Spending more or Spending Better: 76404 Improving Education Financing in Indonesia Policy Brief March 2013 EUROPEAN UNION This policy note summarizes the �ndings and recommendations Photo credit: World Bank from the recent Indonesia Education Public Expenditure Review (PER)2, which examines in detail how these additional resources were spent and the extent to which they have translated into outcomes, with the ultimate objective of providing recommendations to improve outcomes by improving the quality of spending. 2. The signi�cant increase in spending has been accompanied by important progress in access and equity of education, but quality remains an issue The biggest payoff for this increase in spending has been in terms of access and equity in basic education; however access to senior secondary and especially tertiary education remains low, especially for the poor. There has been rapid progress in access and equity over the last 5 years, with children from poor families enrolling earlier and staying in school longer. The share of 1. The Government of Indonesia’s “20 percent 15 year olds from the poorest consumption quintile who enrolled rule,� which allocates 20 percent of government in school increased from 60 to 80 percent between 2006 and 2010. spending to education, has provided a signi�cant However, beyond the age of 15, the share of children enrolled from increase in education resources the poorest quintile drops dramatically, and by higher education, falls to less than 2 percent. Only 40 percent of 19 year olds from Indonesia has made a clear commitment to education, passing the richest quintile were enrolled in school in 2010, a share that, a constitutional mandate to allocate at least 20 percent of worryingly, did not change since 2006. the total government budget to education.1 This has led to a large increase in resources -- more than a doubling of education Figure 2: Share of children enrolled in school by age and spending in real terms since the passage of the constitutional quintile, 2006 and 2010 amendment in 2002, with the largest jump occurring in 2009, 100% 2006 after the rule was de�ned and clari�ed by the Constitutional Court. 90% 2010 80% Between 2008 and 2009, the education budget increased by 17 70% percent in real terms, the equivalent of an additional 6 percent of Share in School 60% the national budget (Figure 1). 50% 40% Figure 1: Public Expenditure on Education, 2001-2010 30% IDR trillion Percent 350 25 20% 21.9 10% Poorest Quintile 21.1 280 21.7 20.9 20 0 16.4 16.3 Age 15.0 15.9 210 14.4 14.5 15.6 15 14.5 100% 90% 2006 11.4 140 10 2010 80% 70% 70 5 Share in School 60% 50% 0 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 40% Real spending, realized education expenditure 30% 2009 prices (LHS) as % total national expenditure 20% Nominal spending (LHS) planned education expenditure Richest Quintile 10% as % total national expenditure 0% Source: World Bank staff estimates based on MoF, APBD and BPS data. Age Source: Own calculations using Susenas, 2006 and 2010 1 The 20 percent rule requires the allocation of minimum 20 percent of the total state budget (central government expenditure and transfers to regions) to education (Ministry of Finance 2 World Bank (2013), Spending more or spending better: Improving education �nancing in Decree 86, 2009). Indonesia. is clear that this composition will have to change in the future. Photo credit: Ratna Kesuma The share of the budget going to non-basic education will likely increase more rapidly in the near future. Figure 4: Distribution of the budget by level of education, 2008-2009 ECD Basic Education other program Senior Sec. education Universities 100.0 90.0 23 21 80.0 70.0 8 11 9 10 60.0 percent 50.0 40.0 30.0 58 56 20.0 On the quality side, learning outcomes are still low and there 10.0 are worrisome trends in math and science. The share of top 0.0 performers is extremely low. Indonesia generally scores at the 2008 2009 bottom on international tests (TIMSS, PIRLS and PISA3) including 100 when compared to other countries in the region. On PISA, the test Percent of education budget by level 90 with the most recent result and a longer time trend, the scores are 80 mixed. While reading has shown steady improvement since 2000, 70 math and science have not. Moreover on both TIMSS and PIRLS, 60 the share of top performers is extremely low: on PISA, no student 50 performed at the highest level in math or science in 2009. Given 40 recent evidence linking PISA scores and the percentage of top 30 performers with GDP growth4, it is clear that increasing the quality of education must be a top priority. 20 10 Figure 3: Indonesia PISA scores in mathematics, reading and 0 science, average scores, 2000-2009 Source: World Bank calculations using MoF, SKID for Indonesia; Edstats for international Indonesia's score on PISA comparisons 410 400 More important is the destination of these funds: more than 390 half of the additional resources went to teacher salaries and PISA scores 380 2000 teacher certification. The increase in spending on teacher salaries 370 was driven mostly by increases in the total number of teachers, but 2003 360 the “regularization� of contract teachers to civil servant status also 2006 played a part. Indonesia already had one of the lowest student 350 340 2009 teacher ratios in the world in 2005 but the number of teachers has 330 outgrown the number of students every year since 2004.5 Given Mathematics Reading Science this rate of growth, what keeps the salary bill sustainable is the high Subjects reliance on contract teachers (40 percent of the teaching body) Source: PISA, OECD with substantially lower