First presentation of the series of Lectures on Educational Finance. BY SKL International Support to Decentralization in Ukraine Project

1. Education Finance in Transition
Countries
Jan Herczyński
SKL Project
„Support to Decentralization in Ukraine”
Kiev, April 22, 2015

2. Structure of the presentation
• Sources of funds for education
• Education finance as an element of national
local public finance system
• Management of education and its implications
for education finance
• Examples of education decentralization
• Lessons for Ukraine
Jan Herczyński, SDU 2

3. Sources of funds for education
• Education is an expensive social function,
employing large staff and consuming between
3% of GDP (Romania, Albania) and over 9%
(Kyrgyzstan)
• Education is predominantly – but not
exclusively – delivered by public institutions
• The sources of funds and a distribution
procedure need to be defined by law
Jan Herczyński, SDU 3

4. Sources of funds for education 2
• In developed countries between 73%
(Germany) and 99% (Denmark) of all funds for
education come from public sources
• Non public funds for education are
concentrated in tertiary and post secondary
education
• Thus primary and secondary education are
mainly funded from public funds
Jan Herczyński, SDU 4

5. Sources of funds for education 3
• Primary and secondary education:
– low private returns to education (high opportunity
costs, lack of immediate labor market relevance)
– high social returns to education (social and
political cohesion, active citizens, literate
workforce and soldiers)
Jan Herczyński, SDU 5

6. Sources of funds for education 4
• Tertiary and post-secondary education:
– high private returns (education as „filtering
system”, significance of degrees, high personal
position in life)
– relatively low social returns (social and political
cohesion achieved already by secondary
education)
Jan Herczyński, SDU 6

7. Sources of funds for education 5
Main sources of public funds for education:
• National budget: based on nationally collected
taxes (PIT, CIT, VAT),
• Local budgets: based on local taxes (local fees,
property tax, etc.)
– But rarely sufficient funds for education
• Local budgets: based on transfers from the
national budgets (grants or shared taxes)
Jan Herczyński, SDU 7

8. Sources of funds for education 6
Types of transfers for education:
• General or specific for sub-sectors
(preschools, primary schools etc.)
• Covering all school costs or specific budget
categories
• Categorical or unconditional
• Needs based or taking into account local
financial capacities
Jan Herczyński, SDU 8

9. Education in national public finance
• In every civilized country, education finance is
a part of national public finance system:
– All instruments of education finance are defined in
budget and finance laws of the country,
– Budgeting process, budget execution, budget
reporting and monitoring in education conform to
procedures valid for all sectors.
• National budget discipline and demands for
effective use of resources apply to education!
Jan Herczyński, SDU 9

10. Education in national public finance 2
Nevertheless, education finance must address
specific needs of the sector:
• School year and budget year do not coincide,
• Education costs are not related to individual
beneficiaries of education (students), but to
providers (teachers, schools),
• Schools require long-term financial stability to
teach well
Jan Herczyński, SDU 10

11. Management and finance of education
Specific instruments of financing education must
be also adapted to the selected model of
education management:
• Model and scope of decentralization,
• Degree of autonomy of education institutions
at different levels
• National tradition and experience, which have
an impact on skills and knowledge
Jan Herczyński, SDU 11

12. Management and finance 2
• In transition countries, reforms of the
inherited Soviet system of governance very
often include decentralization
• Different countries decentralize for different
reasons and choose different models
• We will review first the models and then the
reasons
Jan Herczyński, SDU 12

13. Management and finance 3
There are two basic models of education
decentralization:
1. Decentralization to the level of local
governments
2. Decentralization to the level of schools
It is useful to review them briefly
Jan Herczyński, SDU 13

14. Management and finance 4
Decentralization to the local governments:
• Municipalities are responsible owners of local
school networks,
• They manage, plan and finance schools on the
basis of short term demographic projections
• They are responsible for rational use of budget
resources
• They assess performance of schools
Jan Herczyński, SDU 14

15. Management and finance 5
Decentralization to level of schools:
• Schools as autonomous institutions manage
responsibly their resources
• School directors understand the needs of
students and expectations of parents
• School activities are tailored to these needs,
within the available budgets
Jan Herczyński, SDU 15

