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Concept Note for the Introduction of Expenditure Norms in the Education Sector; Lao PDR


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Concept Note for the Introduction of Expenditure Norms in the Education Sector; Lao PDR

  1. 1. CONCEPT NOTE FOR THE INTRODUCTION OF EXPENDITURE NORMS IN THE EDUCATION SECTOR Jean-Marc Lepain Public Finance Specialist and Intergovernmental Fiscal Advisor April 2010Based on the new Budget Law approved by the National Assembly in December 2006, andon the Prime Minister’s Implementation Decree of April 2008, the Ministry of Finance isplanning to change the budget formulation procedure by introducing budget norms. Theobjective of the present Concept Note is:(a) To define the general policy framework for the introduction of sector budget norms,including its relation to the more global objectives of the Budget Law such as promulgationof principles for better efficiency and transparency and introduction of a General PurposeGrant to finance all provincial recurring expenditures;(b) To identify issues associated with the education sector expenditure assignments such asvertical and horizontal responsibilities for service delivery, service financing, management(planning, budgeting, budget execution, project implementation, management control andreporting) and issuance of regulation;(c) To define the general principles for the architecture of sector budget norm formulae inrelation to provinces, districts and education facilities associated to these different levels ofservice delivery;(d) To define the articulation between education budget norms, block grants financingeducation facilities, and earmarked grants addressing specific issues such as poverty;(e) To present the best options for the selection of indicators, cost units and weighting ratiosto be used in the design of the sector budget norms formulae and ;(f) To identify data collection requirements for the regular updating of the budget normformulae and their application to budget formulation at the sub-national level; 1
  2. 2. 1. Background 1.1. Legal FrameworkThe new Budget Law considers the implementation of budget allocation norms essential as abasis for recommending targets for the budget allocation to each province and each sectorwithin the framework of the consolidated state budget and as a key component of a formulabased system of intergovernmental transfers. The Prime Minister’s Implementation Decree(No 25/PM 208) provides further guidance and gives to the Ministry of Finance full authorityfor developing (a) intergovernmental transfer mechanisms through general and earmarkedgrants and (b) budget norms for allocation of recurrent and investment expenditures in closecooperation with sector ministries, the Ministry of Planning and Investment and PACSA.Article 3 of the Revised Budget Law defines budget norms as “recommended targets indetermining allocations to sectors and localities based on characteristics, work standardsand specifics of each sector and locality” and Article 6 stipulates that “Budget allocations tosectors and localities shall be based on the budget allocation norms”.The Prime Minister’s Implementation Decree No 25/PM dated 14-02-2008 provides moredetails. Article 11 assigns the responsibility of preparing budget norms to the Ministry ofFinance and implementation will be conducted through another Prime Minister’s Decree.Article 19 of the Prime Minister’s Decree distinguishes between budget norms for recurrentexpenditures and budget norms for investments.Article 20 defines the two types of grants on which the Intergovernmental Transfer Systemwill be based. A “General Purpose Grant” will be established for the financing of provincialrecurrent expenditure. “Earmarked Grants” will be allocated for “the implementation ofprograms and investment projects assigned in addition by the Government” and for“resolution of emergencies and urgent issues relating to natural disasters, defense, security,and epidemics not included in the localities’ annual budget”. It is probable that the scope ofearmarked grants will need to be broadened to cover needs of some provinces in excess ofwhat they would received from a strict application of sector budget norms and aggregatedbudget norms.Article 23 mentions that a new revenue and expenditure assignment between provinces,districts and cities will be prepared by the Ministry of Finance. The article mentionsspecifically “(the) sharing of responsibilities for investments and development of generaleducation public schools, more specifically of kindergartens, primary and lower secondaryschools”. This article provides the legal basis for modifying, if necessary, the expenditureassignment and supervisory duties between District and Provincial Education Offices, and forintroducing school block grants. 2
  3. 3. Within the framework of the Budget Law, a new Prime Minister Decree will be issued for theintroduction of budget norms. It is assumed that a new decree will cover budget normimplementation for the Education sector and the Health sector. The decree will (a) modifysome of the technical provisions of the former decree if necessary, (b) provide budget normformulae at the disaggregate level for the two sectors and (c) reflect policy principles thatwill be established in more detail by the policy framework for budget norms andintergovernmental transfers and (d) clarify the expenditure assignment and modify ifnecessary responsibilities for planning, budgeting, managing and reporting the utilisation offunds allocated to each sector at the sub-national level.In a second stage, the Ministry of Finance will (a) extend the budget norm system to othersectors and (b) prepare aggregated budget norms that will become part of the system ofintergovernmental transfers.Additionally a Revised Education Law was promulgated in July 2007 which includes somereferences to budgeting and budget norms that might conflict with the Revised Budget Law.Article 55 of the Revised Education Law provides a definition of investment that mightinclude a large portion of recurrent expenditures as it includes “personal training,construction of building, contribution in vehicles or equipments, teaching-learning materials,other materials, teachers and learners’ privileges, etc.” Investment might also include anyexpenditure that contributes to “the development of education”. It seems that the objectiveof such an article is to allow the use of donor funding for recurrent expenditures other thansalaries.Article 56 of the Laws stipulates: “The Government shall list education as one of the firstpriorities and increase the rate of national education expenditure until reaching 18% andover. The provision of the allocation budget for regular administration of the schools,learning centres and education institutions shall be calculated with the number of learners(per person). The Government and local authorities have the responsibilities to strictlyimplement the expenditures of these allocated budgets” (unrevised provisional translationprovided by MOE).This article has been obviously drafted in reference to ESDF’s objective of raising the share ofeducation spending to 18% of the national budget by 2015 and to open the way for blockgrants. 1.2. Trends in Education FinancingFollowing the 1999- 2000 financial crisis there has been a sharp decline for the educationbudget from 14% to 7.2% of the national budget and from 3% to 1.4% of GDP. There have 3
  4. 4. been signs of recovery until FY 2005/06 when the education budget reached 14.8% of thenational budget, followed by two years of sharp decline and stabilization in FY2009/10 at11% of the national budget and 2.5% of GDP.However, if we eliminate the fluctuation in donor assistance the picture looks better. Donorfunded activities have declined from 60% of the sector budget in FY2005/06 to 37.2% inFY2009/10. While donor contribution represented nearly 2% of GDP in 2005/06, it is nowonly 1%. Recurrent expenditure is now representing 56.6% of the total budget and hasincreased by 23% this fiscal year. Total government sector financing has increased from1.24% of GDP five years ago, to 1.59% this fiscal year. However, although the trend ispositive, the ratio remains far below all other neighbouring countries except Myanmar.At the provincial level, on average, non-wage expenditures have dropped in FY2008/09 to13% of the education budget, with considerable across provinces going from 45% in Attapeuto 2% in Luangphrahbang. This budget decline has been partially offset by an increase inparental contributions which might represent 14% of the education spending according toassumptions made for the preparation of the Education Sector Development Plan.The Government of the Lao PDR considers that the introduction of non-wage budget normsand block grants offers a good opportunity to reverse that trend and with Nam Theun 2revenue and contribution the Fast Track Initiative (FTI) is confident that the past negativetrend will be corrected. It will be the responsibility of MOF’s Fiscal Policy Department to setobjectives compatible with the Government’s fiscal policy and with the objectives of the 6 thFive Year Plan.Additionally, MOF is committed to use a significant part of any additional treasury supportfunding received through The Second Programmatic Series of the Poverty Reduction SupportOperation (PRSO) to support the education sector. 4