salaries than civil servants. Therefore the increase in regularization is worrisome. We estimate that converting 3. Inef�cient spending, particularly on teachers, all teachers to civil servants would increase the salary bill by at least 50 percent, while providing certi�cation allowances would more helps to explain why increased resources have not than double the salary bill. Given the current number of teachers, translated into suf�cient improvements in learning both of these goals would be �scally unfeasible. outcomes The problem with spending on increasing the number of Between 2008 and 2009, spending on education increased teachers is that given the current levels of student teacher by 17 percent in real terms but basic education still received ratios, adding new teachers does not lead to better learning most of the additional budget. The composition of spending outcomes. At the school level, there is no correlation between by level of education changed slightly, with senior secondary additional teachers and learning outcomes in basic education, and higher education receiving slightly higher shares of the total either in Bahasa or in math (�gure 6, math not shown). Similarly, budget. Comparing Indonesia to other countries in the region it per student spending at the district level (which is largely driven by teacher salaries and certi�cation) is not correlated with results on 3 TIMSS: Trends in International Mathematics and Science Study; PIRLS: Progress in national exams. Both graphs suggest that adding teachers will not International Reading Literacy Study; PISA: Program for International Student Assessment. result in better learning outcomes. 4 Hanushek and Wößmann (2007), Education Quality and Economic Growth; Pritchett (2009), Long-Term Global Challenges in education: Are There Feasible Steps Today? Pritchett and Viarengo (2009), Producing Superstars for the Economic Mundial: The Mexican Predicament with Quality of Education. 5 World Bank. 2010b. “Transforming Indonesia’s Teaching Force.� World Bank, Jakarta, Indonesia 2 Figure 5: Distribution of additional funds from the 20 percent rule by program, 2009 a) Distribution of additional funds b) Growth in number of students and number of teachers by level of education, 2004-2010 Index (2004-100) 200 200 25 Number of teachers 180 Number of student 180 Other programs and 20 % of Total State Budget 6 160 160 BOS 15 2 5 2 140 140 Universities 2 10 2 120 120 11 100 100 5 11 9 80 80 2004 2006 2008 2010 2004 2006 2008 2010 2004 2006 2008 2010 2004 2006 2008 2010 2004 2006 2008 2010 0 2006-08 2009 Kindergarten Primary Junior Senior Vocational Secondary Secondary School Source: a) World Bank elaboration using MoF, SIKD. b) MoEC, TK: kindergarten/pre-school, SD: primary school, SMP: junior secondary school, SMA: senior secondary school, SMK: vocational senior secondary school Meanwhile, as currently implemented, the teacher certification 4. Indonesia needs to spend better to ensure that resources program (which absorbs 9 percent of the education budget), are translated into improved ef�ciency (adequacy), equity has shown no significant impact on learning outcomes. Initially and performance in education. intended to improve teacher competencies and attract the best and the brightest to the profession, the program may have been The amount of resources available for education in Indonesia weakened by the option of a simpli�ed procedure for certi�cation is largely adequate -- the key is to ensure that the resources called “portfolio certi�cation�. With this option, teachers became are well spent. Judging by international comparisons, after the 20 eligible for certi�cation by providing evidence of past training percent rule, Indonesia’s spending on education is largely adequate. and experience, without the need for further training or testing. Relative to its level of income, Indonesia still spends slightly less than An early evaluation shows that while the program improved the other middle-income countries, especially in secondary education, livelihoods of teachers, it did not lead to improvements in learning but relative to its overall government spending Indonesia is at the outcomes for students.6 Indeed, when looking at scores in math higher end of the distribution. Few countries spend more than 20 and Bahasa Indonesia, there is no signi�cant difference between percent of their budgets on education. However, the distribution students of certi�ed and of non-certi�ed teachers. Thus the effects of resources can be improved. of certi�cation on learning do not seem commensurate with the high cost of the program. Some decisions can be directly made at the central level: reallocating resources across levels of education and improving important central government programs, including scholarships. Early childhood education, senior secondary and higher education are underfunded by international standards, and scholarships received only 1 percent of the total 6 De Ree (2012), Teacher certi�cation in Indonesia: A doubling of salary, or a way to improve budget in 2009. Increasing funding for these levels will require learning? Figure 6: Student-teacher ratio, per-student spending and test scores in public schools a) Student-Teacher Ratio vs Bahasa scores b) District Spending vs National Exams 80 60 70 change in National exam score in SMP % 40 60 50 20 40 30 0 20 -20 10 -100 0 100 200 300 0 change in real education expenditure % Change of SMP UN score & Education Expenditure Fitted Line Source: School Based Management Survey, World Bank-RAND (2010) 3 more efficient spending in other areas, such as basic education and using the latest government teacher