BUDGETARY ANALYSIS OF THE EDUCATION SECTOR DEVELOPMENT FRAMEWORK (2000-2015) IN

THE LAO PDR

Jean-Marc Lepain

Public Finance Specialist

Intergovernmental Fiscal Advisor

Ministry of Finance

October 9th 2009

Executive Summary

The ESDF Model calls for a very significant budgetary effort from the Lao PDR Government.

After three years of decline, the model requires that education budget increase immediately

to 3% of GDG to reach 4.6% by 2015. Without such an effort the Lao PDR will not be able to

meet the Millennium Development Goals and is unlikely to leave the group of the least

developed countries.

Financing the model should be considered more as a political decision than a budgetary one.

But covering to total shortfall seems impossible without massive donor assistance.

Considering that ESDF is part of PRSO triggers, MoF has the choice either to revise its

budgetary priorities or to ask MoE to revise the model.

Due to low implementation capacity, the model might be over ambitious for the year

2009/10 and 2010/11.

As it appears unlikely that MoE will get the funds it needs for FY2009/10. We recommend

that, based on negotiation between MoE and MoF, a more realistic Medium Term

Expenditure Framework (MTEF) be prepared for the years starting in FY2010/11 to FY

2013/14 (the current MTEF is developed without consultation with MoF). The MTEF will not

only guide allocation of multi-year fiscal envelopes, but become the basis for calculating

budget norms and block grant formulae. The MTEF can become part of the implementation

roadmap required by PRSO. It should be stressed that an MTFEF not endorsed by MoF would

be useless.

With the decision to limit budget norms to non-wage expenditures, the budget norm

formula will become the block grant formula after deduction of the cost of the feeding

programme and scholarships which probably will be financed by donors.

The enrolment figures for primary schools appear very high and it seems necessary to clarify

the methodology for tracking school enrolment. Without a reliable tracking system the

introduction of block grants or budget norms will be difficult.

The high priority given to kindergarten and play groups should be questioned. Although it

makes a lot of sense in pedagogical terms, in budgetary term the cost appear high. Putting

more funds in primary school recurrent budget might be a more attractive strategy.

Primary school non-wage expenditures, after deduction of the feeding programme, remain

too low at around 9%-10% of recurrent expenditures while it is considered that 20% would

be a minimum. At 10% of recurrent expenditures, non-wage budget will be totally absorbed

by large urban schools, living district and village schools without financing unless a system of

block-grant, with budget execution control, guarantees that funds reach all schools.

As parent contribution represents 0.3% of GDP in FY2008/09, it is critical to develop a better

monitoring system for school fees. A policy paper should be prepared and new regulation

should be drafted in relation with other sectors such as health and transport.

Introduction

The ESDF model is a model that has been created by MoE at the request of donors and is one of

PRSO 5 triggers. PRSO 6 objectives already include the implementation of the ESDF model. If MoF

decided that ESDF cannot be implemented, then either PRSO 6 triggers must be revised or the model

must be adjusted.

The ESDF Models exist in two versions. The first version is the one approved by the Prime Minister

and the donors. The second version has been released a few months ago with three main

differences: (i) budget figures for 2008/09 are based on actual budget figures; (ii) enrolment plans

for pre-schools have been increased from year 2009/10 as well as the non-wage recurrent budget.

Non-wage recurrent expenditures per student in pre-schools go from 373 thousand kip in the

approved model to 428 thousand kips in the revised model, including the feeding programme; (iii)

enrolment number have been increased in all major programmes from FY2010/11 onward.

The ESDF Plan recognises that the resource disparity across provinces is an obstacle to its

implementation and requires reviewing “the financial arrangement and mechanism introduced in

support of decentralization”. It stresses the necessity “to return some education functions from the

provinces to the Ministry”, to clarify expenditure assignment (p. 35 §63), and to revise budgeting

procedures (p.34).

1. Required level of funding

In general, the ESDF Model requires a very significant budgetary effort from the Lao PDR

Government that will reverse the current budgetary trends. Education budget has declined from

3.1% of GDP in 2005/06 to 2.2% in 2008/09, and from 14.8% of the national budget to 10.8%. The

ESDF Model assumed that this negative trend will be reversed and that the education budget will be

restored to 3.1% of GDP in 2009/10 an will grow faster than GDP in FY2011/12 and FY2012/13 to

reach 4.15% of GDP in 2015/16

This scenario is very much what donor had in mind when the PRSO Agreement was put in place.

However, donor assistance, as it could be expected, has not grown as fast as the national budget and

the Government has kept it contribution around 1.1%-1.2% of GDP. As a consequence, the education

budget has not been growing as fast as the general budget resulting in a virtual transfer of 49M

USD from the Education Sector to other sectors for last fiscal year only. Obviously Nam Theun 2

additional revenue will not cover that gap.

