. In this case, it has been assumed that academic staff must be paid salaries that on average yield a return on their investment in education that is no less than the opportunity cost of capital. In order to satisfy this criteria, average salaries must increase by roughly a factor of three. The capacity of higher education institutions is being fully utilized at present, so further enrollment growth will require investment in both teaching space and student support facilities. Alternatives 10. Privatization of Higher Education. The option of privatizing higher education has been dismissed for two reasons. First, the private sector will not be able to operate Hungary's higher education system with the revenues that might be obtained from students and their families. Even though the rate of return on education is attractive in Hungary, even during the transition, the ability of households and students to invest in education is severely limited by the absence of a well-developed credit market. Private lenders are unwilling to lend for education unless a full guarantee of repayment can be secured from a competent guarantee agency, since the loans generally cannot be secured Annex 20 Page 4 by a lien on property. Loans to students are especially risky because the students' success as either a student or a worker has not yet been demonstrated. Second, the higher education system, as joint products of teaching, provides research and advisory services that are non-rivalrous: the optimal supply of these services can be assured only through public sector intervention. 11. Promotion of Private Education. The option of promoting private higher education as a means of meeting the demand for additional places in colleges and universities has also been discarded. About ten percent of students enrolled in higher education institutions attend a private college or university. These institutions charge tuition but may receive state support if they qualify for accreditation. About 40% of the costs of operation of accredited private institutions is financed by the state. The unit costs of instruction are lower in private than public universities principally because private institutions rely almost entirely on part-time, adjunct faculty drawn from public colleges and universities. Moreover, the private higher education system has focused on supplying low cost programs of instruction in fields such as management, law, linguistics and theology. No private Hungarian institution provides instruction in the sciences, medicine, engineering or the performing arts where unit costs are much greater. Thus the ideal of a multi-faculty university will not be fulfilled by private institution. Instead, the private sector will address demands for vocationally oriented training. In order for the private sector to provide instruction in the sciences, medicine and engineering will reqluire enormous investments in specialized facilities. The public sector has the required bui]l[dings and equipment and should be reoriented to meet the needs of a larger number of students. 12. Reform and Expansion of the Public System. The third option is to reform public higher education. By merging small institutions into true universities, introducing a course credit, creating opportunities to transfer credit among institutions and degree programs, and modemizing instructional methods the required expansion could be achieved at low cost. The Hungarian system of higher education at present relies very heavily on classroom instruction as the primary teaching method and emphasizes the mastery of vocational applications of knowledge through extensive practical instruction in laboratories and workshops. The duration of formal instruction is much greater than in Western Europe; about half of all students are enrolled in university programs of 5 or 6 years duration. The other half are enrolled in college programs which last for 3 or 4 years. Substantial cost savings could be achieved by requiring that students assume greater responsibility for their own education by devoting much larger amounts of time to reading, research and writing while at the same time spending much less time in formlial classroom instruction. This change will release both academic staff and classroom/laboratory space for additional students. The change will also help to develop additional skills among students in identifying information, assessing its quality and applying information and skills to novel situations. If Hungary were to adopt the standards that prevail in high quality institutions in the West, it could free up nearly half of its academic staff resources. Additional investments in administration and in facilities Annex 20 Page 5 will be necessary to manage and accommodate individual study and to deliver large lecture classes. 