Indonesia: Higher Education Financing 58956 Policy Brief October 2010 Key higher education financing issues A. Resource mobilization: Is Indonesia investing sufficiently in higher education? Total spending on public and private higher education in Indonesia is low as a percentage of GDP and reflects the low enrollment rate in HEIs. Indonesia's tertiary education participation rate is at the lower- middle end of the scale compared with other middle-income countries. Developed countries such as Denmark and Finland, spend between 2-3 percent of GDP on tertiary education and have higher tertiary graduation rates. Indonesia by comparison spends about 1.2 percent of GDP on Photo by: BINUS University Photo Archive tertiary education. Like many other lower middle-income countries, the relative figure mostly reflects lower enrollment and therefore graduation Indonesia's higher education sector has expanded rapidly since rates. Independence. Nearly 4 million students are enrolled in higher education institutions (HEIs) nationwide representing a gross enrollment One distinctive feature of tertiary education financing in Indonesia is rate of 26.6 percent. The expansion is characterized by the growing the large share of financing from households/private sources. Of the 1.2 provision of higher education by private institutions. There are currently percent of GDP spent on tertiary education, 0.9 percent or three-quarters more than 130 public- and over 3,000 private HEIs. Although public is contributed from private sources, mostly in the form of tuition and institutions represent just 4 percent of the total, they account for 32 other fees and levies. The private share is one of the highest in the world. percent of enrollments, with the remaining 68 percent enrolled in private institutions. Due to the expansion in the number of private providers, Figure 2: Public and private spending on Tertiary Education as Indonesia's tertiary education enrollment rates exceed population percentage of total GDP growth rates, with approximately 27 percent of 18-22 year-olds enrolled Malaysia 2.1 0 in higher education. Tunisia 1.8 0 OECD avearage 1.3 0.4 Jamaica 1.1 1.6 Figure 1: Gross tertiary enrollment rates in private and public India 1 0.2 institutions, 2001 ­ 2008. Thailand 0.9 0.4 public Japan 0.7 1.0 30 Paraguay 0.7 0.8 private Private Public All Argentina 0.7 0,7 25 Korea 0.6 3.4 Uruguay 0.6 0 20 Chile 0.5 2.7 Peru 0.3 0.4 15 Indonesia 0.3 0.9 26.6 9.5 9.8 9.8 10.2 10 18.2 20.1 1 2 3 4 5 14.9 5 % of GDP 5.8 6.1 6.3 6.7 0 Source: UNESCO: World Education Indicators (WEI, 2007). Figures reflect estimates 2001 2002 2003 2004 2005 2006 2007 2008 for 2004-05. Indonesian figure is from 2009 budget Source: SUSENAS Core Module 2001-2008; Enrollments in private vs. public institutions were only collected in selected years B. Resource allocation: Do public funding mechanisms reward performance and promote accountability? Despite a steady increase in the enrollment rate in recent years, higher education access by, and the participation of the rural A large proportion of the Directorate General for Higher Education population and socio-economically disadvantaged groups remain (DGHE) budget goes to public institutions. The 2009 government a critical concern. The government wants to increase the relevance of budget for higher education is Rp 18.5 trillion, or US$ 1.8 billion. Roughly higher education so that it can provide graduates in the fields where 85 percent of the budget is to support tertiary education institutions: they are needed to respond to the rapidly growing economy and the 69 percent is allocated to 76 nonautonomous public HEIs, 11 percent structural changes required for Indonesia to be competitive in the global to seven autonomous institutions, and 6 percent is to subsidize private economy. One indicator of the possible mismatch between the output institutions.1 of the higher education system and the needs of the economy is the long waiting period between graduation and employment. 1 Some civil servant lecturers and professors also work at private institutions. This form of public subsidy to private institutions is not included in these estimates.. 1 Figure 3: Composition of the DGHE's Rp 18.5 trillion budget Under the Higher Education Long-Term Strategy (HELTS), the (2009 approved)2. government intends to introduce a new financing innovation: Coordination of performance-based funding for HEIs. Performance-based funding will 75 public institutions 69% private universities tie a portion of public spending for higher education to an institution's 6% State budget performance, and will be first applied to the autonomous universities. Seven autonomous 63% universities However, the revocation of the Education Legal Entities Law (BHP), Institution revenue 11% (fees, etc) which removed the legal basis for performance-based funding, and the directorates 37% low capacity of many public HEIs has impeded its implementation. 