Economics of Education II: Intermediate Economic Analysis

of Education Sector Projects

Fiscal Impact AnalysisPeter Moock

2

Economic Analysis of Projects

• effectiveness analysis• cost-effectiveness

analysis• cost-benefit analysis

– discounting– net present value– rate of return analysis

costs benefits

3

Internal Rate of Return

• discount rate that equates project costs and benefits

• compare alternative projects

• profitable investment, yes, but affordable?

costs benefits

4

“Social Rate of Return”

PPPUUUBBBLLLIIICCC PPPRRRIIIVVVAAATTTEEECCCOOOSSSTTTSSS

BBBEEENNNEEEFFFIIITTTSSS

Private rate of return

Social rate of return

External benefits

Rationale forpublic sectorinvolvement

Capital marketimperfections

External costs

5

Financial Analysis

PPPUUUBBBLLLIIICCC PPPRRRIIIVVVAAATTTEEECCCOOOSSSTTTSSS XXX YYY

BBBEEENNNEEEFFFIIITTTSSS

Is the project financially sustainable?

Fiscal impact analysis

How affordable are the public and private costs?

What are longer-term recurrent-cost implications of project?

What is the scope/justification for increased cost recovery?

6

Decentralized Financial Analysis

CentralGovt

LocalGovt

Commun-munities Families

CostsBenefits

7

Incidence analysis

PPPUUUBBBLLLIIICCC PPPRRRIIIVVVAAATTTEEECCCOOOSSSTTTSSS WWWHHHOOO???

BBBEEENNNEEEFFFIIITTTSSS WWWHHHOOO???

Who are the winners? Who are the losers?

What are the benefits and the costs for the poor, the very poor?Consistent with project objectives/rationale?Consistent with equity (poverty alleviation) goal as well as efficiency goal?

8

Fiscal AnalysisExamples

• Vietnam– Education Financing Sector Study– 1997 ESW

• Lesotho– Second Education Sector Development Project– 1999-2002

• Indonesia– Sulawesi and Eastern Island Basic Education

Project– 1999-2006

9

VietnamEducation Financing Sector Study (VEFSS)

• Published as World Bank Country Study, “Vietnam Education Financing,” Washington, DC, 1997 (ISBN 0-8213-4023-9).

10

VietnamEducation Financing Sector Study (VEFSS)

1. Demographic and macro-economic context2. Education and training sector3. Education expenditure and finance4. Unit costs and internal efficiency5. External efficiency and equity6. Future directions for education finance

– Vietnam in relation to HPAEs– Enrollment projections and fiscal affordability– Promising policy options

11

Vietnam Budget projection, 1994-2004

• GDP: about 10% per year (Revised Minimum Standards Model)

• State Budget as percent of GDP: constant at 26%

• Debt repayment: rise, then fall• Recurrent spending as percent of State Budget:

fall from 83% to 73%• Education’s share of recurrent budget: constant

at 13.3% (conservative)

12

Table 6.2. Projected GDP, State Budget and Allocations for Education and Training, 1994-2004(in VND '000,000,000,000 at constant 1994 prices; 1994 actual, 1995 budgeted, 1996 projected)