13. Reducing the barriers between departments and faculties will not only permit larger and more economical classes, but also promote greater cross-fertilization among disciplines and academic groups. The project will support the realignment of course requirements for diplomas and degrees so that acquisition of basic skills and knowledge might occur in interdisciplinary settings. The participating institutions will review the commonalties among degree requirements and design common courses that might be taken by students from different programs. These services course might include languages, mathematics, management and psychology, for example. The integration of these requirements will not only reduce costs but will also promote broader understanding of each discipline, cultivate skills in the application of broad knowledge to specific situations and encourage competition among professors and departments for students outside their respective degree programs. Design Standards for Facilities 14. The project will introduce for the first time, national standards for instructional space, faculty offices and student services. These standards will facilitate the design and appraisal of investments in higher education infrastructure. The proposed standards have been adapted from North American standards in order to accommodate differences in the subjects to be taught, methods of instruction, and patterns of social activity. These standards will reduce the cost of capital investments by approximate 25%. In addition, the review of standards has shifted attention to the cost of occupancy, including utilities. maintenance and depreciation charges, rather than initial construction costs alone. Role of the State in Higher Education 15. Production of Education Services. The state will continue to play an important role in the production of higher education in Hungary for the foreseeable future. A small private higher education system has emerged during the 1 990s. The private sector now enrolls about 10% of all college and university students. About half of private higher education is conducted by religious institutions; the other half is operated by private, for- profit organizations. The creation of multi-faculty universities in which students from a broad range of disciplines enroll together in the same classes and interact informally within the university community has eluded the private universities. 16. On the other hand, Hungary has a highly developed system of public higher education institutions. Moreover these institutions are increasingly becoming both academically and financially autonomous. The introduction of a formula-based system of state support for higher education has made public higher education institutions responsive to market signals. Thus, Hungary is evolving a system of public higher Annex 20 Page 6 education institutions that functions independently from state control and responds to economic signals. 17. Higher Education Finance. The state also has an important role in the financing of higher education because markets for student loans are incomplete. Hungary's consumer credit system is underdeveloped. But in addition, private credit institutions everywhere are reluctant to offer student loans, principally because students typically have little or no legally acceptable collateral with which to secure loans. A state sponsored guarantee agency can provide the necessary assurances to the private banking system. Moreover, the state often can apply a wider and more powerful array of sanctions to borrowers who default on repayment of education loans. Thus, intervention by the public sector is needed in order to make loan funds efficiently available to students, and thereby to overcome political opposition to recovery of the cost of higher education from beneficiaries. Overview of Project Benefits 18. The proposed project will finance the development of eight multi-faculty universities. These universities combine about half of all public institutions of higher education. The project will provide the funds necessary for them to renovate or reconfigure existing space to allow for larger classes; build additional library anld independent study space; consolidate administrative offices; implement a modern, computerized data management system; and provide student services facilities, including sports fields, assembly halls and student canteens. Analysis of Sub-Projects 19. Preparation of three sub-projects has occurred in parallel with development of this project. The remaining five sub-projects will be financed during phase two or three of the project. Work on the preparation of these sub-projects will take place during project implementation. The most developed of the three reform plans is analyzed in detail below as an illustration of the potential. 