15% Source: DGHE D. Equity: Are public funds distributed equitably? The current public financing arrangement for HEIs does not have Regional disparities have been narrowing, owing to the an explicit financing formula and strong incentives at the system government's continuous investment in higher education in level that reward good institutional performance. The recurrent disadvantaged areas, however there is still significant disparity budget allocation is mostly incremental, and capital budgeting is mostly in the ability of rich and poor to access tertiary education on a needs basis and dependent on various negotiation processes. The opportunities. Less than 2 percent of youth aged 19-22 from households DGHE's per-student recurrent financing is highly uneven, even across of the lowest wealth quintile are enrolled in HEIs, compared with over 60 similar institutions. percent of those from the wealthiest households. The biased enrollment favoring the relatively rich leads to the highly regressive pattern of public The implementation of a mechanism to channel public expenditure spending on tertiary education in Indonesia: over 80 percent of the for higher education via a combination of block grants, competitive public spending on tertiary education benefits the better-off 40 percent grants and performance-based grants started a few years ago. These of households, and over 60 percent benefits the richest 20 percent. resource transfers focus on improving education quality, governance, efficiency and equity. This is followed by the recent introduction of Figure 5: Tertiary education gross enrollment rate by demand-side financing through higher education scholarships to high household expenditure quintile school graduates that can potentially serve as a channel to transfer funds 70.00% to both public and private HEIs. 60.00% 50.00% C. Resource utilization: Do HEIs use available resources 40.00% 38.89% efficiently? 30.00% Private Public The average length of time taken to complete a diploma or degree 20.00% has decreased in recent years, possibly reflecting the increased 10.00% 12.19% 22.53% internal management efficiency of tertiary institutions. For example, 0.75% 1.66% 3.29% 2.35% 6.06% 0% 1.06% in public HEIs the older cohorts (aged 36-40 in 2008) took nearly six years 0.35% poorest Q2 Q3 Q4 wealthiest to finish their four-year Degree (S1) studies. The average duration has been shortened to about four and half years for the latest graduates aged Source: 2006 SUSENAS Education Module 26-30. A similar pattern is also shown for diploma programs on average. Whether the shortened graduation period reflects the efficiency gain Public and private agencies offer a variety of scholarship schemes will also depend on whether the quality of learning is being sacrificed. to undergraduate students. Non-government sources provide There is insufficient evidence to conclude one way or the other. a significant number of scholarships at HEIs. It is estimated that approximately half of the scholarships at public HEIs, and over 85 percent Figure 4: Average number of years to obtain a tertiary diploma/ of the scholarships at private HEIs are provided by private sources. degree. However, on average, less than 2 percent of higher education 7.00 enrollees are beneficiaries of scholarships from government or 5.98 Average number of years in HEI 6.00 non-government sources. The National Socioeconomic Household 5.42 5.70 4.50 5.00 Survey (SUSENAS) data shows that among these scholarships recipients, 5.10 4.00 over 60 percent are enrolled in public institutions. If public and private 4.00 3.18 3.00 HEIs are examined separately, the scholarship coverage is 2.7 percent 3.24 2.62 2.00 in public HEIs, three times as much as the 0.9 percent in private HEI 2.37 2.00 1.64 institutions. 1.00 0 Scholarships do not benefit the most disadvantaged students due 36-40 31-35 26-30 to the biased enrollment in higher education. Since most children Graduates' age in 2008 from the poorest households drop out of the education system before D1-D3 Public D1-D3 Private S1/D4 Public S1/D4 Private they even reach higher education, and most of the relevant scholarships Source: IFLS 4. The small sample size prevents the authors to from estimating the are awarded after one is enrolled, there is little chance that the children average study duration for D1, D2, D3 separately from the poorest households can benefit. Scholarship schemes for financially disadvantaged high school leavers who want to pursue a 2 Among all public higher education institutions, autonomous universities' higher education are very rare. This inevitably limits the opportunity for own revenues from fees, etc., are not included in the national budget (APBN), them to pursue a higher education. while non-autonomous institutions' revenues are reported in the APBN. 2 allowing for opportunity costs, the total direct cost of higher education The Way Forward in Indonesia may amount to over US$ 1,000 per year per household, a major factor in why most tertiary students, in both public and private 1. Increase public funding and rationalize public institutions, come from Indonesia's better-off households. expenditure for greater efficiency Benchmarking efficiency using service standards and unit costs Financial aid also needs to be increased and the balance between will be a useful tool for institutions to reflect on their internal institutional- and individual funding adjusted. One feasible start is management issues. This is particularly applicable to the operational to change the government financing channel to public HEIs. Instead of or recurrent costs for undergraduate education in public HEIs. The cost giving public HEIs a budget allocation inclusive of scholarships, part of calculation can be based on the average standard, and account for the budget could be allocated as direct student financial aid. Some of this several parameters such as curriculum, class size, and student-staff ratios. direct aid should be allocated to promising secondary school graduates. To reflect the special costs associated with certain types of institution, The institutions would then obtain the funding indirectly through cost- some weighting will be applied at a later stage. This will also include a recovery from these students. This change would both improve equity weighting to recognize different costs for different fields of studies as and create a culture of competition between both private and public well as variability in the average price index in different parts of the institutions. country. 