  5. 5. EDUCATION BUDGET TRENDS 2005/06 2006/07 2007/08 2008/09 2009/10 (actual) GDP 33,222.00 38,409.00 43,287.00 50,325.58 54,100.00 GDP Growth 13.34% 15.61% 12.70% 16.26% 7.50% Population 5,595,066 5,732,649 5,873,616 6,000,379 6,144,388 Total State Budget 6,942.90 7,913.00 8,884.00 10,026.10 12,470.43 Budget Growth 13.97% 2.24% 12.86% 24.38% Budget/GDP 20.90% 20.60% 20.52% 19.92% 23.05% Education Budget (Central+Local) 1,026.40 1,155.80 1,140.53 1,088.30 1,366.33 Education/Total Budget 14.78% 14.61% 12.84% 10.85% 10.96% Education Budget/GDP 3.09% 3.01% 2.63% 2.16% 2.53% Education spending per capita 183,447 201,617 194,179 181,372 222,370 Recurrent Budget 377.90 421.80 552.44 628.73 772.75 Recurrent Budget/Sector Budget 36.82% 36.49% 48.44% 57.77% 56.56% Recurrent Budget Growth 11.62% 30.97% 13.81% 22.91% Recurrent Budget/GDP 1.14% 1.10% 1.28% 1.25% 1.43% Recurrent spending per capita 67.54 73.58 94.05 104.78 125.77 Investement Budget 648.50 734.00 588.09 459.57 593.58 Domestic Investment 33.6 40.2 47.1 54.5 85.2 Donor Funded projects 614.9 693.9 473.0 405.1 508.3 Donor Funded projects/sector Budget 59.91% 60.03% 41.47% 37.22% 37.20% Donor Funded projects/GDP 1.85% 1.81% 1.09% 0.80% 0.94% Investment/Sector Budgdet 63.18% 63.51% 51.56% 42.23% 43.44% Government Sector Financing 411.54 461.96 599.56 683.19 858.00 Government Sector Financing / GDP 1.24% 1.20% 1.39% 1.36% 1.59% 2. General Policy Framework for Budget Norms and Intergovernmental TransfersThe development of budget norms for the education sector has to be put in the perspectiveof “The Policy Framework for the Implementation of a Budget Norm System and a System ofUnconditional and Conditional Intergovernmental Transfers” developed by the Ministry ofFinance for guiding the development of sector norms.The objectives of the budget norm system are defined as follows: (1) Ensure that the rational distribution of fiscal resources across sub-national jurisdictions is done in a transparent equitable manner; 5
  6. 6. (2) Ensure that fiscal resources allocated to sub-national jurisdictions (provinces and districts) are administered in line with the Government development objectives. (3) Ensure that all provinces and districts receive sufficient funding to deliver public services with equal standards according to the mission given to them by the central Government and in a manner that takes into account the characteristics of the population to be served and the cost of service delivery in each geographic area; (4) Improve financial management at the local level, including planning, budget formulation, budget execution and reporting;When applied to the education sector these principles mean:  Correcting existing vertical imbalance will require the introduction of a sector ceiling that will apply to both the central government and the provinces;  Equity of fund allocation between provinces and districts must be ensured;  Mechanism for a better alignment of sub-national planning and budgeting with national priorities and policies must be put in place;  Other aspects of the expenditure assignment must be clarified;  The Government must ensure that sufficient funding is channelled to local schools and educative institutions for them to accomplish their mission within the constraints of the fiscal capacity of the provinces and of the central Government.  The introduction of budget norms and block grants should be conducive to the complete waiving of user fees in primary schools. For other types of schools (pre- schools, secondary schools, etc.), a clear policy will be defined and put in place, including rules for managing and reporting collected funds.The system will use three types of norms: (a) Sector budget norm(s) used for the calculation of each sector budget for each province; (b) Budget norms that provinces will use for allocating funds by economic categories to the various types of schools and educational programmes; (c) Budget norms that will apply to line-ministries at the central level and that will not be part of the Intergovernmental Transfer System.The objective is to develop a transfer system that will be based on the followingcomponents: (a) One single unconditional transfer covering the total recurrent budget (General Purpose Grant). 6
  7. 7. (b) A number of conditional grants to cover additional recurrent expenditure for a limited number of provinces such as: (i) Provinces having sectors with structural expenditure needs above the level of funding provided by the unconditional grant; (ii) Provinces facing temporary revenue shortfall; (iii) Provinces having unexpected expenditure needs due, for example, to natural calamities (c) Conditional grants for financing large investments or specific programmes managedvertically but implemented at the provincial level.The calculation of the General Purpose Grant will be based on an aggregated norm formulathat will reflect the different sector components of the grant. The total amount of theGeneral Grant will not be less than the aggregated amount of sector budgets based onbudget norms.The general purpose grant will be either the result of the aggregation of all sectoral budgetnorm formulae or a more aggregated formula that will not necessarily reflect the differentsub-formulae. 3. Scope of budget normsThere will be two sets of budget norms: one for provincial budgets and one for the centralbudget of MOE.Regarding the provincial budgets, the budget norm system will cover all programmes. Thisincludes the following MOE’s programmes: 1. Kindergarten and Pre-primary (Early Childhood Education) 2. Primary School 3. Lower Secondary School 4. Upper Secondary School 5. Non-Formal Education 6. Technical and Vocational Education 7. Education administration 8. Higher education 9. Teacher trainingFor the purpose of budget norms, programmes will be aggregated in three sets: 7
  8. 8. Set 1: Early Childhood Education + Primary Education + Secondary Education + Non- Formal education Set 2: Technical and Vocational Education Set 3: Higher Education + Teacher TrainingNon-formal education has been added to set 1 because its cost unit is close to primaryeducation. However, MOE at the moment is unable to provide statistics on non-formaleducation enrolment and it is possible to use the formula without taking into account thisnumber.At this stage it was decided to join higher education and teacher training together becausethey have similar cost unit. However, user fees play a role in financing university andtherefore we expect that higher education might have the same cost unit as vocationaleducation.Cost of education administration will be covered by the provincial budget calculated on thebasis of budget norm formula without having a component in the formula. Cost of educationadministration will have to be deducted from total provincial education budget before thebudget can be disaggregated into block grants.In a first stage the introduction of budget norms will cover only non-wage expenditures forMOE central budget as well as provincial education budgets. However, a model will bedeveloped in parallel to prepare the next stage combining both wage and non-wage with theobjective of preparing comparative costing and identifying potential issues.Non-wage expenditures are defined as all line-items of chapter 12 of the budgetnomenclature and line-items of chapter 16. Non-wage expenditure for the education sectoralso includes development of education (13.03.01.). More discussions are required todetermine if “other unforeseen expenditures” (Chapter 15 of the budget nomenclature)should be included. The present view is that “unforeseen expenditure” should be managedcentrally at the provincial level without any allocation to any sector. 4. Sector ceilings and fiscal policy planningThe development of budget norms must start from the calculation of an earmarked fiscalenvelope. Determining the size of the fiscal envelope available for non-wage budget normsand for aggregated norms requires sector ceilings which are normally based on the nationalMedium Term Fiscal Framework (MTFF). In the absence of a formal MTFF, sector ceilings canbe determined by percentage of GDP and percentage of the total national budget. However, 8
  9. 9. MOF’s Fiscal Policy Department is already engaged in the process of developing a MTFF andwe can expect that it will become operational by the time budget norms are implemented.Budget Norms Formulae will be used to ensure a better linkage between planning andbudgeting. It will link together the different planning and budgeting tools.  MOF will be responsible for developing and maintaining the Medium Term Financial Framework that will be used to determined sector ceilings.  The education sector ceiling will be disaggregated into two sub-ceilings: one for the Education Ministry that will be binding, and one for provinces that will be indicative.  MOE will be responsible for preparing a costed and prioritized multi-year budget forecast based on its own Medium Term Expenditure Framework resulting from an expenditure need assessment carried out in every province, following the methodology already put in place on a pilot project basis.  At the beginning of the budget preparation cycle, MOF will communicate to MOE the annual sector ceiling. On the basis of that ceiling MOE will revise its Medium Term Expenditure Framework (MTEF).  Based on the MTEF and the sector ceiling MOF will prepare every year the budget norms using the same formula structure.In the absence of a MTFF, MOF’s Fiscal Department will need to project sector ceilingsstarting from FY 2010/11 as the reference year, up to FY 2013/14.The introduction of sector ceilings in Lao PDR is a difficult issue because of the changes itrequires in current practices of budget formulation and the contradiction between provincialautonomy and the fiscal discipline required for the implementation of national policies. TheMinistry of Finance will need to move gradually away from the current budget preparationmethodology based on economic categories to start allocating budget on a sector basis withthe possibility to isolate within the budget, a number of specific programmes requiringearmarked funding. A better synchronisation between the budget formulation cycle at thenational level and at the provincial level will be necessary (the present time lag is of fivemonths, despite the fact that provinces start their planning process much earlier than line-ministries). Changes in budget preparation methodology at the provincial level will be alsonecessary.The existing constraints imply that sector ceilings needs to be disaggregated into two sub-ceilings, one for the Education Ministry at the central level and one for the province. As theprovinces, under the existing budget law, are free in their allocation of funds to the sectors,and as budget norms are purely indicative, there is no mechanism that can ensure that thetotal of provincial allocations to the education sector will fit within the sector ceiling. As aconsequence the education sector sub-ceiling for central spending will be a binding ceilingwhile the sub-ceiling for provinces will be an indicative ceiling. 9