20. The sub-projects will all pursue similar aims and will include similar components. The first component will focus on increasing the capacity of the Hungarian higher education system to meet the education and training needs of its citizens. This aim will be accomplished primarily by using existing faculty and staff more intensively. The ratio of students to instructional staff will be roughly doubled in participating institutions. This objective will be realized by implementing four initiatives. First, the hours that students are required to spend in formal classes will be reduced by about 25%. Second, core courses in such areas as mathematics, communications and statistics will be combined for clusters of students studying related disciplines (such as engineering, the social sciences or the physical sciences) in order to reduce the numbers of classes offered by each university. Third, the amount of individual study and independent research demanded of Annex 20 Page 7 students will be increased sharply in order both to replace the learning sacrificed as a result of reduced class time and to strengthen students' skills in learning independently. And finally, the present tailored course offerings for each degree program will be replaced by a modularized curriculum in which students will draw on offerings from several faculties and departments in order to meet the requirements for a degree. 21. In order to meet these objectives, it will first be necessary for the participating faculties to adopt curricular reforms, for small independent faculties to integrate to form true, multi-faculty universities and for the integrated universities to provide the classrooms, laboratories, libraries, computer facilities and study areas needed for independent, individual study. 22. The project will also increase the quality of learning by creating a more responsive, competitive system of higher education. Enrollments and institutional budgets in the reformed system will be determined primarily by student choice rather than central plans. The number of degree programs being offered will be both reduced and greatly simplified. The stress placed on individual study and original investigations will be greatly increased. The curriculum will be modularized and registration across traditional departmental boundaries will be encouraged in order to allow students to construct customized specializations. The modules will also be made available to continuing education students to allow them to update and adapt their qualifications. 23. The improvement of quality will also require the development of a credit system for accounting for student work and an administrative apparatus for registering the credits earned and assessing the completion of course requirements. The multi-faculty universities will need to develop administrative centers and to invest in computer technology with which to manage the registration of students and record completion of degree requirements. The Szeged University Reform 24. The probable costs and benefits of the project may be illustrated by analysis of the most fully elaborated plan, submitted by the Szeged University institutions. The proposed project will spend US$32.1 million in order to provide the additional class room space and joint facilities required in order for six regional colleges and universities to merge to form a single multi-faculty university in Szeged. (The combined institutions operated their classrooms at 96% of full capacity and their laboratory facilities at 103% of capacity during the academic year 1996-97.) The investments will include the relocation of sports facilities to allow construction of a library and study center, the construction of the center, and construction of a student center. The designed capacity of the six institutions will be increased from in 11,230 students in 1995-96, to about 16,000. The leadership of the university projects enrollment growth of about 23% over the next five years. Annex 20 Page 8 25. The Reform Program. The merging institutions will not only share existing facilities but also permit cross registration of students among institutions. In addition, the adoption of the reforms in teaching, being supported by this program, will allow the new university to reduce its need for classroom space by at least 16%. However, in order to accommodate a much larger number of large lecture classes, investments will be required to build more lecture halls. In addition, the separate library facilities of the six predecessor institutions will be relocated to create a single joint library in which study space will be provided for about 1250 students at a time. The investment plan also includes the development of a central administration building, the creation of a computerized management information system, and the introduction of modern, higher- education management systems including new budgeting and planning systems. 