16. Management and finance 6
The two models are in many respects
compatible:
• School autonomy should be harmonized with
municipal sphere of competence
• School directors and municipal officials should
cooperate to improve school quality
• Dialogue between different stakeholders is
necessary for education
Jan Herczyński, SDU 16

17. Management and finance 7
BUT:
In two most important aspects the two models
are in in disagreement:
1. School closures: who will decide that a school
needs to be closed
2. Setting school budgets: who will decide on
the funds to be used by the school
Jan Herczyński, SDU 17

18. Management and finance 8
Implications for network management:
• Local government may become an agent of
planned school consolidation
– Decisions should taken on the basis of
demographic projections
• Schools will compete on the local education
market and the „losers” will have to be closed
by some special procedures
Jan Herczyński, SDU 18

19. Management and finance 9
Implications for school financing:
• Education grants will be directed to either the
schools or the local governments
• In theory, school level formulas should be much
more complex, taking account many school
needs
– Local formulas in UK and Australia are very complex
• In practice, they are often the simplest
(Georgian and Armenian vouchers)
Jan Herczyński, SDU 19

20. Examples of education decentralization
We discuss briefly a few examples of education
decentralization in transition countries:
• Poland 1990
• Macedonia 2002
• Georgia 2003
Jan Herczyński, SDU 20

21. Examples 2
Poland 1990:
• As the first transtion state to have a non-
Communist prime-minister, Poland faced huge
problems
• The new team of reformers was a small group
of Solidarność activitists elected to run well
organized and hostile buraucracy
• They decided to cut the buraucracy from
below
Jan Herczyński, SDU 21

22. Examples 3
Poland 1990:
• Ministry of National Education initially
opposed decentralization
– Other tasks in education sector were considered
far more urgent
• MNE only managed to obtain postponement
• Because Poland chose strong decentralization
program, education was decentralized to
municipalities
Jan Herczyński, SDU 22

23. Examples 4
Macedonia 2002:
• In 2001, armed clashes between Albanian
intruders from Kosovo and Macedonian army
killed a number of people and almost erupted
into a war
• Peace imposed by EU was based on the
principle of ethnic decentralization
• Education was just a part of this process
Jan Herczyński, SDU 23

24. Examples 5
Macedonia 2002:
• Albanian and ethnic Macedonian
municipalities existed side by side
• Their autonomy was planned as a guarantee
of peaceful development of the country
• Education was therefore decentralized to the
level of local governments
Jan Herczyński, SDU 24

25. Examples 6
Georgia 2003:
• The Saakashvili government came to power as
a result of rose revolution
• The driving force was the revolt against the
corrupt state
• Fight against corruption became the symbol of
the new government
• Local governments were among the most
corrupt institutions in the country
Jan Herczyński, SDU 25

26. Examples 7
Georgia 2005 :
• The new government took all the money and
functions away from local governments
• This included education
• In consequence, schools were established as
autonomous budget institutions
• Thus decentralization to the level of schools
was selected
Jan Herczyński, SDU 26

27. Lessons for Ukraine
Of the many lessons for Ukraine, we focus on
two only:
• Model of education decentralization should be
selected in accordance with political
objectives and the traditions of the country
• Education finance should be adapted to the
selected model of decentralization of the
sector
Jan Herczyński, SDU 27

28. Lessons 2
Choose wisely national model of education
decentralization:
• Although both models have important
benefits, one must be selected as the basis
• Reforms of the budget code and planned
administrative territorial reform point towards
decentralization to municipalities
• But strong forces exist in the opposite
direction
Jan Herczyński, SDU 28

29. Lessons 2
Adapt the financing system in education to
governance model:
• In fact, financing reforms have preceded any
reforms of education governance
• Various official strategic documents need to
be harmonized
• Incoherent financing system is especially
dangerous during fiscal contrainst due to war
and must be avoided
Jan Herczyński, SDU 29

30. Thank you for your attention!
Jan Herczyński, SDU 30