  10. 10. In that context, budget norms will become the most important instrument of fiscal disciplineand the Government’s meeting or not meeting its targets will depend on how effective thefiscal discipline is at the provincial level. Disaggregation of the Education Sector Ceiling Education Sector Ceiling Central Ceiling Provincial Ceiling (binding) (indicativeFor the sake of budget norm preparation, in the absence of a MTFF, MOF’s FiscalDepartment will project sector ceilings starting from FY 2010/11 as the reference year, up toFY 2013/14. These sectors ceilings will be entered in the macro-fiscal model that will beused for testing and selecting budget norm formulae. The ceilings at this stage are purelyindicative and should not represent a commitment from MOF.Based on sector ceilings, MOF will recalculate each year’s budget norms using its macro-fiscal model. The formula structure and the various ratios will remain unchanged. Only thefix amount per student will be adjusted. 10
  11. 11. MTFF Fiscal Planning Process Sector Ceiling Provincial Ceilings MTEF Budget Norms Provincial Budget Sector Provincial Plan Cost Units 5. Sector Assessment and Education DevelopmentOverall progress in the education sector, despite budget constraints, is impressive. Broadly,during the past five years there are more children enrolled in schools, more classes andschools have been open and more teachers have been recruited and trained. Howeverprogress on the qualitative aspect of education has not been realized as fast as quantitativeaspects.Problems of the education sector are both structural and local. Because budget norms willbe used for determining local budget, it is important to assess whetherthey are the properinstrument to address local issues or if other instruments, such as special grants should bedeveloped. This problem centres mostly on the relation between poverty and educationdevelopment. This question is also linked to the relation between local planning and theEducation Sector Development Framework (ESDF) that will be addressed in the nextsections. 5.1. Sector Structural Issues  Enrolment rates, which had been growing steadily during the past decade, still need to grow further, especially among ethnic minorities and in remote areas. Growth will 11
  12. 12. be moderate in Primary education until 2013 when primary school enrolment is expected to stabilize, but enrolment growth will remain strong for secondary education. MOE is also planning strong enrolment growth in early childhood education, but reaching the objectives will be difficult due to fiscal constraints.  Gender balance in enrolment and drop-out rates remain important issues.  Integration of ethnic minorities in the education system remains a challenge.  Emphasis in the forthcoming years must shift from enrolment to better education quality, especially in primary education.  Lao PDR still has a low completion rate, notably in primary and secondary education. Repetition and drop-out remains high, especially for boys.  There are widespread disparities in education access, especially in the poorest districts and in areas with high percentage of ethnic minorities.  The number of manuals in schools remains insufficient and access of student to books of general interest beside manuals is an important issue.  Although important progress has been made in the compilation and processing of statistical data at the national level, provinces do have the tools and the capacity to analyse statistical data and to relate it to their policy. 5.2. Sector Budgetary issuesThe sector structural issues are linked to budgetary issues and cannot be addressed properlyuntil the sector fiscal problems have been solved.  The portion of the general budget allocated to the education sector, while improving, remains low compared to other countries of the region or countries with a similar level of development.  Budgetary flow to local schools remain insufficient to reach MDG objectives  The mismatch between national priorities set out by MOE and budget allocation by provinces highlight an important weakness of the public finance management system.  Salaries and investments absorb most of the sector fiscal envelope  Teachers salaries remain too low to attract quality people and to retain them  Too high a proportion of education spending is made of capital spending, most of it financed by donors.  Provincial authorities do not have the planning and management capacity to relate educational objectives to the allocation of fiscal resources or to monitor the benefits or impact of expenditures.  Budget cuts made by MOF are not policy based. They are made by economic categories. MOF does not avec a sector approach of provincial budgets. 12
  13. 13.  Expenditure for Non-Formal Education (for literacy and skills development), as a proportion of total recurrent spending still needs to increase significantly. 5.3. Horizontal ImbalanceHorizontal Imbalance, the disparity in fund allocation between provinces, has always beenhigh in Lao PDR. Its correction is one of the objectives of the introduction of budget norms.The table below shows a trend toward a reduction of horizontal imbalance.From FY2005/06 to FY2009/10 the imbalance index has been reduced from 2.9 to 1.9. Itmeans that the province that allocated the highest budget per capita to the education sectorallocated 1.9 times more per capita than the province with the lowest allocation per capita,against 2.9 times more two years ago.However, when measured for the recurrent budget, if we do not take into account thespecial case of Bolikhamay, the imbalance index has remained stable at 2.0 showing that theadjustments result from a better policy in investment and allocation of donor funding. FY2005/06 FY2008/09 FY2009/10 Total Recurrent Horizontal Horizontal Total Recurrent Total Recurrent Spending Horizontal Spending Imbalance Imbalance Spending Horizontal Spending Horizontal Spending Horizontal Spending HorizontalProvinces per Imbalance per Index Index per Imbalance per Imbalance per Imbalance per Imbalance capita Index capita 1 2 capita Index capita Index capita Index capita IndexVientiane Capital 49,663 1.0 44,712 4.2 1.2 81,713 1.2 73,126 1.1 131,133.80 1.43 73,697.63 1.00Xayabury 97,691 2.0 65,998 6.1 1.7 132,130 1.9 100,346 1.5 101,966.22 1.11 92,775.92 1.26Bolikhamxay 75,764 1.5 10,767 1.0 N.S. 101,745 1.5 85,407 1.3 108,480.88 1.18 104,555.87 1.42Vientiane Pro. 100,751 2.0 79,836 7.4 2.1 118,107 1.7 113,048 1.7 108,386.35 1.18 102,225.67 1.39Champasak 65,013 1.3 60,839 5.7 1.6 93,181 1.3 84,141 1.3 123,249.63 1.34 118,322.71 1.61Xiengkhuang 91,635 1.8 69,635 6.5 1.8 125,393 1.8 120,697 1.8 106,894.24 1.16 86,801.59 1.18Khammouane 73,537 1.5 45,404 4.2 1.2 174,151 2.5 106,121 1.6 141,436.21 1.54 134,913.01 1.83Luangphrabang 82,993 1.7 58,266 5.4 1.5 101,683 1.5 98,427 1.5 96,899.38 1.06 91,114.91 1.24Oudomxai 57,871 1.2 38,808 3.6 1.0 129,526 1.9 77,284 1.2 148,664.64 1.62 123,022.12 1.67Savannakhet 59,165 1.2 51,396 4.8 1.3 100,982 1.4 82,782 1.2 157,369.81 1.42 134,185.36 1.82Bokeo 89,147 1.8 54,114 5.0 1.4 100,911 1.4 91,358 1.4 163,902.73 1.48 126,336.96 1.71Houaphan 106,366 2.1 69,983 6.5 1.8 186,489 2.7 109,590 1.6 110,455.24 1.00 102,570.91 1.39Luangnamtha 118,053 2.4 70,889 6.6 1.8 203,739 2.9 134,754 2.0 137,373.83 1.24 126,799.41 1.72Xekong 145,855 2.9 78,509 7.3 2.0 168,767 1.3 119,690 1.8 148,635.95 1.62 147,997.12 2.01Attapeur 72,075 1.5 51,553 4.8 1.3 145,140 1.1 117,855 1.8 91,765.72 1.00 87,601.97 1.19Saravanh 61,848 1.2 38,423 3.6 1.0 69,673 1.0 66,552 1.0 170,364.90 1.86 137,674.45 1.87Phongsaly 77,982 1.6 64,681 6.0 1.7 125,635 1.8 110,814 1.7 156,015.09 1.70 152,366.92 2.07AVERAGE 83,842 1.7 56,107 5.2 1.5 126,998 99,529 1.5 2,202,994.58 1,942,962.51The differences in the imbalance index across provinces might not only reflect differentlocal sector priorities, but also difference in compensation of teachers and differences inthe cost of service delivery. Disparities in recurrent spending allocation reflect for a greatpart the difference in teacher compensation policy across provinces. 13
  14. 14. 5.4. Education Development IndexMOE has prepared an Education Sector Development Plan which is based on the EducationFor All Framework for Action adopted by the international community in 2000 duringUNESCO Conference held in Dakar. This document commits governments to achievingquality basic education for all by 2015, with particular emphasis on girls schooling. In orderto measure progress toward the EFA objective, MOE has started to measure the EducationDevelopment Index (EDI) which will become the most important performance indicator tomeasure progress in the education sector.The Education Development Index (EDI) reflects four of the six EFA goals: universal primaryeducation, adult literacy, quality of education and gender parity. Each of these goals has anindicator and the EDI is the arithmetic mean of the observed value of all four indicators.Since the four indicators are expressed as percentages; the EDI value can vary from 0% to100% or, when expressed as ratio, from 0 to 1.  Universal primary education is measured by the total primary net enrolment ratio (NER) which reflects the percentage of primary school-age children who are enrolled in either primary or secondary schools.  Adult literacy is measured by the Adult Literacy Rate (ALR) measuring the percentage of people over the age of fifteen who can read.  Quality of education can be measured by several proxy indicators the percentage of students who complete grade 5 also called the ‘survival rate to grade 5’.  Gender parity is measured by a composite index, the gender-specific EFA index (GEI) that takes into account two sub-goals: gender parity per se (achieving equal participation of girls and boys in primary and secondary education) and gender equality (ensuring that educational equality existing between boys and girls).The measure of the EDI in Lao PDR produces very optimistic results when compared with theobjective social-economic situation observed in the field. This is not an uncommon situationin developing counties as the measure of the EDI different components raises considerablemethodological issues. Overestimation of the EDI is due to several factors:  The enrolment rate in primary education does not reflect necessarily the attendance rate.  There is a lack of consensus on the definition of primary school completion 14