26. The proposed reforms and related investments will increase the capacity of the university at an estimated capital cost per designed additional student place of slightly more than US$8100. This compares with a replacement cost per student averaging US$31,200 for the combined institutions. This estimate includes clinical teaching facilities in the medical school; the replacement cost per student of existing facilities excluding the medical complex will be US$18,080. The number of instructional staff will decline by about 5% over the next five years despite the enrollment growth because of reductions in the amount of time in class required of students, and increases in the number of classes each member of the academic staff will be required to teach. The number of non-teaching staff will decline over time from the current 1950 to about 1300. The decrease will be achieved primarily by combining administrative functions and computerizing data management. 27. At the same time, the reform and reorganization of the University of Szeged will sigynificantly increase the quality of education by creating a more competitive internal market for instruction; allowing more effective use of the university's best faculty; permitting students to construct degree programs that are responsive to market opportunities and student interests; creating a much wider range of course offerings from which students may choose; and shifting emphasis from classroom instruction to individual study and research. 28. Project Costs. Estimates of the investment costs of these reforms are drawn from an architectural master plan prepared for the Szeged University consortia. The design and space standards were adapted from those used in creating the University of Illinois- Chicago Circle Campus -- a campus with a designed enrollment of 18,000. The expected enrollments by field of study and the space standards for faculty offices, common spaces and student services were modified to reflect Hungarian realities, including the mix of laboratory and classroom instruction associated with the distribution of major areas of study. The use of construction materials and finishes has been reviewed to ensure optimal durability. IUnit costs of construction were obtained from recent contracts; the cost of classroom and library space were priced separately from areas to be used as laboratories and workshops. Annex 20 Pa-e 9 29. Recurrent Cost Implications. Estimates of the recurrent cost of staffing the university have been based on historical costs adjusted for changes in faculty work loads, administrative staff requirements and required classroom instruction. In addition, analyses of the effects of distortions in faculty salaries have been prepared. The salaries paid to academic staff have been compressed in recent years due to tight public budgets. These very low salaries cannot be maintained in the longer term without a massive exodus of staff. Rather salaries must rise enough to cover the full opportunity cost of time and investments in training. Non teaching staff may be expected to command salaries that are competitive with highly trained workers in the public and private sector. 30. An approximation of the minimum salary required to retain such staff may be calculated as the salary paid secondary school graduates plus the amortized cost of higher education. For purposes of these calculations, it is assumed that workers move directly from school to work. The cost of a year of higher education ranges from 555,000 HUF (US$3850) to 1,300,000 HUF (US$9100) depending on the field of study. The average salary of a Hungarian worker with a secondary education was 560,000 HUF (US$3850) in 1996. The cost of a Ph.D. degree (opportunity cost of student time plus training costs) therefore ranges from as little as 9,000,000 HUF (US$63,000) to as much as 16,100,000 HUF (US$112,700). The annual amortized value of this training ranges from US$7600 to US$13,500 a year, if one assumes that the degree holder remains in the labor force for 30 years and the opportunity cost of capital is 8% a year. All of this taken together implies that a university professor must earn between US$11,500 and US$17,350 if the profession is to be competitive with alternative jobs. These figures are 2.2 to 3.3 times the amount that professors are now being paid. 31. These estimates of the cost of training assume that current technologies and wage rates prevail, and that students bear the full cost of instruction. Currently students contribute all of the opportunity cost of participating in higher education, but only about 10% of the direct costs of instruction. The private cost of a Ph.D. degree then ranges from about $37,000 to $71,000 and the amortized cost of the degree is between $3900 and $7000 a year for each year of employment. Therefore, a salary of $7800 to $11,000 will be required to render investment in graduate studies financially attractive. 