2. Pro-poor policy

The ESDF models envisaged four types of pro-poor measures:

A robust scholarship system is proposed for securing improved student retention and cohort

survival rate;

Waiving of parent contribution for primary schools and lower secondary schools;

Incentive programmes for recruiting and retaining very good teachers in the poorest

districts;

A children feeding programme;

3. Introduction of school block grants

The ESDF Model is based on the introduction of a school block grant system which is one of the

objectives assigned by the Poverty Reduction Strategy Operation and a trigger of PRSO 6. PRSO 6

gives as objective: “MoE and MoF agree to pilot formula-funded school grants for non-wage

recurrent expenditures, with allocations in the FY2010/11 budget”.

However, because of the spit between salaries, non-wage and investment budgets, the block grant

system is limited to non-wage expenditures. With the decision to limit budget norms to non-wage

norms, de facto, the budget norms formula becomes the block grant formula.

4. Enrolment Figures

Kindergarten and Play Groups: An increase of 28% of enrolment was planned in 2008/09 and we

will need confirmation that it has taken place. Enrolment is expected to grow by 31% in FY2009/10

and 25% in 2010/11. To keep such a growth rate will represent a serious challenge and enrolment

growth should be closely monitored.

Primary Enrolment: A number of objective elements seem to indicate that enrolment figures for

primary education have been inflated.

The ESDF Model establishes enrolment at 898 thousand children for year 2009 when other

reports from the statistic department put that number to 878 thousand (-1.9%)

The ESDF Model put the total primary school age population at 990 thousand. This represent

16.5% of total population; something biologically impossible. Data from MPI suggest that

school age population is around 897 thousand children.

ESDF Model puts child enrolment in public schools at 90.2% plus 2.1% for private enrolment.

An enrolment rate of 92.3% looks highly improbable compare to neighbouring countries and

does not seem compatible with the drop-out rate observed in rural area. The enrolment rate

rises to more than 100% of the school age population according to MPI numbers. In a survey

the Word Bank has estimated that only two third of students entering grade 1 reach Grade

5. Even if the rate has improved it cannot be higher than 80%.

The ESDF report says “Net enrolment rate in Vientiane City and Vientiane Province is above

90%. The net enrolment rates in Luangnamtha, Pongsaly and Saravanh are around 50%” and

add that 57% of primary schools are incomplete and unable to teach up to grade 5.

Data communicated by the provinces seems also inflated. Considering the average fertility

rate (31.6 per 1000) and infant mortality (63.2 per 1000), the school age population should

not exceed 15% of population, but 14 provinces reported higher enrolment rates, sometime

as high as 19.6%. Oudomxay is the province that reports the highest enrolment rate after

Luangnamtha and Oudomxay.

Principles under which enrolment is reported should be checked before the correct level of financing

per student and per programme can be decided. MPI data have also their own discrepancies.

Whereas MPI estimates age 0-4 and 10-14 at 13.4% of total population, age 5-9 is only 12.6%. MPI is

not able to give any explanation for this loss of 100 thousand children. But even if we correct school

age population by adding 100 thousand children, enrolment numbers appear still too high. The only

other possible hypothesis is that MPI underestimates total population by half a million.

Lower Secondary Enrolment is planned to increase 33% in 2009/10. As the school year starts in

September, MoE should be able to confirm if the increase has taken place. In 2008, enrolment in

lower secondary education represents 30% of enrolment in primary. To raise that ratio to 40% in one

year seems very ambitious.

Upper Secondary Enrolment: We do not have enough information to understand the numbers.

Enrolment is supposed to decrease by 22% in 2009/10 and increase by 23% in 2010/11. This seems

to be correctly reflected in salaries.

Teacher Training: An important recruitment of nearly 3,000 teachers is supposed to take place in

2009/10. We will need confirmation from MoE that it goes according to plan.

No significant increase is scheduled for non-formal education, technical and vocational and higher

education.

5. Priority given to pre-school

The ESDF Model reflects a high priority given to kindergartens and play groups with a growth rate of

25% to 30% from year 2009. The very high figures of the ESDF model (enrolment growing to 117

thousand in 2009) cannot be correlated to the Education Sector Baseline MTEF that shows an

enrolment of 28 thousand children. We are in process of clarifying this point with MoE and expecting

more information.

The plan gives priority to enrolment over quality. With non-wage expenditures fluctuating around

10% of the recurrent budget (not including the feeding programme), it would be almost impossible

to provide the required pedagogical materials.

The high priority given to kindergarten and pre-schools can easily be understood in pedagogical

terms. However, due to budget constraints, the development of pre-schools seems to impact

negatively the development of primary education that will continue suffering from a chronic lack of

non-wage resource well after 2015.

6. User Fees and Parent Financing

Registration and instructional fees for schools have been identified as one of the main cause for low

enrolment and high drop-out. The objective of MoE is to waive all user fees for primary and lower

secondary education as soon as possible. The ESDF model sets the objective for FY2009/10 for

primary education and 2010/11 for lower secondary education. However if after budget negotiation

the ESDF model is not completely funded, MoE might decide to keep parent contribution.