  15. 15.  The measure of the literacy rate is based on conventional methods not using test. International experience shows that in developing countries when methods using tests are substituted by conventional methods, the literacy rate drops.However, based on the assumption that the same methodology has been used across all Laoprovinces, the methodological weaknesses of the EDI do not affect comparisons betweenprovinces.EDI has been measured in FY2005/06 and FY2008/9. During these three years importantprogress has been made. The lowest ranking province in FY2005/06, Saravanh, has movefrom an EDI of 0.61 to 0.76. If we exclude Vientiane Capital, improvements, in general, rangefrom 7 base points (Houaphan) to 25 (Oudomxay which moved from the 15 th position to the9th). 5.5. Relation between the Education Development Index and the Human Poverty IndexDetermining the relation between the Education Development Index (EDI) and the HumanPoverty Index (HPI) is an important step in defining which factors could be used in thebudget norm formula. Surprisingly the relation between the two indexes appears relativelyweak as shown in the table below. 15
  16. 16. COMPARISONS BETWEEN HPI AND EDI Poverty EDI EDI Provinces Index 2005/06 2008/09 Vientiane Capital 1.17 0.91 0.96 Xayabury 1.25 0.85 0.93 Bolikhamxay 1.29 0.82 0.92 Vientiane Pro. 1.19 0.85 0.92 Champasak 1.18 0.79 0.88 Xiengkhuang 1.42 0.79 0.88 Khammouane 1.34 0.73 0.86 Luangphrabang 1.23 0.71 0.85 Oudomxai 1.45 0.60 0.85 Savannakhet 1.43 0.71 0.85 Bokeo 1.21 0.67 0.81 Houaphan 1.52 0.73 0.80 Luangnamtha 1.23 0.67 0.78 Xekong 1.42 0.66 0.77 Attapeur 1.44 0.64 0.76 Saravanh 1.54 0.61 0.76 Phongsaly 1.51 0.62 0.71 AVERAGE 1.32A number of rich provinces perform surprisingly low in terms of education. This is the case ofBokeo that ranks 4th on HPI but 11th on EDI, Luangphrabang and Luangnamtha that rank 5thon HPI but rank respectively 8th and 13th on EDI.A number of poor provinces perform very well in terms of education. It is the case ofXiengkuang that ranks 11th on HPI but 6th for EDI. One explanation is that Lao PDR remains chiefly a rural country where agricultural activitiesare important and where the level of living of the population depends mostly on geographicconditions, such as the abundance of water and fertile land. Additionally the existence of aborder with Thailand and China also plays an important role by allowing the development oftrans-border trade and the development of small industries. For the time being, thesefactors are not very much influenced by the level of education. However education plays animportant role in the transition from a rural society to a more urban society. 16
  17. 17. 5.6. Relation between education development and level of spendingThe same way that there is a weak correlation between the Human Poverty Index and theEducation Development Index, there is a weak correlation between education developmentas measured by EDI and the amount of spending per capita. Of the three factors thatcontribute to education development, namely good policy, good management and sufficientfunding, policy and management appear more important than funding. BUDGET ALLOCATION PER CAPITA AND CHANGES IN EDI Total Recurrent Investment Total Recurrent Investment Growth Growth Growth EDI Spending Spending Spending EDI Spending Spending Spending EDI Total Recurrent RecurrentProvinces 2005/06 per per per 2008/09 per per per Differential Spending Spending Spending capita capita capita capita capita capita per cap. per cap. per cap.Vientiane Capital 0.91 49,663 44,712 4,951 0.96 81,713 73,126 8,587 0.05 64.5% 63.5% 73.4%Xayabury 0.85 97,691 65,998 31,693 0.93 132,130 100,346 31,784 0.08 35.3% 52.0% 0.3%Bolikhamxay 0.82 75,764 10,767 64,997 0.92 101,745 85,407 16,338 0.10 34.3% 693.2% -74.9%Vientiane Pro. 0.85 100,751 79,836 20,915 0.92 118,107 113,048 5,059 0.07 17.2% 41.6% -75.8%Champasak 0.79 65,013 60,839 4,174 0.88 93,181 84,141 9,040 0.09 43.3% 38.3% 116.6%Xiengkhuang 0.79 91,635 69,635 22,000 0.88 125,393 120,697 4,696 0.09 36.8% 73.3% -78.7%Khammouane 0.73 73,537 45,404 28,133 0.86 174,151 106,121 68,030 0.13 136.8% 133.7% 141.8%Luangphrabang 0.71 82,993 58,266 24,727 0.85 101,683 98,427 3,256 0.14 22.5% 68.9% -86.8%Oudomxai 0.60 57,871 38,808 19,063 0.85 129,526 77,284 52,242 0.25 123.8% 99.1% 174.0%Savannakhet 0.71 59,165 51,396 7,769 0.85 100,982 82,782 18,200 0.14 70.7% 61.1% 134.3%Bokeo 0.67 89,147 54,114 35,033 0.81 100,911 91,358 9,553 0.14 13.2% 68.8% -72.7%Houaphan 0.73 106,366 69,983 36,383 0.80 186,489 109,590 76,899 0.07 75.3% 56.6% 111.4%Luangnamtha 0.67 118,053 70,889 47,164 0.78 203,739 134,754 68,985 0.11 72.6% 90.1% 46.3%Xekong 0.66 145,855 78,509 67,346 0.77 168,767 119,690 49,077 0.11 15.7% 52.5% -27.1%Attapeur 0.64 72,075 51,553 20,522 0.76 145,140 117,855 27,285 0.12 101.4% 128.6% 33.0%Saravanh 0.61 61,848 38,423 23,425 0.76 69,673 66,552 3,121 0.15 12.7% 73.2% -86.7%Phongsaly 0.62 77,982 64,681 13,301 0.71 125,635 110,814 14,821 0.09 61.1% 71.3% 11.4%AVERAGE 83,842 56,107 27,735 126,998 99,529 27,469 51.5% 77.4% -1.0%Another explanation could be that the EDI captures only partially the real improvement ineducation quality.The most significant number is the recurrent expenditure per capita. The most populousprovinces; Vientiane Capital, Champassak, and Savannaketh are those spending the less percapita without any noticeable deterioration of their education system. Poor provinces likePhongsaly, Attapeu, Xekong and Houaphan spend more than the national average with goodprogress of their EDI except for Houaphan. By contrast, Saravanh is still very below thenational average but has shown good progress of its EDI (+15 base points).Xiengkuang is a relatively poor province (HPI: 1.42) but ranks 6th in terms of EDI performance(EDI: 0.88) with a progression of 0.9 base points over three years. The province has one ofthe highest level of recurrent spending with 120,700 kips per capita.The counter-example is Luangnamtha that is a relatively rich province (HPI: 1.23), but ranks13th in terms of EDI performance. The province has had good progression of its EDI (11 basepoints) with a very high level of recurrent spending reaching 134,750 kips per capita.A few conclusions can be drawn from that table: 17
  18. 18.  Poor provinces, with only a few exceptions have higher service delivery cost for education  The level of recurrent spending per capita is not the main factor that explains 6. Expenditure Need Assessment and sector planningThe Ministry of Finance has decided to opt for a top-down approach of budget normsreflecting the fiscal capacity of the Government. However, as seen in the section on fiscalpolicy planning, we expect that sector ceilings will take into consideration both the fiscalconstraints existing at the central level and the financing needs existing at the local level.In the absence of a full-fledge expenditure need assessment or of an inventory of local needsbased on multi-year plans such as those required by the MTEF, it has been decided to useThe Education Sector Development Framework (ESDF) as a substitute for the expenditureneed assessment. However this approach gives only a partial view of local needs. The ESDFFinancial Model is a planning tool based on a top-down macro-economic approach that doesnot integrate the fiscal capacity of the Government nor the specific situations that mightexist at the local level. It is not a budgeting tool but the best substitute we have until theMTEF is fully developed.As a budgeting tool the ESDF Model displays a number of weaknesses:  It is a macro-economic approach and the model cannot be disaggregated by province;  The model is not prioritized and does not reflect the overall fiscal capacity of the country;  Absorptive capacity of the provinces is not taken into consideration;  Provinces do no implement the plan at the same pace and human resource is an important constraints. It is not possible to measure the achievement of the provinces against the model.  The ESDF model does not distinguish between the different sources of founding and in particular the issue of recurrent expenditures financed by donors. We will address this issue in the next section of the expenditure assignment.  The ESDF Financial model requires raising the education share of the national budget from 12% in FY2009/10 to 18% in FY2015/16 without indication if this level is attainable. Even after this very significant effort there will be a financing gap in the amount of 242.6M USD.It is clear that the introduction of budget norm in FY2010/11 will require a betterprioritization of the ESDF Financial Model. MOE will reach this objective through the 18
  19. 19. preparation of a three year costed and prioritized budget plan. Cost units of this budget planwill reflect a fiscal sustainable level of budget norms.This prioritized budget plan should take into consideration three new factors: (i) revenuefrom Nam Theun 2 do, (ii) donor funding made available through the Fast Track Initiative(FTI), (iii) additional funding made available through the Poverty Reduction SupportOperation (PRSO) |[under negotiation]. 7. Integrating the ESDF in MOF’s fiscal policyAs a planning tool the ESDF financial model tells us what it would cost to implement MOFstrategy. It tell us how many teachers must be recruited and trained, how many schoolsmust be built, how much should be invested in renovation, what programme must beexpended, etc.MOE considers that the ESDF having been approved by the Prime Minister and its objectiveof raising the share of education spending to 18% of the Government’s Budget has beenwritten into the Education Law should be considered binding on MOF. However the situationis complicated by the fact that there is a growing gap between the model and reality.Defining the status of ESDF and its implication is an important fiscal policy issue that needsclarification. The present view of MOF is that the ESDF Model, not taking into considerationthe Government’s fiscal capacity, should not be considered as binding. MOF currently doesnot have the tools to integrate ESDF into its fiscal policy and developing these tools shouldbe considered as a high priority assignment for defining a sector financing strategy.The issue should be addressed in two steps. The first step consists in analysing the financialgap of the model and prioritizing its objective. The second step consist in preparing a threeyear prioritized budget plan approved by MOF and revised every year that will be based onactual enrolment figures and take inflation into account. 8. Sector Financing StrategyThe ESDF Model is based on a fiscal strategy consisting in raising the share of educationspending in the Government’s budget from 6.7% in FY2007/08 to 18% in 2015/16. Even afterthis important effort, the model still have an important cumulated shortfall estimated at2,659 billion kips (243.5 M USD) over seven years. The real gap is in fact more importantbecause the model does not integrate inflation. 19