32. Rates of Return on Investments. The value of benefits has been estimated using the costs per student that will prevail without the project. This analysis suggest that the rate of return on investments in the reform of higher education at Szeged University is greater than 47% a year if very conservative assumptions are adopted. These assumptions include (a) that academic salaries do not increase in real term; (b) that assets created under the project have an economic life of only 10 years; and (c) that required enrollment growth could be achieved in the without project case without further capital investments. If one introduces the plausible assumption that academic salaries must rise by a factor of 2.5 in order to attract and retain qualified staff, then the returns form the project will cover all investment costs mid-way through the second year of full operations. The results of the analysis also depend on the rate at which the increase in capacity is translated into enrollments. In its calculations, the University has assumed Annex 20 Page 10 that enrollment will grow at approximately five percent a year, leveling off at an enrollment of 13,400 students (approximately 85% of designed capacity). However, if one assumes that the new capacity is utilized more slowly, the rate of return is reduced by about 10% to an annual rate of 38%. 33. The flows of benefits and costs and the assumptions employed in these analyses are summarized in Attachment 1 8-A. The sensitivity of estimated rates of return to a range of plausible assumptions and cross-over values for these parameters are summarized in Attachment 18-B. Annex 20 Page I I SUMMARY OF OPERATING COSTS BY INTEGRATING INSTITUTION: SZEGED UNIVERSITY (1997 Costs in HUF Millions) LABOR MATERIALS STIPENDS MAINTENANCE TOTAL JATE 1756 604 479 199 3038 SZOTE 3034 1697 145 287 5163 JGYTF 586 202 179 28 995 SZEF 159 69 41 16 285 TOTAL 5535 2572 844 530 9481 WORKSHEET FOR COST OF (Base OPERATIONS Case) 1997 Values HUF Millions LABOR COSTS LABOR @2.5A MATERIALS STIPENDS MAINTENANCE TOTAL WAGES JATE 1756 4390 604 479 199 3038 SZOTE 3034 7585 1697 145 287 5163 JGYTF 586 1465 202 179 28 995 SZEF 159 397.5 69 41 16 285 TOTAL 5535 13837.5 2572 844 530 9481 1997 Values in US$ Millions LABOR COSTS LABOR @2.5* MATERIALS STIPENDS MAINTENANCE TOTAL WAGES JATE $10.98 $27.44 $3.78 $2.99 $1.24 $18.99 SZOTE $18.96 $47.41 $10.61 $0.91 $1.79 $32.27 JGYTF $3.66 $9.16 $1.26 $1.12 $0.18 $6.22 SZEF $0.99 $2.48 $0.43 $0.26 $0.10 $1.78 TOTAL $34.59 $86.48 $16.08 $5.28 $3.31 $59.26 Annex 20 Page 12 CASH FLOW ANALYSIS (US$ Millions) Costs Without Project Costs with Project year operating capital total operating capital total Net Flows 1998 $111.10 $46.20 $157.30 $111.10 $11.80 $122.90 $34.40 1999 $116.66 $23.00 $139.66 $107.21 $20.30 $127.51 $12.14 2000 $122.49 $122.49 $103.46 $103.46 $19.03 2001 $128.61 $128.61 $99.84 $99.84 $28.77 2002 $135.04 $135.04 $96.34 $96.34 $38.70 2003 $135.04 $135.04 $96.34 $96.34 $38.70 2004 $135.04 $135.04 $96.34 $96.34 $38.70 2005 $135.04 $135.04 $96.34 $96.34 $38.70 2006 $135.04 $135.04 $96.34 $96.34 $38.70 2007 $135.04 $135.04 $96.34 $96.34 $38.70 2008 $135.04 $135.04 $96.34 $96.34 $38.70 2010 $135.04 $135.04 $96.34 $96.34 $38.70 2011 $135.04 $135.04 $96.34 $96.34 $38.70 2012 $135.04 $135.04 $96.34 $96.34 $38.70 2013 $135.04 $135.04 $96.34 $96.34 $38.70 2014 $135.04 $135.04 $96.34 $96.34 $38.70 2015 $135.04 $135.04 $96.34 $96.34 $38.70 2016 $135.04 $135.04 $96.34 $96.34 $38.70 2017 $135.04 $135.04 $96.34 $96.34 $38.70 2018 $135.04 $135.04 $96.34 $96.34 $38.70 2019 $135.04 $135.04 $96.34 $96.34 $38.70 2020 $135.04 $135.04 $96.34 $96.34 $38.70 2021 $135.04 $135.04 $96.34 $96.34 $38.70 2022 $135.04 $135.04 $96.34 $96.34 $38.70 2023 $135.04 $135.04 $96.34 $96.34 $38.70 2024 $135.04 $135.04 $96.34 $96.34 $38.70 2025 $135.04 $135.04 $96.34 $96.34 $38.70 2026 $135.04 $135.04 $96.34 $96.34 $38.70 2027 $135.04 $135.04 $96.34 $96.34 $38.70 Internal Rate of Return Undefined Assumptions: 1. Opierating costs based on 1997 actual costs. 2. Shadow wage of academic staff equals 2.5 1997 market wage. 3. Average economic life of structures and equipment is 30 years. 4. Capital costs to meet enrollment growth equal 20% of replacement cost of existing plant for without project scenario. 5. All ltechnical assistance and related investment in information technology occurs in the first year. 6. Enrollment grows by 6 percent a year for four years (total of 20%). 