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004A. GDP 170.3 186.5 204.3 223.7 245.0 268.3 293.7 321.5 352.0 385.3 421.8B. State Budget (I+N) 44.2 45.6 47.2 59.8 65.0 70.8 77.0 83.9 92.6 99.8 109.8C. State Budget as % of GDP 26% 24% 23% 27% 27% 26% 26% 26% 26% 26% 26%D. Interest payments 2.92 2.48 3.47 3.23 3.05 2.87 2.71 2.58 2.46 2.34 2.23E. Discretionary State Budget (B-D) 41.3 43.1 43.7 56.6 62.0 67.9 74.3 81.3 90.1 97.5 107.6F. E&T (ca. 12% of E and 3% of A) 5.01 5.28 5.29 6.81 7.36 8.06 8.83 9.66 10.65 11.50 12.62G. Education (71-73% of F) 3.63 3.85 3.83 4.91 5.25 5.75 6.29 6.89 7.56 8.15 8.90H. Training (27-29% of F) 1.38 1.42 1.46 1.90 2.11 2.32 2.53 2.77 3.09 3.35 3.72I. Current State Budget 32.9 34.9 34.9 43.0 44.2 48.0 52.0 56.6 60.9 65.2 69.7J. Discretionary current budget (I-D) 30.0 32.5 31.5 39.8 41.2 45.1 49.3 54.0 58.4 62.8 67.5K. E&T (13.3% of J) 3.98 4.30 4.17 5.28 5.46 5.98 6.54 7.16 7.75 8.33 8.95L. Education (77.4% of K) 3.08 3.33 3.23 4.09 4.23 4.63 5.06 5.54 6.00 6.45 6.93M. Training (22.6% of K) 0.90 0.97 0.94 1.19 1.23 1.35 1.48 1.62 1.75 1.88 2.02N. Capital State Budget 11.3 10.6 12.3 16.8 20.8 22.8 25.0 27.3 31.7 34.7 40.1O. E&T (9.1% of N) 1.03 0.97 1.12 1.53 1.90 2.09 2.28 2.50 2.90 3.17 3.66P. Education (53.8 of O) 0.56 0.52 0.60 0.82 1.02 1.12 1.23 1.34 1.56 1.71 1.97

Training (46.2% of O) 0.48 0.45 0.52 0.71 0.88 0.96 1.06 1.16 1.34 1.47 1.69Memo Item:

GDP Deflator 100 119 130 139 148 157 166 174 183 192 202Source: World Bank estimates prepared by the East Asia 1 Country Operations Division using MOF data and the Revised

Minimum Standards Model (see Annex 6.1, Tables 1, 5 and 6).

VEFSS

13

VEFSSExpenditure Scenarios

• Baseline (no change) scenario– driven by population projections

– GERs and unit costs at 1994 levels

• Plan scenario– Govt (MPI) enrollment targets

– higher than Baseline -- by as little as 2% in case of technical to 138% in case of vocational

14

Figure 6.4. Affordability of Two Enrollment Scenarios

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Fiscal Year

VN

D tr

illio

n

Projected Budget

Plan Scenario

Baseline Scenario

Sources: VEFSS Projections.

VEFSS

15

VEFSS - study recommendations

• Target subsidies to basic and to poor

• Cost recovery in tertiary

• Go slow with vocational

• Reduce dropout and repetition

• Quality enhancement– monitor learning– increase instructional

hours– teacher upgrading and

regular in-service trng– increase govt spending

on textbooks and learning materials

16

Figure 6.6. Affordability of Increasing Instructional Hours

0.0

2.0

4.0

6.0

8.0

10.0

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Fiscal Year

VN

D tr

illio

n

Projected Budget Plan Scenario with 40 percent increase in teachers' salaries

Sources: VEFSS Projections.

VEFSS

17

Figure 6.5. Shares of Education and Training Budget by Level/Type of E&T, 1994 and 2004

0%

20%

40%

60%

80%

100%

1994 Baseline 2004 Plan 2004 Full Reform?

1994 (actual shares) and 2004 (shares under alternative scenarios)

Other

Post-Grad.

Tertiary

Technical

Vocational

Upper Sec.

Lower Sec.

Primary

Pre-school

Source: VEFSS projections.