  20. 20. The ESDF Model was designed with an important fiscal gap even after increasingsubstantially the share of education spending in the Government’s budget.Nam Theun 2 revenue projections have already been integrated in the Government’s fiscalpolicy but are clearly insufficient for reaching the ESDF objectives. FTI funds will play a moreimportant role. 65M USD will be made available over a period of three years (2010-2112),but these funds cannot be used for routine recurrent expenditure. Additionally, it isexpected that some of the funds granted by the donors for General Budget Support (GBS)will be allocated to the education sector through the Poverty Reduction Support Operation(PRSO). The PRSO agreement includes a variable tranche related to specific education andhealth sector indicators. These additional funding ensures that the very limited expectedcost of expenditure equalization and implementation of budget norms can be easilyabsorbed. The performance indicators will track the level of recurrent expenditure, theprovision of textbooks, recurrent financing for schools in priority districts, and thecomprehensiveness and timeliness of EMIS data and reporting.The way the budget norm system has been designed takes into full consideration the policyobjectives of the ESDF. This includes the use of block grants for financing schools, freedistribution of books for poor districts and school feeding programmes and scholarshipprogrammes as poverty alleviation instruments.The Ministry of Education and the Ministry of Finance note that in the future it will benecessary to develop better techniques for expenditure need assessment reflecting localneeds and priorities. 9. Capacity BuildingIt should be underlined that financial resource is not the only requirement for ESDFimplementation. Capacity building is also a major element, and the lack of human resourceshas been one of reasons for slow ESDF implementation in the past. Capacity buildinginitiatives will have to be prioritized using the Capacity Building Framework of the ESDF. Abasic understanding of ESDF across all MOE’s Department and Provincial Education Offices isof the utmost importance to extract priority needs and align them to the next Five Year Plan.The introduction of block grants will require another significant investment in long termcapacity building. Training mechanism should cover all aspects of the managementdimension of the expenditure assignment such as planning, budgeting, accounting reportingat all levels of the education organisation. 20
  21. 21. 10. Policy regarding parental contributionThe objective of the Government is to phase out parental contribution for elementaryschools in FY2011/12 and lower secondary schools in FY2012/13. The final decision will becoordinated with the introduction of budget norms and block grants with the intention thatblock grant will compensate schools for the waiving of parental contribution.The policy for parental contributions will be formalized into a joint regulation issued by MOFand MOE. For schools not benefiting from the waiving of parental contribution such as pre-schools and upper secondary schools, user fees will be budgeted, recorded in the accountingsystem and, above a certain cash limit, deposited into a bank account, especially in urbanareas. In rural areas where there is no access to banks they will be considered as ‘communityfunds’. MOF in consultation with MOE will prepare a policy paper to set more preciseobjectives and later an implementation decree will be issued. 11. Articulation between budget norms and block grantsBlock grants, if implemented for all education levels should represent more than 90% of thenon-wage provincial budget for education. However, block grants will be implementedgradually, starting with primary school in FY2010/11 or FY2011/12 and to be extended to alltypes of schools (pre-schools, lower and upper secondary schools, vocational school, etc.) inFY2011/12 or FY2012/13. The reason for a gradual implementation is that we must be surethat the total of block grant to be delivered will not exceed either the total of the provincialnon-wage budget for education. The block grant will be mostly driven by the number ofregistered students with a minimum allocation for small schools (see section 11). As we donot have data to determine the number of schools that might benefit from the minimumallocation, it is not possible at this stage to calculate precisely the envelope required for allschools. There are also some elements of uncertainty regarding the cost of books that mustbe integrated in the block grantsBlock grant can be implemented in two different ways: either centrally by MOE as a specificpurpose grant in accordance with Article 20 of the budget law or by the provinces as anapportionment of their education budget calculated in the basis of a budget norm formula.In both cases each school grant will be calculated using the same block grant formula.It should be noticed that the implementation of general block grants does not preclude theintroduction of more specific grants targeting educationally disadvantaged districts thatcould be used for specific programmes such as school feeding programmes, scholarshipprogrammes and other programmes targeting ethnic minorities, remote areas, etc. As wewill see in sections 12 and 14, rather than introducing variation in budget norms and block 21
  22. 22. grant formula, these situations are better addressed either by an education improvementgrant or by specific grants linked to specific programmes. The education improvement grantand Donors/FTI funded grant will be managed centrally by MOE.The Ministry of Finance has a preference for the second option but recognizes that a finaldecision will require further discussion with donors as it involves the use of Nam Theun 2funds and of TFI funding. Provinces need also to be associated to the final decision. In casethat an agreement on this point cannot be reached before June 2010, the implementation ofblock grants for elementary school will be delayed until FY2011/2012.At this stage of the discussion, MOF expresses a strong preference for a decentralised optionthat will leave the apportionment of block grants to the provinces for several reasons:  Considering that provinces have little control over the wage budget and that block grants are likely to represent more than 90% of the education non-wage recurrent budget, this amount to a de facto recentralisation of the education budget which is in contradiction with the spirit of the budget law.  Data for the allocation of block grants are only available at the district level. A complete centralisation of data, school by school will be a huge enterprise that cannot be managed within a short span of time.  Managing centrally block grants will require a dedicated complex organization that will be expensive and unlikely to be put in place in a short period of time. It will include increase in which MOE has little expertise.If block grants are introduced centrally, a budget norm formula will still be necessarybecause block grants will cover only primary schools. However when block grants will coverall types of schools, the budget norm formula will become redundant and it will be necessaryto remove it.If block grants are managed at the provincial level, it will be important to determine thesource of funding which can involve funds passing through the investment budget. A non-conditional grant could be given to finance the portion of budget norm base budget neededfor block grants. Even if MOE will have a certain control on the grant, it would be better tolet provinces calculate the total amount of the grant as part of their budget request. 12. Budget norm and poverty reduction strategyAn important issue with the development of the budget norm formula is the povertyreduction dimension. 22
  23. 23. There are 47 poor districts in the Lao PDR but 53 educationally disadvantaged districtsidentified by MOE using an Education Index which seems to be a better indicator than theHuman Poverty Index. There is no doubt that disadvantaged districts should receive moreattention from MOE which might translate into additional cost for service delivery. If weexclude the case of Saravanh, the five provinces with the lowest EDI spend 27% more percapita on education than the six most advanced provinces and 30% more than the group offive intermediary provinces.When integrating the poverty reduction dimension in a budget norm formula, a number ofissues should be looked at:  Lao children deserve the same quality teaching wherever they live. Poor areas do not need necessarily more books, more notebooks and more teaching materials. Money should not be allocated in the name of poverty unless we are certain that it will be used for remedying the consequences of poverty in the education sector in an efficient manner.  Poverty measured at the provincial level is not a good indicator. Poverty is essentially a local phenomenon that should be measured and addressed at the district and village level. As a result a budget norm formula does not appear as a good instrument to address all types of poverty issues.  Allocation of funds for poverty reduction must aim at several objectives: (1) to provide incentives to family for sending children to school, (2) to offer additional compensation for teachers for accepting positions in poor areas or for providing additional teaching to children with special needs, (3) to allow education provincial and district offices to give more support to poor areas, (4) to buy additional pedagogical materials to address certain cultural issues linked to poverty.  Allocation of funds for poverty reduction should be clearly and strictly linked to certain programmes and activities with measurable outputs.  The current system of budgeting in Lao PDR does not allow the mixing of government and donor funding for recurrent activities.Of the four objectives of poverty reduction in the education sector, only objectives (3) and(4) can be integrated in a budget norm formula. Objectives (1) and (2) can be better reachedthrough earmarked grants such as school development grants. As a consequence thepoverty reduction component in the education budget norm formula should be keptrelatively small.MOE has designed two main programmes to address poverty issues: the school feedingprogramme and the scholarship programme. Both of them are designed to provide incentiveto poor family for sending their children to schools. 23