7. Staffing requirements reduced by 3.5% a year for each of five years. Annex 20 Page I3 CASH FLOW ANALYSIS (US$ Millions) Costs Without Project Costs with Project Net Flows year operating capital total operating capital total 1998 $111.10 $0.00 $111.10 $111.10 $11.80 $122.90 ($11.80) 1999 $116.66 $0.00 $116.66 $107.21 $20.30 $127.51 ($10.86) 2000 $122.49 $122.49 $103.46 $103.46 $19.03 2001 $128.61 $128.61 $99.84 $99.84 $28.77 2002 $135.04 $135.04 $96.34 $96.34 $38.70 2003 $135.04 $135.04 $96.34 $96.34 $38.70 2004 $135.04 $135.04 $96.34 $96.34 $38.70 2005 $135.04 $135.04 $96.34 $96.34 $38.70 2006 $135.04 $135.04 $96.34 $96.34 $38.70 2007 $135.04 $135.04 $96.34 $96.34 $38.70 2008 $135.04 $135.04 $96.34 $96.34 $38.70 2010 $135.04 $135.04 $96.34 $96.34 $38.70 2011 $135.04 $135.04 $96.34 $96.34 $38.70 2012 $135.04 $135.04 $96.34 $96.34 $38.70 2013 $135.04 $135.04 $96.34 $96.34 $38.70 2014 $135.04 $135.04 $96.34 $96.34 $38.70 2015 $135.04 $135.04 $96.34 $96.34 $38.70 2016 $135.04 $135.04 $96.34 $96.34 $38.70 2017 $135.04 $135.04 $96.34 $96.34 $38.70 2018 $135.04 $135.04 $96.34 $96.34 $38.70 2019 $135.04 $135.04 $96.34 $96.34 $38.70 2020 $135.04 $135.04 $96.34 $96.34 $38.70 2021 $135.04 $135.04 $96.34 $96.34 $38.70 2022 $135.04 $135.04 $96.34 $96.34 $38.70 2023 $135.04 $135.04 $96.34 $96.34 $38.70 2024 $135.04 $135.04 $96.34 $96.34 $38.70 2025 $135.04 $135.04 $96.34 $96.34 $38.70 2026 $135.04 $135.04 $96.34 $96.34 $38.70 2027 $135.04 $135.04 $96.34 $96.34 $38.70 Intemal Rate of Retum 84% Assumptions: 1. Operating costs based on 1997 actual costs. 2. Shadow wage of academic staff equals 2.5 1997 market wage. 3. Average economic life of structures and equipment is 30 years. 4. Capital costs to meet enrollment growth equal 10% of replacement cost of existing plant for without project scenario. (That is, the incremental capital cost of increasing enrollment capacity is equal to half the average historical cost.) 5. All technical assistance and related investment in information technology occurs in the first year. 6. Enrollment grows by 5% a year for four years (total of 20%). 7. Stafring requirements reduced by 3.5% each year for five years. Annex 20 Page 14 CASH FLOW ANALYSIS (US$ Millions) Costs Without Project Costs with Project Net Flows year operating capital total operating capital total 1998 $59.20 $0.00 $59.20 $59.20 $11.80 $71.00 ($11.80) 1999 $62.16 $0.00 $62.16 $57.13 $20.30 $77.43 ($15.27) :2000 $65.27 $65.27 $55.13 $55.13 $10.14 2001 $68.53 $68.53 $53.20 $53.20 $15.33 2002 $71.96 $71.96 $51.34 $51.34 $20.62 2003 $71.96 $71.96 $51.34 $51.34 $20.62 2004 $71.96 $71.96 $51.34 $51.34 $20.62 2005 $71.96 $71.96 $51.34 $51.34 $20.62 2006 $71.96 $71.96 $51.34 $51.34 $20.62 2007 $71.96 $71.96 $51.34 $51.34 $20.62 2008 $71.96 $71.96 $51.34 $51.34 $20.62 2010 $71.96 $71.96 $51.34 $51.34 $20.62 2011 $71.96 $71.96 $51.34 $51.34 $20.62 2012 $71.96 $71.96 $51.34 $51.34 $20.62 2013 $71.96 $71.96 $51.34 $51.34 $20.62 2014 $71.96 $71.96 $51.34 $51.34 $20.62 2015 $71.96 $71.96 $51.34 $51.34 $20.62 2016 $71.96 $71.96 $51.34 $51.34 $20.62 2017 $71.96 $71.96 $51.34 $51.34 $20.62 2018 $71.96 $71.96 $51.34 $51.34 $20.62 2019 $71.96 $71.96 $51.34 $51.34 $20.62 2020 $71.96 $71.96 $51.34 $51.34 $20.62 2021 $71.96 $71.96 $51.34 $51.34 $20.62 2022 $71.96 $71.96 $51.34 $51.34 $20.62 2023 $71.96 $71.96 $51.34 $51.34 $20.62 2024 $71.96 $71.96 $51.34 $51.34 $20.62 2025 $71.96 $71.96 $51.34 $51.34 $20.62 2026 $71.96 $71.96 $51.34 $51.34 $20.62 2027 $71.96 $71.96 $51.34 $51.34 $20.62 Internal Rate of Return (Assuming 30 year asset life) 49% Internal Rate of Return (Assuming 20 year asset life) 49% Internml Rate of Return (Assuming 10 year asset life) 47% Internal Rate of Return (Assuming 5 year asset life) 40% Assumptions: 1. Operating costs based on 1997 actual costs. 2. Shadow wage of academic staff equals 1.0 times 1997 market wage. 3. Average economic life of structures and equipment is 30 years. 4. Capital costs to meet enrollment growth equal zero. 5. All technical assistance and related investment in information technology occurs in the first year. 6. Enrollment grows by 5% a year for four years (total of 20%). 7. Staffing requirements reduced by 3.5% a year for five years. Annex 20 Page 1 5 CASH FLOW ANALYSIS (US$ Millions) Costs Without Project Costs with Project Net Flows year operating capital total operating capital total 1998 $59.20 $0.00 $59.20 $59.20 $11.80 $71.00 ($11.80) 1999 $60.68 $0.00 $60.68 $57.13 $20.30 $77.43 ($16.75) 2000 $62.20 $62.20 $55.13 $55.13 $7.07 2001 $65.31 $65.31 $53.20 $53.20 $12.11 2002 $66.94 $66.94 $51.34 $51.34 $15.60 2003 $66.94 $66.94 $51.34 $51.34 $15.60 2004 $66.94 $66.94 $51.34 $51.34 $15.60 2005 $66.94 $66.94 $51.34 $51.34 $15.60 2006 $66.94 $66.94 $51.34 $51.34 $15.60 2007 $66.94 $66.94 $51.34 $51.34 $15.60 2008 $66.94 $66.94 $51.34 $51.34 $15.60 2010 $66.94 $66.94 $51.34 $51.34 $15.60 2011 $66.94 $66.94 $51.34 $51.34 $15.60 2012 $66.94 $66.94 $51.34 $51.34 $15.60 2013 $66.94 $66.94 $51.34 $51.34 $15.60 2014 $66.94 $66.94 $51.34 $51.34 $15.60 2015 $66.94 $66.94 $51.34 $51.34 $15.60 2016 $66.94 $66.94 $51.34 $51.34 $15.60 2017 $66.94 $66.94 $51.34 $51.34 $15.60 2018 $66.94 $66.94 $51.34 $51.34 $15.60 2019 $66.94 $66.94 $51.34 $51.34 $15.60 2020 $66.94 $66.94 $51.34 $51.34 $15.60 2021 $66.94 $66.94 $51.34 $51.34 $15.60 2022 $66.94 $66.94 $51.34 $51.34 $15.60 2023 $66.94 $66.94 $51.34 $51.34 $15.60 2024 $66.94 $66.94 $51.34 $51.34 $15.60 2025 $66.94 $66.94 $51.34 $51.34 $15.60 2026 $66.94 $66.94 $51.34 $51.34 $15.60 2027 $66.94 $66.94 $51.34 $51.34 $15.60 Internal Rate of Return (Assuming 30 year asset life) 38% Internal Rate of Return (Assuming 20 year asset life) 38% Internal Rate of Return (Assuming 10 year asset life) 36% Internal Rate of Return (Assuming 5 year asset life) 27% Assumptions: 1. Operating costs based on 1997 actual costs. 