allocation guidelines, we especially teacher management. estimate that about 340,000 teachers, or 17 percent of the teaching force, would need to be transferred to ensure all schools have the Expanding and improving the Scholarships for the Poor minimum number of teachers. While most of this reallocation program (Bantuan Siswa Miskin, BSM) will increase equity could occur within districts, there is still a need to shift teachers of access to education. Increasing the scholarship amounts, across districts and even provinces. The size of the reallocation and expanding coverage, improving targeting, aligning the the lack of clear mechanisms for these transfers make realizing disbursement of the bene�t with the timing of the expenditures these efficiency and equity gains difficult to achieve in the short and possibly providing an incentive “transition� bonus when period of time of validity of the decree. children make the leap to the next level of schooling, would greatly improve equity in spending. The ideal scenario would cover 100 There is also a need to revisit school planning, particularly percent of the cost for all poor students from SD to SMA. This when it comes to dealing with the high share of small schools. would ensure that cost is not a reason for dropping out. Dealing effectively with small schools through the reallocation of teachers should be considered a medium-term strategy, but there The teacher certification program needs to be reassessed, are more immediate measures that can be expanded. Multigrade since it is not delivering the expected results. While certi�ed and cluster teaching (whereby teachers teach more than one teachers are less likely to hold second jobs, students of certi�ed grade level or more than one subject) can be effective models for teachers do not perform signi�cantly better on tests. The small schools, but districts need support in their implementation. In introduction of compulsory competency tests to be eligible for addition, existing incentives for teaching in remote areas could be certi�cation and a recerti�cation requirement may improve the clari�ed and expanded, though the evidence on the effectiveness impact of the program. A promising step is the inclusion in 2012 of of these types of incentives is mixed. Contract teachers should be a competency-test to determine eligibility before a teacher starts used to deal with shortages more strategically. the certi�cation process. Improving district support and funding to schools. More than 5. The central government must provide the right incentives half of local governments support schools by providing (small) for district governments when it comes to improving teacher discretionary funds directly through the BOSDA program. A management and budget planning. The central government majority of these provide top-up funds using the same per student can also better support districts in managing and funding formula as the central government’s BOS program, and a few are schools. experimenting with alternative formulas (per school, per teacher, equity-based formulas and even some performance-based Districts are responsible for over 60 percent of the total formulas). The Indonesia Education PER report demonstrates that education budget and manage two of the most important these additional discretionary funds are associated with better inputs in basic education: schools and teachers. However learning outcomes. BOSDA also has the potential to improve districts rely on central government transfers to pay for district management by allowing districts to allocate resources teacher salaries. The central government, therefore, can play a more equitably and introducing more active district involvement stronger role in district decision-making, including through a more in school management. effective use of transfer mechanisms, providing the right incentives for district governments to improve teacher management, spend less Improved budget reporting is needed to ensure accountability on teachers and more on managing and funding schools. and transparency in the planning and allocation of resources. The 20 percent rule makes holding spending agencies accountable Districts face incentive to overstaff from two central more challenging because the pressure to show results at the time government sources: i) the sub-national transfer formulas of budgetary decision-making is now diminished (the 20 percent (DAU) and ii) the guidelines for teacher distribution. The basic is “guaranteed.�) In order to ensure that the additional resources are allocation component of the DAU formula (the main transfer from spent in a transparent manner, linked to long-term development central to sub-national governments) is based partly on the number objectives and speci�c program needs, it is important to improve of civil servants in a district, which provides an incentive to hire education budget reporting at the sub-national level and to teachers rather than redistribute them when needed. In addition, develop and report budget priorities for mid-year windfalls at the the guidelines for teacher allocation7 tend to support high teacher national level. Other important areas include improving the Ministry numbers, especially in small schools, as they are based on teaching of Education and Culture (MoEC)’s monitoring and evaluation and groups as opposed to student-teacher ratios. By tackling these two moving towards performance-informed budgeting. In addition, issues, and expanding the performance-based component of its the existing National Education Development Fund, which receives spending, the central government can improve the efficiency of a