  24. 24. The issue must be addressed through a specific grant that should be modelled along thesame principles as Education Development Grant Facility which is made of twocomponents, the scholarship program and the Education Development Grant. This enlargedEducation Development Grant could address poverty issues in general as well as issuesspecific to certain districts much better than a budget norm formula or a school block grantformula could do.An alternative to this policy that is considered by MOE is to use school block grant in non-poor district and school development grant in poor district. The implication is that the schooldevelopment grants will not only cover poverty reduction programmes, but also basic non-wage need covered in non-poor district by school block grants. There will be severaladvantages to that approach:  It will be a way to use donor funding for recurrent expenditure and therefore to ease the pressure on the recurrent budget;  If school development grants were managed centrally it will be only a temporary duration to the principle that provinces are responsible for formulating and managing their recurrent budget, as in the long term school development grants will disappear when poverty condition improved and be replaced by school block grant. 13. Structure of the budget formula 13.1. Level of disaggregation of the budgetAlthough each education programme has different unit costs, it is expected that a budgetnorm formula will be highly aggregated as there is no need at the provincial level to reflectthe different cost components. Many countries used a single cost unit such as totalpopulation, school age population, or number of enrolled students. The budget normformula will be used to calculate the provincial fiscal envelope, while the different blockgrant formulae will be used to disaggregate the fiscal envelope by school types and bylocation.After much discussion it has been decided that the formula will be made of three segmentsor components reflecting the different costs of service delivery:  First component: for pre-schools, elementary schools and lower and upper secondary schools and informal training programmes  Second component: all higher education institutions under the authority of MOE including teacher training  Third component: all vocational training schools 24
  25. 25. 13.2. Selection of the cost unitDue to the fact that there are important differences in population age structure andenrolment rates across provinces, it has been decided that the cost unit used by the budgetnorm formula will be the number of enrolled student as recorded the previous year. Forexample, for preparation of FY2011/12 budget, enrolment number of school year 2010/11will be used.This choice raises several issues:  The number of enrolled students in the current year must be known when preparation for the next year’s budget starts. The school year commences in September, but MOE finishes the collection of enrolment data in April, and compilation and analysis of data might not be completed before mid-may. Numbers are officially not available before mid-June when they have been formally approved by the Education Minister and the provinces. For the sake of budget preparation, it would be better to accelerate the compilation and analysis of enrolment number to have the data ready by mid-March or earlier.  The enrolment number might not reflect the attendance number, because some enrolled children, never start school or because they dropped out during the school year. In some regions, it is the habit for some under-age children to attend school with their siblings. This issue will have to be dealt with through the introduction of report-cards.  Some provinces might be tempted to increase artificially the number of enrolled student to increase their budget. The problem must be deal with a more efficient statistical system based on report cards.An analysis of enrolment numbers in comparison with total population show considerablevariation across provinces.The country average enrolment rate is 22.6% of the total population. 11 provinces haveenrolment rates above the national average which is artificially low because of the specialsituation prevailing in Vientiane Capital where the average age of the population is olderthan all other provinces and where more children are attending private schools.Whereas we could expect the enrolment rate to decrease when the poverty index increase,it is often the opposite that happens, although there does not seem to be any rule. 25
  26. 26. Enrolment seems also to decrease with the size of the population. In general small or poorprovinces, such as Xekong (enrolment 18.2% poverty index 1.42), Houaphan (enrolment27.5% - poverty index 1.52) or Oudomxay (enrolment 19.3%- poverty index 1.45) tend tohave a higher enrolment rate than more prosperous provinces such as Luangphrabang(enrolment 16.8% - poverty index 1.23 ), Bokeo (enrolment 15.4 , or Vientiane Province. Twolarge provinces, Savannakhet and Champasak have a very low enrolment rate around 20.5%despite the fact that they have very different human poverty index (1.43 and 1.18respectively). Differences in age structure and fertility rate do not appear sufficient as dataexplaining such variations. ENROLMENT NUMBERS FOR YEAR 2008/09Source: MoE Statistic Department Popul a tion Huma n Number Pre-s chool Number Pri ma ry Number Seconda ry Tota l Number Number Provi nces MPI Poverty of Students / of Students / of Students / of Student/ Es tima te Index Pre s chool Tota l Pri ma ry Tota l Lower & Upper Tota l Students Popul a tion Students Popul a tion Students Popul a tion Seconda ry Popul a tion StudentsVientiane Capital 740,010 1.17 6,191 0.84% 56,113 7.58% 58,406 7.89% 120,710 16.31%Savannakhet 874,660 1.43 9,537 1.09% 123,097 14.07% 46,365 5.30% 178,999 20.46%Cham pasak 634,756 1.18 6,588 1.04% 84,153 13.26% 39,202 6.18% 129,943 20.47%Kham m ouane 360,304 1.34 4,000 1.11% 56,168 15.59% 23,927 6.64% 84,095 23.34%Luangphrabang 431,439 1.23 6,258 1.45% 72,312 16.76% 30,206 7.00% 108,776 25.21%Bolikham xay 248,378 1.29 1,769 0.71% 40,753 16.41% 21,328 8.59% 63,850 25.71%Houaphan 302,809 1.52 2,436 0.80% 57,035 18.84% 23,690 7.82% 83,161 27.46%Oudom xai 285,874 1.45 2,921 1.02% 55,303 19.35% 18,034 6.31% 76,258 26.68%Xayabury 360,195 1.25 5,132 1.42% 49,290 13.68% 28,567 7.93% 82,989 23.04%Xiengkhuang 257,683 1.42 2,459 0.95% 44,123 17.12% 26,463 10.27% 73,045 28.35%Vientiane Pro. 454,660 1.19 5,193 1.14% 68,630 15.09% 41,866 9.21% 115,689 25.45%Bokeo 157,422 1.21 2,134 1.36% 24,325 15.45% 9,502 6.04% 35,961 22.84%Phongsaly 172,286 1.51 2,313 1.34% 29,257 16.98% 7,953 4.62% 39,523 22.94%Luangnam tha 156,667 1.23 2,389 1.52% 25,228 16.10% 10,648 6.80% 38,265 24.42%Saravanh 349,478 1.54 2,142 0.61% 52,759 15.10% 14,265 4.08% 69,166 19.79%Attapeur 121,134 1.44 1303 1.08% 20,678 17.07% 6,459 5.33% 28,440 23.48%Xekong 92,624 1.42 1134 1.22% 19,267 20.80% 5,699 6.15% 26,100 28.18%TOTAL 6,000,379 1.32 63,899 1.06% 878,491 14.64% 412,580 6.88% 1,354,970 22.58%Several factors might explain why some of the poor provinces have higher enrolment rate:(i) birth rate is higher in poor provinces, (ii) children might be automatically enrolled by thehead of village although they do not attend school, (iii) underage children go to school toaccompany their siblings because there is no one to take care of them at home, (iv) a highrepetition rate has the consequence that a number of children attend primary school wellbeyond the usual age. Statistical mistakes cannot be excluded either for calculating theenrolment numbers or by underestimating the total population. 26
  27. 27. 13.3. Cost factors and poverty reduction strategyA number of cost factors and measures of expenditure needs have been reviewed for theirpotential use by the budget norm formula. These cost factors include the number ofstudents per teachers, the urbanization rate (urban schools are more expensive than ruralschools), the number of students per class room, poverty, remoteness and minoritypresence.The main cost factor that seems to explain budget variation across provinces is the numberof teachers and the number of teachers is often correlated with the urbanization rate (urbanschools have more student than rural schools). Urban schools are also more expensive to runthan rural schools. Like for enrolment, it appears that there is no correlation between thenumber of teachers and the level of poverty, as seen below: Number Number Provinces Poverty Student/ Students Index Population per teacher Vientiane Capital 1.17 16.24% 18.2 Cham pasak 1.18 20.28% 27.9 Vientiane Pro. 1.19 25.56% 27.6 Bokeo 1.21 22.90% 28.4 Luangphrabang 1.23 25.09% 34.5 Luangnam tha 1.23 24.44% 24.0 Xayabury 1.25 22.96% 27.8 Bolikham xay 1.29 25.92% 36.6 Kham m ouane 1.34 23.28% 33.6 Xiengkhuang 1.42 28.32% 28.2 Xekong 1.42 28.31% 32.6 Savannakhet 1.43 20.36% 33.5 Attapeur 1.44 23.52% 28.6 Oudom xai 1.45 26.70% 40.1 Phongsaly 1.51 22.67% 23.9 Houaphan 1.52 27.49% 36.7 Saravanh 1.54 19.81% 40.2Clearly richest provinces have a better teacher/students ratio, with the exception ofBolikhamxay. Provinces with a high enrolment rate usually do not have a goodteachers/students ratio such as Houaphan, Xienkhuang, Oudomxai and Xekong. 27