2. Shadow wage of academic staff equals 1.0 times 1997 market wage. 3. Average economic life of structures and equipment is 30 years. 4. Capital costs to meet enrollment growth equal zero. 5. All technical assistance and related investment in information technology occurs in the first year. 6. Enrollment grows by 2.5% a year for four years (total of 10%). 7. Staffing requirements reduced by 3.5% each year for five years. Annex 20 Page 16 CASH FLOW ANALYSIS (USS Millions) Costs Without Project Costs with Project Net Flows year operating capital total operating capital total 1998 $59.20 $0.00 $59.20 $59.20 $11.80 $71.00 ($11 80) 1999 $60.68 $0.00 $60.68 $58.17 $20.30 $78.47 ($17.79) 2000 $62.20 $62.20 $57.15 $57.15 $5.05 2001 $65.31 $65.31 $56.15 $56.15 $9.16 2002 $66.94 $66.94 $55.17 $55.17 $11.77 2003 $66.94 $66.94 $54.20 $54.20 $12.74 2004 $66.94 $66.94 $53.25 $53.25 $13.69 2005 $66.94 $66.94 $52.32 $52.32 $14.62 2006 $66.94 $66.94 $52.32 $52.32 $14.62 2007 $66.94 $66.94 $52.32 $52.32 $14.62 2008 $66.94 $66.94 $52.32 $52.32 $14.62 2010 $66.94 $66.94 $52.32 $52.32 $14.62 2011 $66.94 $66.94 $52.32 $52.32 $14.62 2012 $66.94 $66.94 $52.32 $52.32 $14.62 2013 $66.94 $66.94 $52.32 $52.32 $14.62 2014 $66.94 $66.94 $52.32 $52.32 $14.62 2015 $66.94 $66.94 $52.32 $52.32 $14.62 2016 $66.94 $66.94 $52.32 $52.32 $14.62 2017 $66.94 $66.94 $52.32 $52.32 $14.62 2018 $66.94 $66.94 $52.32 $52.32 $14.62 2019 $66.94 $66.94 $52.32 $52.32 $14.62 2020 $66.94 $66.94 $52.32 $52.32 $14.62 2021 $66.94 $66.94 $52.32 $52.32 $14.62 2022 $66.94 $66.94 $52.32 $52.32 $14.62 2023 $66.94 $66.94 $52.32 $52.32 $14.62 2024 $66.94 $66.94 $52.32 $52.32 $14.62 2025 $66.94 $66.94 $52.32 $52.32 $14.62 2026 $66.94 $66.94 $52.32 $52.32 $14.62 2027 $66.94 $66.94 $52.32 $52.32 $14.62 Internal Rate of Return (Assuming 30 year asset life) 32% Internal Rate of Return (Assuming 20 year asset life) 32% Intermal Rate of Return (Assuming 10 year asset life) 28% Internal Rate of Return(Assuming 5 year asset life) 17% Assumptions: 1. Operating costs based on 1997 actual costs. 2. Shadow wage of academic staff equals 1.0 times 1997 market wage. 3. Average economic life of structures and equipment is 30 years. 4. Capital costs to meet enrollment growth equal zero. 5. All technical assistance and related investment in information technology occurs in the first year. 6. Enrollment grows by 2.5% each year for four years (total of 20%). 7. Rate of staffing reduction is half the expected rate of 3.5% . Annex 20 Page 17 Attachment 18-B SUMMARY OF SENSITIVITY ANALYSES (Estimates of Internal Rates of Return) Asset Life: 30 years 20 years 10 years 5 years Assumptions: Analyses at Market Prices Enrollment grows at 5.0% a year 49 49 47 40 Enrollment grows at 2.5% a year 38 38 36 27 Staff Reduction at Half Projected Rate And No Investment in Without Scenarios 32 32 28 17 Shadow Wage Equals 2.5 Times Market Wage 84 (Enrollment grows at 2.5 % a year) Annex 21 Page I REPUBLIC OF HUNGARY HUNGARY HIGHER EDUCATION REFORM PROJECT DOCUMENTS IN THE PROJECT FILE Altman, Robert, "Monitoring Indicators (Proposed Higher Education Program, Hungary)," November 21, 1996. Altman, Robert, "Policy and Institutional Matrix (Hungarian Higher Education Project)", December 2, 1996. Altman, Robert, "Project Design Matrix (Including Summative Impact Indicators)" December 26, 1996. Aradi, Zsolt, "Expert Opinion on "Policy Note," September, 1996. Benk6, Dr. Stephen E., "The History of Tuition in Hungary," November, 1996. Benko, Dr. Stephen E., "Preparation for the Higher Education Loan," March 1997. Benk6, Dr. Stephen E., "International Support for Hungarian Higher Education," June, 1997. Bakos, Karoly and Tamas Meszaros, Methodological proposal for definition of admission frames in professional fields, November 1996. Bakos, Karoly and Tamas M6szaros, " Possibilities of defining state financed student enrolment allocations by professional fields and institutions," January, 1997 Biedenweg, Dr. Frederick (Pacific Partners Consulting Group), Site Visit on Administrative Systems, November 10 - 18, 1996. Bojan, Robert and Balazs Poczkodi, "Educational (pre-) Savings System," November 11, 1996. Center for Higher Education Policy Studies, "Draft Terms of Reference for Management Development Program for Hungarian Higher Education," June, 1996. Chaszar, Julianna and Peter Darvas, eds., Overall Analysis of Issues in Higher Education, July 17, 1996. Claus, Frank and Peter Szivos, Proposal for a National Student Loan Plan for Hungary, December, 1996. Annex 21 Page 2 Coopers . Lybrand, "Agreements Reached at the October 29, 1996 Talks between Representatives of