proportion of the windfalls, can bene�t from clear guidelines and education spending. a mid-term expenditure framework. Reallocating teachers across schools would improve equity 6. Better cooperation between multiple stakeholders and the and efficiency; however the sheer size of the reallocation right sequencing of reforms can help Indonesia improve the required makes it difficult in the short term. Despite the low quality of education spending. overall STRs, there are massive differences in the availability and quali�cations of teachers across schools and regions, with a clear Implementing all these reforms will be challenging due to the disadvantage for rural and remote areas. One way to address the complex political economy. Reforms that involve one stakeholder issue of equity is through the reallocation of teachers. However, can be relatively easy to implement; expanding BSM or increasing funding for higher education are relatively straightforward. However, reforms that involve multiple stakeholders can prove impossible 7 Joint Decree between Five Ministries – Ministry of Education and Culture, Ministry of if interests are not aligned. Some policy recommendations, such Religious Affairs, Ministry of Home Affairs, Ministry of Finance and Ministry of Sate Apparatus as improving the use of transfer mechanisms and increasing and Bureaucracy Reform; issued in October 2011. 4 pressing or politically sensitive than others. Teacher management Photo credit: World Bank should be dealt with urgently in order to free up resources and stop the trend of excessive hiring and uneven teacher distribution. Improving budget planning and transparency are important in the context of the 20 percent “earmark.� These two reforms would set the stage for a more sustainable expansion in the future. Other reforms may require further reflection and planning -- for example, while increasing spending on ECD is desirable, funding sources and a sustainable �nancing scheme need to be developed. Even pending notoriously difficult reforms such as adjusting transfer mechanisms, MoEC can still improve the system significantly. In addition to supporting some strategic programs such as BSM, MoEC can move to incentivize and assist districts in teacher management through clear guidelines and by helping districts to implement multigrade teaching and other reforms. It is time to translate the strong commitment to education performance-based transfers, are largely out of the control of MoEC into higher quality education. Indonesia is ready for that – falling instead under the Ministry of Finance and the Ministry of qualitative leap. Although it will require the collaboration and Home Affairs. Such recommendations may have consequences coordination of many actors, the potential gains are plentiful. As for many sectors, not only education; balancing incentives and Indonesia consolidates as a middle-income country, the presence the interests of various stakeholders will be complex and require of a highly-skilled labor force will be crucial. Improving the quality improved advocacy and coordination. of education by improving the quality of spending would be a big step toward ensuring the country is prepared. The sequencing of reforms is important. Some issues are more OBJECTIVES Learning Expansion Outcomes QUALITY OF SPENDING Adequacy / Equity Performance POLICY AREAS Strategic Budget reallocation Teacher School and planning, of of transfer Management District transparency expenditures mechanisms Management and accountability 5 Strategic reallocation of expenditure transfer mechanism MoEC MoEC Towards ECD, Senior Secondary, HE Incentives for districts Towards scholarships District MoF - MoHA Towards non-salary spending DAU reform Towards supporting schools Performance Based Transfer Teacher Management: MoEC School and District Guidelines Management Regulations MoEC Provide incentives for BOSDA MoF - MoHA - MenPAN - MoRA Provide support for low capacity districts DAU reform Joint Decree District Expand BOSDA District Experiment with equity and performance-based formulas. Redistribute before hiring Incentives for teachers Budget planning, transparency and accountability MoEC Increase transparency in the use of budget “windfalls� Increase amount in "education endowment fund" MoF Guidelines for "education endowment fund" Reformating district reporting District Improve budget reporting: more timely, more complete Based on research by Pedro Cerdan-Infantes, Yulia Makarova, Samer Al-Samarrai, Dandan Chen, Yus Medina, Imam Setiawan and Steisianasari Mileiva. The Government of the Kingdom of the Netherlands and the European Union have provided grants for the Basic Education Capacity Trust Fund (BEC-TF) with the purpose of supporting the Government of Indonesia in improving the delivery of decentralized basic education. Managed by the World Bank, the BEC-TF supports analytical work and thematic dialog in education between the Government and development partners at the national level. At local government level, it supports capacity development and strengthening of systems for planning, budgeting, financial and information management in the education sector. The findings, interpretations and conclusions expressed in this publication do not necessarily reflect the views of the Government of Indonesia, the Government of the Kingdom of the Netherlands, or the European Union. For more information, please contact: Human Development Sector World Bank Office Jakarta Indonesia Stock Exchange Building, Tower 2, 12th Floor Jl. Jenderal Sudirman Kav. 52-53 Phone: (021) 5299 3000 Fax: (021) 5299 3111 www.worldbank.org/id/education printed on recycled paper