  28. 28. Looking at the teacher/students ratio by province might not be significant because such aratio is only an average and urban areas have a better ratio than rural areas. Provinces witha good ratio are provinces which are more urbanized. This reflects the inefficiency in staffallocation as well as the difficulty to recruit teachers to teach in remote areas.Although the number of teachers appears to be an important cost factor, it is not possible tolink it to other cost factors such as poverty, population density or remoteness.Poverty level does not appear a good indicator of education needs, as some very poorprovinces have better education infrastructures as compared to better off provinces.The table below shows also that there is a very weak correlation between the number ofstudents per teacher and the quality of education as measured by the EDI. Number Students EDI per Poverty 2008/09 teacher Provinces Index Vientiane Capital 1.17 0.96 18.2 Xayabury 1.25 0.93 27.8 Bolikhamxay 1.29 0.92 36.6 Vientiane Pro. 1.19 0.92 27.6 Champasak 1.18 0.88 27.9 Xiengkhuang 1.42 0.88 28.2 Khammouane 1.34 0.86 33.6 Luangphrabang 1.23 0.85 34.5 Oudomxai 1.45 0.85 40.1 Savannakhet 1.43 0.85 33.5 Bokeo 1.21 0.81 28.4 Houaphan 1.52 0.80 36.7 Luangnamtha 1.23 0.78 24 Xekong 1.42 0.77 32.6 Attapeur 1.44 0.76 28.6 Saravanh 1.54 0.76 40.2 Phongsaly 1.51 0.71 23.9Bolikhamxay ranks third on EDI despite showing 36.6 students per teacher when Phongsalyranks last despite 23.9 students per teacher. 28
  29. 29. However these results cast a doubt about EDI as a good indicator of the quality of education.There are methodological issues that need to be looked at if MOE decides using EDI as themain education quality indicator.The possibility of integrating the number of teachers in the budget norms formula has beenconsidered. Integrating the number of teachers in the formula might have severaladvantages:  It reflects better the actual operating cost of the schools;  It reduces the impact of distortions in enrolment number that we have considered in section 12.2;  It favours urban schools that might be underfinanced under the present arrangement.On the negative side, several points have to be taken into consideration.  It impacts negatively the budget of provinces which have multiple class teaching;  It goes against the policy of MOE to give priority to small rural schools versus large urban onesSeveral formulae using different weighting for the number of teachers have been tested onthe macro-fiscal model. Although integrating the number of teachers in the formula producesome small improvements in the fiscal results, MOE has not considered that theimprovements were not significant enough to justify using a more complex formula, andtaking the risks of having conflicting policy objectives in relation to staffing and staffcompensation. 13.4. Budget Norm FormulaAfter considering several possible structures for the education sector budget norm formula,MOF and MOE have agreed that the best formula for the time being is a formula based onthe number of students.The formula has three components: one for general education, one for universities and onefor vocational trainings and other training.PEA is the provincial allocation for the education sector(St) is the number of students in all educational programmes except universities andvocational training (but including informal education).(StU) is the number of students in higher education.(StI) is the number of students in vocational training and other types of training(A) is the allocation per student as defined by (St). 29
  30. 30. (B) is the allocation for students studying in universities under the supervision of MOE at the provincial level. That excludes student studying in school and universities under the supervision of other ministries such as medical faculties, nurse schools or military schools, or universities financed by the central budget of MOE.(C) is the allocation per student in informal education and other types of trainingp1, p2 and p3 are expenditure need ratios based on the Education Development Index (EDI).Provinces have been grouped in three categories:Category 1 for more advanced provinces with an EDI above 0.87Category 2 for intermediary provinces with and EDI between 0.87 and 0.81Category 3 for less advanced provinces with an EDI below 0.81The expenditure need ratio will be used only with the students enrolled in pre-schools,primary schools and secondary schools. It will not apply to higher education, vocationaltraining and informal education.Although informal education and vocational training should be part of any poverty reductionpolicy, it appears that there is no uniform policies applying to all provinces that could justifya modulation in the level of spending per student and that the problem could be betteraddressed by earmarked grants.The final formula is: PEA = p(St x A) + (StU x B) + (StI x C)Tests conducted on a fiscal model show that there is no need to disaggregate studentallocation by type of school as the budget is calculated at the macro-level. Block grants willdisaggregate the budget at the school level. 14. School Development Grants and other earmarked grantsThe recurrent budget calculated on the basis of the budget norm formula will not be theonly source of funding of schools. As explained in section 12, poverty issues will beessentially addressed through a School Development Grant which for the time being willcover essentially the school feeding programme and the scholarship programme. Becausethese two programmes are financed by donors, the School Development Grant will beconsidered as part of the Development Budget. The possibility that the Government will useits own funds to expend these programmes is under consideration. In that case thesegregation of the source of funding will be maintained by deciding which provinces are tobe funded from Government sources or from Donors sources. 30
  31. 31. 15. School Block Grants 15.1. Objectives of block grantsThe primary purpose of the block grant system is to ensure that every school will receivesufficient funding for utilities, the maintenance of buildings, the purchase of teachingmaterials and other needs.Secondary objectives are:  Improving quality education through better access to teaching materials and a better school environment;  Improving access to education by removing user fees,  Increasing community involvement in schools  Introducing more accountability for school directors and provincial authorities 15.2. Expenditure coverageThe block grants will have the same expenditure coverage as non-wage budget norm definedin section 3 of this concept note, namely line-items of chapter 12 and 16 plus line-item13.03.01. 15.3. Block Grant Management ManualMOE will be responsible for issuing and regularly updating a Block Grant ManagementManual. However the manual will have to be approved by MOF. 15.4. Structure of the block grant formulaeAt this stage we will only take into consideration the block grant formula for primary schoolsfor introduction in FY2010/11. Other formulae for secondary education and other types ofschools will be developed for implementation in FY2011/12.There are two traditional approaches for block grants, one based on a fixed amount byschool type, and one based on a fixed amount by student. It appears that in Lao PDR it isbetter to combine the two approaches. 31
  32. 32. MOE is only considering two categories of schools in the formula structure: schools with lessthan 50 children and school with more than 50 children.All schools will receive a fixed amount around 2 millions kip plus a fixed amount per student.The fixed amount for school with less than 50 students will be more than the fixed amountfor schools with more than 50 children.If Block Grant A is the block grant for schools of ≥ 50 studentsIf Block Grant B is the block grant for schools of ≤ 50 students(G) is the fixed amount per school(St) is the number of student(a) is the fixed amount per student for schools of ≥ 50 students(b) is the fixed amount per student for schools of ≤ 50 studentsThen:Block Grant A = G + (St x a)Block Grant B = G+ (St x b)The fixed amount per (G), (a) and (b) will have to be determined when the fiscal envelope fornon-wage recurrent expenditure will be known. 16. Block Grant funding modelBeside block grants type A and B, there will be different block grants for the 47 poordistricts.Block Grants type A and B will be funded from the Government general budget. Block grantsfor the 47 districts will be funded from FTI grants. FRT grants will be have the same formulastructure, but variable (G), (a) and (b) will have different value. 17. Financing of text booksThe printing and distribution of text books will no longer be financed by the investmentbudget and is now transferred to the recurrent budget. 32
  33. 33. In accordance with PRSO agreement, text books for Grade 1-5 have been provided to allstudents in all schools in the country by financing the Education Development II – EDP IIproject. The replacement cost per year has been estimated at 11% per year and this cost willbe integrated into block grant to allow schools to replace worn out books. 18. Budgeting technique and mechanism for fund transfersThere can be two different ways to manage school block grants and to transfer the funds tothe province. MOF thinks that whatever way is chosen the allocation of block grant shouldbe reflected in provincial budget and appropriate budget techniques will have to be devised. (1) The first approach is to let the fund transit through MOE central budget before being allocated to the province. It requires that the transfer to provinces become an earmarked block grant under the supervision of MOE. It should be noted that if the Budget Law under Article 23 allows earmarked grants, these grants are seen as the exception and not the rule. Transferring the essential part of non-wage recurrent budget as an earmarked grant seems to contradict the general spirit of the law that decentralises the budget. Additionally, the law does not say anything about earmarked grants managed by line-ministries. As a consequence, if technically it appears possible to manage block grants centrally through earmarked grants, it implies a political risk and will require new regulation. This new regulation implies a complete revision of the expenditure assignment. It will need to carefully identify the respective responsibilities of MOF and MOE in approving and managing the grants. (2) The second option is to let the provinces include the block grants in their annual budget requests and to let them allocate the funds to the schools through the Provincial Education Office and District Education Office. This option involves less political risks because it will involve Provincial Governors. It requires less additional regulation and no modification of the expenditure assignment. The risk involved here is that provinces will not use the additional funding for block grants. This problem can be overcome by creating a legal obligation for the provinces for earmarking the funds and depositing them into a separate account supervised by the provincial treasury office. 19. Budget Norms for central education budgetA non-wage expenditure norm will be implemented for FY2010/11 or FY2011/12 budget.This expenditure norm will be expressed in percentage of wage expenditures calculated asthe sum of expenditures under chapter 10 and 11 of the budget nomenclature. The 33