In kindergarten and upper secondary education parent financing is expected to play an increasing

role. In kindergarten and play groups parent contribution is in expected to rise from 8.2% of

recurrent expenditures in 2009, to 13% in 2011 and 22.2% in 2015. In upper secondary education

parent contribution represents 23.4% of recurrent expenditures in 2008/09. ESDF sets an objective

to reduce that ratio to 16.7% in 2009/10 and to stabilize it around 17.6% by 2011/12. However it

should be noted that by 2015/16 parent contribution will exceed non-wage expenditures, meaning

that parent contribution will finance a portion of salaries. In Technical and Vocational Schools,

parent contribution has nearly doubled from 56% in 2007/08 to 103% in 2008/09 and 107% in

2009/10.

Regarding higher education, parent contribution is expected to reach 244% of the total education

budget (recurrent + investment) in 2015/16. At this level of financing, the affordability of higher

education will certainly become an issue for many families and there will be strong pressure on the

Government to develop a strong system of scholarship.

The importance that parent contribution plays in education financing calls for more regulation from

MoF. In 2008/09 parent contribution represented 28% of all local budgets with large regional

disparities and 0.3% of forecasted GDP. However, parent contribution does not appear as a resource

in MoE budget and technical fees only capture a very small portion of the total amount. The

importance that parent contribution plays in education financing call for strict accounting and

reporting rules and a clear policy established jointly by MoE and MoF. The fact that MoE envisages

to use parent contribution in future to finance salaries is questionable and will require, if

implemented, very strict regulation.

7. Feeding Programme

The Children Feeding programme is an important component of MoE’s pro-poor policy and an

important measure to reduce drop-out rate.

In 2009/10, 43,508 M kips are allocated to the kindergarten feeding programme, representing 52%

of recurrent expenditures and an amount of 372,663 kips of per student declining to 208,458 kips in

2015.

As only a small proportion of primary student are expected to benefit from the feeding programme,

the cost per capita is much lower, but still the cost of the programme represents 27% of the

recurrent budget in 2009/10 and decline to 16% in 2015.

Three questions should be raised:

Can the feeding programme be financed by donors? It seems that it is what MoE expects but

it requires confirmation.

Are the donors ready to make a multi-year commitment?

Is the logistic of the programme ready, and what will be the expected starting date if the

financing is secured?

If donors financed the feeding programme, the cost of budget norm will be significantly reduced.

8. Scholarship system

A scholarship system is already in place for technical and vocational education, teacher training and

higher education. It is planned to expend this system to primary education in 2010 and upper

secondary education in 2011. The additional cost will be 5,447 M kips (0.6M USD) in 2009/10 and

20,141 M kips in 2010/11 (2.4M USD).

Scholarship programmes will be targeted at around 20% of projected enrolment including Grade 4

and 5 enrolment.

9. Books

Books are considered as part of the investment budget.

PRSO 6 includes the following objective: “MoE and MoF agree to provide one set of textbook per

student for grade 1-5, including free distribution to poorest students, and reflect this in the

FY2010/20011 budget”. The indicator is the average student / textbook ratio in 47 priority districts.

The current target is to have at least 3 essential textbooks for each child in primary school and 4

textbooks for each secondary school student.

Provision of free textbooks is already in pilot phase. However first results seem to indicate that a

high proportion of textbook are either lost or damaged every year. A better book management

system is required. A solution could be to give a budget to schools for textbook replacement.

Textbook budget should be included in the school block grants. Textbooks as a free resource do not

encourage good management. MoF should ensure that financial resources allocated for textbooks

are managed in a responsible manner.

10. Teacher Salary increase

Proposed salary increase is set at around 10% per annum and will be linked to the capacity

development framework. As teachers are public servants, strategies for securing the salary outcome

will need to be worked out between MoE, MoF and PACSA.

11. Realism of the ESDF Model

In terms of budgeting technique, the ESDF Model is a first class tool even if some of the assumptions

can be questioned. It is an ambitious model, and considering that the future of the country is at

stake it is worth to be considered by the Government for financing. One of the assumptions that

underpins the model is that the Lao PDR will reach the Millennium Development Goal by 2015.

However, considering delays in providing adequate funding to basic social programmes one can

wonder if it not already too late.

Because of the constrains put by the Millennium Development Goal, the ESDF model might be too

ambitious. Even if the Government provide the funding it seems that the model requires doing too

many things too fast. High enrolment rate in several sectors will require a very significant effort to

build facilities and to recruit teachers. As it appears unlikely that MoE will get the funds it needs for

FY2009/10, we recommend that a more realistic Medium Term Expenditure Framework be prepared

for the years FY2010/11 to FY 2013/14.

12. Costing and budget gap

The ESDF Model is based on its own macro-economic assumptions which are difficult to reconcile

with MPI and MoF data. The development of a common MTEF should solve this problem. In any

case, the shortfall is important and is equivalent to 243.6 M USD from now until 2015. This is

probably an underestimation. Budget restrictions for FY2009/10 might increase significantly the

shortfall for that year estimated at 43.6 M USD by MoE. Donor efforts to cover the shortfall are likely

to be proportional to the efforts made by the Government. Certainly MoE will need to produce an

annual implementation plan with less ambitious targets. Finance is not the only constraints. Capacity

constraints might also delay the implementation and reduce the required funding.