the World Bank and Coopers/Lybrand and Representatives of the Finance Ministry." Coopers (\ Lybrand, Financial controls applied to higher education institutions (HEIs), November 4, 1996. Coopers & Lybrand, Hungarian Higher Education Institutional freedom to manage resources (Final report for the World Bank, October 1996.) Coopers (\ Lybrand, Hungarian Higher Education Content and development of HEI business plans (Final report for the World Bank), April 1997.) Csirik, Jdnos, "Policy Note -- Hungary (revised)," September, 1996. Darvas, Peter, "Overall Analysis of Issues in Higher Education", April 29, 1997 Derenyi, Andras, "The introduction of the credit system to Hungary" (Version 2.2). February 18, 1997 Dinya, Laszl6, "State-of-the-art and strategic tasks" (White Paper), draft, November, 1996. Dinya, Laszl6, "The Financing of the Hungarian Higher Education Modernization Program in Connection with the World Bank Loan", Februaty 10, 1997 Feher, Csaba, Review of the Budgets and the Financial Reporting Systems at the Szeged Universitas Affiliates, March 31, 1997 Freny6, V. Laszl6. ed,, "integration as an element of the modemization of higher education," based on reports by Karoly Bakonyi, Jarnes Cofer and Laszl6 Dinya and the comments of the ad hoc Committee on Integration, December, 1995. Kovacs, Tibor, "University and college scholarships," Novem ber, 1996. Levy, Daniel, "Public Policy for Hungarian Private Higher Education," March, 1997. Morgan, Antony W., "Assesment of Institutional Development Plans (Szeged, Debrecen, Kecskem6t)," January, 1997 Morgan, Antony W., Timothy R. Warner, "Report on Site Visit to Szeged", September. 1996 Annex 21 Page 3 Morgan, Antony W., "Szeged University Institutional Development Plan", "Debrecen University Institutional Development Plan", "Kecskemet University Institutional Development Plan", April, 1997 Nagy, Judit D., Constraints on Development of Private Higher Education in Hungary - Report for the World Bank, (revised), November 30, 1996 Nagy, Judit D., Sector Analysis of Higher Education in Hunga - Report for the World Bank, February, 1997 Peterne Hat6 Marta, "Expected income from tuition in state-supported HEIs (not including medical and military institutions), 1996-2000," November, 1996. Pol6nyi, Istvan, "An Outline of Simplified and Consolidated (Training and Establishment Operating) Normative Financing," January 1997 Polonyi, Istvan, "A possible alternative for the steps and staging of the introduction of a complete normative financing of higher education," November, 1996. Polonyi, Istvan, A Review of the Economic Parameters of Higher Education in Hungary. Polonyi, Istvan, Costs incurred by and the effects of the Higher Education Program in Hungary, November, (1996). Polonyi, Istvan, Formula and Block Financing - the antecedents of the normative financing of Hungarian higher education, its present situation and future conceptions, June, 1996. Preddey, George, Normative Financing, June 26, 1996. Preddey, George, World Bank: Pre-Appraisal Mission to Hungary 2-13 December, 1996, Technical Report on: Implementation of normative financing, Proposed allocative mechanism, Proposed accountability mechanism, Proposed pilots for devolution of financial authority, December 13. 1996 Preddey, George, "Response to 'An Outline of Simplified and Consolidated (Training and Establishment Operating) Normative Financing,' by Istvan Polonyi (Ministry of Culture and Education, January 1997", January, 1997 Annex 21 Page 4 Preddey, George, Defining state-financed student enrolment allocations by field/HEI (outline for further development), February 26, 1997 Semj6n, Andras, "Attitudes towards Tuition Fee in Higher Education and Willingness to Pay for learning," December, 1996. Semjen, Andras, Overall Issues Analysis of Hungarian Higher Education with emphasis on its current status and legal basis, September, 1996. Semj'en, Andris, "Determining Total Admission to State-funded Higher Education and the Allocation of Students between of Studies: Some Policy Options" (draft, May 1997) Setenyi, Janos and Pter Drahos (Expanzi6 Consulting), The Development of the Higher Vocational Education System in Hungary, 1996 Budapest. Skrapits, Kriszta, "The Harmonisation of the Operations of the Higher Education Development Fund (FEFA) and the Higher Education Tenders Office (FPI)," November, 1996. Somogyi, Botond, "Report on Investments in Higher Education by the Ministry of Culture and Education," November, 1996. Varga., Julia, Private and Social Rates of Return to Education and to Higher Education by Field. Warner, Timothy and Dr. Frederick Biedenweg, "Report on Site Visit Regarding Hungarian Higher Education Information Systems", March 31, 1997 Institution Development Plan, Federation of the Debrecen Universities (University of Debrecen), 1996. Institutional Development Plan, Kecskemet, 1996. 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