  34. 34. calculation of the norm will take into consideration three factors: (i) historical trends, (ii) thefiscal capacity of the government (iii) budgetary needs of MOE at the central level. The normwill be revised every year. 20. Revision of the expenditure assignmentThere is a consensus that budget norms must be implemented on the basis of the existing defacto provincial expenditure assignment. However clarification of the expenditureassignment is the first and fundamental step in the design of any system ofintergovernmental finance. An effective system of budget norms will not be able to functionunless there is clarification of the various levels of responsibility, especially in the areas ofplanning, budgeting and reporting.Expenditure and responsibility assignment can be broken down in four components ordimensions: (1) responsibility for delivering services, (2) responsibility for administering theservice, (3) responsibility for financing a service and (4) responsibility for setting standards,regulations or policies guiding the provision of services.Under the Circular number 1500 (Circular MOE, Personnel Dep. 02, “Instruction forDecentralization in the Education Sector”), Dimensions (1), (3) and (4) of the ExpenditureAssignment are relatively clear, but like other sectors the management dimension (2) willrequire important revision to make budget norms effective.In the case that the Government decides that block grant will be managed centrally, this willaffect the third dimension (financing responsibility). Important additional regulation willhave to be issued and the Budget Law Implementation Decree of 2008 might have to berevised.Responsibility for delivering services and financing can remain unchanged for all educationprogrammes except higher education. Provinces have an obligation to finance universitieswhich in practice can be seen as centrally managed with an unclear sharing ofresponsibilities.However, most of the issues in expenditure assignment focus on the second dimension,namely the management responsibility. The Circular on Education Decentralization says verylittle on the subject and there is not a coherent body of regulation. This affects, in particular,the linkage between planning and budgeting.One of the weaknesses of the present planning process is that there is no strict distinctionbetween policy planning, which should be the responsibility of MOH at the central level, andimplementation planning, which should be the responsibility of the provinces. There is noobligation of the provinces to follow national policies. 34
  35. 35. Planning at the provincial level appears disconnected from planning at the central level dueto the absence of common tools and to the large autonomy of provinces. This is preciselywhat makes the implementation of block grants in a decentralized manner difficult. Intheory, provinces must be guided for planning and budget preparation by the Five Year Planand by national policy; in practice because there is no quantitative objectives assignedcentrally to provinces, there is little incentive for provinces to align their planning activitieswith national priorities.Provincial planning is also disconnected from national budgeting and as a result provincialbudgets suffer from systematic cuts that force districts to go through an additional revisionphase of their plan when budgets are announced. The provincial planning and budgetingprocess is probably one of the longest in the world and in the base case scenario lastedfifteen months.The introduction of the Education Sector Development Framework is an essential step in theright direction, but there is little understanding of the ESDF in the provinces and the rolesand responsibilities of the different provincial departments in ESDF implementation are yetto be clarified and identified. As the model cannot be disaggregated by province it seems tohave little relevance for the provincial authorities which are not capable of developing ESDF-driven activities in each sub-sector. The development of the Medium Term ExpenditureFramework based on multi-year sector development prepared by the provinces will providean essential budgeting tool with a link to the ESDF. Full integration will be reached when,MOE on the basis of the MTEF and of ESDF will be able to produce a costed and prioritizedannual work plan that could be used for budget norm preparation. Although MOE is workingon such a plan, because the MTEF is not yet fully developed, an essential link betweenplanning and budgeting is still missing.The introduction of budget norms will require changes in budget procedures and this shouldbe taken as an opportunity to bring more clarity in policy formulation, planning budgeting,accounting and reporting. As budget norms will be based on policy priorities, programmesand objectives defined at the central level, it is important that proper mechanisms are inplace to ensure that province budgets are in line with national priorities and objectives. Thiscould be partially achieved through a multi-year budget plan that will require approval ofboth MOE and MOF as part of the sector MTEF, already under development. MOE shouldalso be given a role in monitoring provincial budget implementation.Other issues must be taken into consideration, including: (a) a clarification of the mechanisms to channel funds to the provinces and the districts based on a better definition of recurrent and investment expenditures and a realistic approach of expenditure needs, (b) a more uniform management policy in line with higher principles defined by MOE and 35
  36. 36. (c) a more homogeneous use of budget classification.Provinces do not always have the same understanding of how the expenditure assignmentlinks to sector policies, and have a very disparate approach to budget preparation andexecution, resulting in a confusion of roles. Among the issues mentioned during the differentinterviews and meetings conducted for the preparation of the Concept Note, a few pointsdeserve attention.Additional regulation will have to be issued to clarify the expenditure assignment. Theseinstructions should address three broad issues: (a) the articulation between policy planning and service delivery planning, (b) the revision of the budget formulation forms and procedures, and (c) the reporting requirements between districts, provinces and MOE.Revising the Circular on Education Decentralization will be necessary. More than a change ofprinciples, the circular required to be enlarged to cover management issues and to provide abetter articulation between the respective responsibilities of MOE and the provinces. 21. Budget classificationThe introduction of budget norms will increase the contradiction between the Chart ofAccounts and Budget Classification, because budget norm requires data that can beproduced by the chart of accounts but not by the Budget Classification.Budget norms are policy driven and need based while the current budget classification isinput driven. Budget norms require a functional classification and the possibility to identifyprogrammes. While the Chart of Accounts provides a functional classification and thepossibility of using programme and project codes, this is not reflected in the budgetclassification. As a consequence it is not possible during budget preparation for MOF toidentify the sub-budget for pre-school education, primary education, secondary education,etc. For example, it is not possible to identify wage and non-wage expenditure for primaryschools.In the long term a revision of the budget classification is unavoidable. In the short term anelement of line-item budgeting must be introduced in the budget classification withoutchanging the current structure.The Ministry of Education has already recognised the need for line item based budgeting.The ESDF Model does not use the current budget classification. The new format for theMedium Term Provincial Education Plan used the budget classification corrected by some 36
  37. 37. element of line-item budgeting or functional classification and we recommend following thesame model for budget norm preparation.Functional classification can be simply introduced by putting under the chapters and sub-chapters of each economic category line-items specific to the education sector andrepresenting the different programmes. 22. Future of the systemThe implementation of budget norms for the education sector should be regarded as animportant step toward the development of a full-fledge system of IntergovernmentalTransfers based on a General Purpose Grant and earmarked grants. This will probablyrequire minor adjustments in the budget norms formulae. Sector budget norms will be usedthen to disaggregate the General Purpose Grant. This will have to be put into the widercontext of a complete revision of the expenditure assignment, a consolidation andharmonization of the existing legislation and regulation, and a complete reform of thebudget formulation process which will have to move from an approach by economiccategories to an approach by sector with a better integration between the budgetformulation cycles of the provinces and the Government. 37