VEFSS

18

LesothoSecond Education Sector Development Project

• “to increase the number of Basotho that benefit from the education and graduate with skills enabling them to meet labor market demand”

• effective: 6/30/99• expected closing: 12/31/02

19

LesothoSecond Education Sector Development Project

• project costs - $25 million• IDA funding - $19 million• four components

1. ECD - $0.52. Primary/Secondary - $23 (IDA $19)3. TVET - $14. NFE - $0.5

20

Lesotho - Project Component 1Early Childhood Development

Component 1 - ECD• “increase coverage and improve quality”• phase I

– policy memo to define GOL and NGO roles– feasibility study to explore attaching community-run

ECD centers to primary schools– pilot models in two or more isolated districts

• subsequent phases - expand coverage

21

Lesotho - Project Component 2Primary and Secondary Education

Component 2 - Primary and secondary• “increase access and equity and enhance quality

and efficiency”• six sub-components

1. curriculum and assessment2. teacher development3. physical construction4. school-level management5. targeted equity-based program6. capacity building in planning, monitoring and evaluation

22

Lesotho - Project Component 3Technical and Vocational Education and Training

Component 3 - TVET• “improve efficiency and cost-effectiveness of

TVET system”• Phase I

– policy and institutional framework for demand-driven system

– skills needs assessment• Phase II - investments identified in phase I

23

Lesotho - Project Component 4Non-formal Education

Component 4 - NFE

• “improve quality of life for Basotho who have missed out on formal schooling by equipping them with skills”

• Phase I - define policies and priorities

• Phase II - investments defined in Phase I

24

Lesotho - Policy Simulation Model Scenario I - UPE

• By 2010:– all children enter school at age 6 and complete grade 7

(dropout from 7.5% to zero)

– primary repetition rate halved (from 20% to 10%)

– 60% of primary graduates enter secondary (up from 54%)

– secondary repetition rate halved (from 10% to 5%)

– secondary dropout rate also halved

25

Lesotho - Scenario I (continued)

• Also by 2010:– primary student-teacher ratio fall from 48:1 to 40:1– secondary student-teacher ratio increase from 25:1 to 30:1– teachers' salaries remain constant in real terms

(incorporating step increases only)– unit costs of classroom construction, books and other inputs

remain same in real terms– higher education expenditure assumed to grow by 2.5%

annually in real terms

• Government expenditure to grow in line with GDP growth (3% per annum)

26

Lesotho - Scenario IProjected primary and secondary age groups and enrollments - Scenario I

0.0100.0200.0300.0400.0500.0600.0700.0

1996/97 2001/02 2006/07 2011/12

(thou

sand

s) Pr. age groupPr. enrollmentSec. age groupSec. enrollment

27

Lesotho - Scenario IGross primary and secondary enrollment

ratios and repetition rates - Scenario I

0%

20%

40%

60%

80%

100%

120%

1996/97 2001/02 2006/07 2011/12

GPER

GSER

Pr. repetition rate

Sec. repetitionrate

28

Lesotho - Scenario IGovernment expenditure - Scenario I

-

500

1,000

1,500

2,000

2,500

3,000

1996/97 2001/02 2006/07 2011/12(Con

stan

t 96/

97 M

alot

i, m

illio

ns)

Other govt expen.Educ. recurrentEduc. capital

29

Lesotho - Scenario IEducation's share of total government

expenditure - Scenario I

0%5%

10%15%20%25%30%35%40%

1996/97 2001/02 2006/07 2011/12

30

Lesotho - Scenario ISub-sectoral shares of education budget -

Scenario I

0%

20%

40%

60%

80%

100%

1996/97 2001/02 2006/07 2011/12Primary Secondary Higher Other education

31

Lesotho - Scenario IIUPE with reduced repetition

• Repetition rates fall more rapidly

• Otherwise same as Scenario I

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32

Lesotho - Scenario IIIFree primary education

• Government pay entire costs of textbooks, learning materials and school maintenance

• Estimated to be Maloti 210 per student• Assumes 3-year life span for textbooks• Otherwise same as Scenario II

33

Lesotho - Comparison of 3 Scenarios

Education's share of total government expenditure - scenarios I, II and III

0%

10%

20%

30%

40%

50%

1996/97 2001/02 2006/07 2011/12

Scenario IScenario IIScenario III

34

Lesotho - Comparison of 3 Scenarios

Sub-sectoral shares of education budget in 2011/12 - scenarios I, II and III

0%20%40%60%80%

100%

Scenario I Scenario II Scenario III

Primary Secondary Higher Other

35

Lesotho - Comparison of 3 ScenariosIndex of projected education expenditure

(Scenario 2 = 1.00)