4. Efficient pathways for future expansion HEI's public funding sources, particularly for research, can be Indonesia will need to explore what type of institutions should further diversified. The imminent need for investment in improved be supported and relied on to expand coverage. Indonesia already infrastructure, facilities, and teaching and learning will possibly crowd has an open university with a large enrollment. Whether more could out other needs such as research funding to some extent. Setting up be established can be further explored. "Community colleges" can also different funding mechanisms to support these activities can also be be considered. They can offer 2-3 year diploma courses with credits considered. In terms of research, one lesson that can be learned from recognized by universities if one wants to pursue a Bachelor's degree. developed countries is the advantage of diversifying government Community colleges are generally less expensive. They could be most funding sources. Research contracts and grants can be generated from relevant in the Indonesian context, given the largely decentralized nature a variety of government agencies and tied to specific research need of education service delivery up to the secondary level. There has already in various sectors: health, agriculture, poverty reduction, science and been demand from local governments for permission to establish "local" technology. colleges. Looking ahead, the key interventions should still strive to improve On the other hand, there is need to review how to better guide the the institutional capacity to manage finances, personnel, and expansion of private HEIs. A key issue that should be highlighted is procurement effectively. the economic consequences of having a lot of small, private institutions. Other countries have found that this can affect potential economies of 2. Innovative and integrated support to private scale and the ability to offer good quality education. These countries institutions have used accreditation decisions to close down or merge some small, private institutions that are substandard. Indonesia could examine the A large proportion of central support to higher education can be experience of other countries in this regard. through direct support to students in the form of grants or loans to cover tuition fees, and work-study programs. These sources will eventually finance institutions' operations. Channeling through targeted E. Increased overall public resource allocation to higher families and students will provide them with "choices" of institutions, education create incentives for institutions to improve service delivery, in order The policy measures outlined here for the way forward will require a to compete for students, and narrow the large tertiary education much higher level of public resources devoted to higher education. participation gap between rich and poor. However, successful It is estimated that to better support public and private HEIs, and to make implementation will also require greater administrative capacity and the system more equitable, even with the current enrollment expansion an adequate data system for targeting, tracking, and collecting student rate, the total amount of public resources needed for higher education loans. will have to increase from 0.3 percent of GDP to 0.6 percent by 2020. If the education budget remains at 20 percent of total GoI budget, the 3. Increased student financial aids to improve equity increased amount will be equivalent to 49 percent of the total MoNE Inequity in access to tertiary education can only be reduced by budget (APBN ­ central government budget) by 2020. bridging the "wealth divide". Supply-side equity has been achieved in the provision of higher education, particularly as a result of the Looking ahead, rationalizing public expenditure at HEIs government's decision in the 1960s to have at least one public institution and increasing the level of public funding will be the key to in each of the then-27 provinces. Indonesia's level of cost-recovery is strengthening Indonesia's higher education sector. currently among the world's highest and continues to rise. Even without 3 Recommendations · Benchmark efficiency using service standards and unit costs to provide a tool for institutions to reflect on their internal management issues. · Diversify public funding sources to HEIs, particularly for research. · Channel direct financial support to students (grants or loans) to encourage "choice" of HEIs by "consumers", and competition among HEIs. · Increase financial aid and balance institutional and individual funding to reduce the wealth divide. · Explore the types of institutions that should be supported and relied on to expand coverage of higher education. · Review the economic consequences of having many small, private institutions. · Increase the public resources devoted to higher education. Preparation of this document received partial funding from the European Commission and the Government of the Netherlands under the supervision of the World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Government of Indonesia, the Government of the Netherlands or the European Commission. For more information, please contact Mae Chu Chang, mchang@worldbank.org or Sheila Town, stown@worldbank.org. Human Development Sector, Prepared by the Education Unit, World Bank Indonesia World Bank Office Jakarta Based on Chen, Dandan et al, 2010 Indonesia Stock Exchange Building, "Indonesia: Higher Education Financing" Tower 2, 12th Floor World Bank, Jakarta, Indonesia Jl. Jenderal Sudirman Kav. 52 ­ 53 Phone: (021) 5299 3000, Fax: (021) 5299 3111