0.800.850.900.951.001.051.101.151.20

1996/97 2001/02 2006/07 2011/12

Scenario 1 -Universal primaryeducation (UPE)Scenario 2 - UPEwith reducedrepetitionScenario 3a - Freeprimary (books,maintenance)Scenario 3b - Freeprimary, imple'dgradually

Lesotho - Policy Simulation Model Assessment

37

IndonesiaSulawesi and Eastern Islands Basic Education Project

• “to mitigate the effect of the economic crisis by– maintaining enrollment rates and transition

rates for the poor– preventing quality deterioration by ensuring

schools can meet essential operating and maintenance costs, and

– realizing efficiency gains

38

IndonesiaSulawesi and Eastern Islands Basic Education Project

• “and to support recovery and return to medium-term education strategy of– improving quality of basic education, and– decentralizing educational planning,

management and implementation to districts and below

• effective: 7/1/99• expected closing: 4/30/06

39

IndonesiaSulawesi and Eastern Islands Basic Education Project

• project costs - $71• IBRD funding - $48• IDA funding - $16• four components

1. Crisis Relief - $302. Institutional Reform - $83. Quality Improvements - $274. Project Management - $6

40

Indonesia - Project Component 1Crisis Relief

Component 1 - crisis relief• Sulawesi (11%), Maluku (20%), Irian Jaya

(22%), Timor Timur (32%) - poverty rates in parenthesis (national rate 11%)

• Scholarships to poor junior secondary school students and families

• Special assistance to primary and junior secondary schools serving poor communities

41

Indonesia - Project Component 2Institutional Reform

Component 2 - institutional reform• District plans for school rationalization and

consolidation• Capacity assessment of district staff in MOEC,

MOHA, MORA and Bappeda with evaluation of training requirements and determination of staff relocation between agencies

• Monitoring and evaluation systems

42

Indonesia - Project Component 3Quality Improvements

Component 3 - quality improvements• District quality improvement plans• Quality components from a positive list

– school rehabilitation and maintenance– training of teachers and other staff– teaching and learning materials and equipment– incentives for teachers in rural, remote schools– matching grants for private schools

• At national level, establishment of Policy Reform Working Group on Teachers

43

Indonesia - Historical Precedent

• structural adjustment of late 1980s - Education sector not protected

• budget declined by 12 percent in real terms between 85/86 and 89/90

• education expenditure from 4.13% to 2.74% of GDP

• real expenditure on basic fell by 71%• 85/86 level not regained until 96/97

44

Indonesia- Fiscal Impact Analysis

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Projected growth of basic education budget

45

Indonesia - MalukuMaluku Base Case vs. High Case

0

20

40

60

80

100

120

Rp

billi

on Base case budget

High case budget

46

Indonesia - Maluku

Fiscal impact of project in Maluku -Base Case

020406080

100120

Rp

billi

on

Basic educationbudget

Capital costs only

Capital plusrecurrent costs

47

Indonesia - MalukuFiscal impact of project in Maluku -

Base Case

0%

20%

40%

60%

80%

100%

Shar

e of

bud

get

Basic education budget

Project recurrent costs

Capital costs only

48

Indonesia - MalukuFiscal impact of project in Maluku -

High Case

020406080

100120

Rp

billi

on

Basic educationbudget

Capital costs only

Capital plusrecurrent costs

49

Indonesia - MalukuFiscal impact of project in Maluku -

High Case

0%

20%

40%

60%

80%

100%

Shar

e of

bud

get

Basic education budget

Project recurrent costs

Capital costs only

Indonesia - Fiscal Impact Analysis Assessment

Fiscal Impact Analysis Summary