1. CONCEPT NOTE FOR THE INTRODUCTION OF EXPENDITURE NORMS IN THE EDUCATION
SECTOR
Jean-Marc Lepain
Public Finance Specialist and Intergovernmental Fiscal Advisor
April 2010
Based on the new Budget Law approved by the National Assembly in December 2006, and
on the Prime Minister’s Implementation Decree of April 2008, the Ministry of Finance is
planning to change the budget formulation procedure by introducing budget norms. The
objective of the present Concept Note is:
(a) To define the general policy framework for the introduction of sector budget norms,
including its relation to the more global objectives of the Budget Law such as promulgation
of principles for better efficiency and transparency and introduction of a General Purpose
Grant to finance all provincial recurring expenditures;
(b) To identify issues associated with the education sector expenditure assignments such as
vertical and horizontal responsibilities for service delivery, service financing, management
(planning, budgeting, budget execution, project implementation, management control and
reporting) and issuance of regulation;
(c) To define the general principles for the architecture of sector budget norm formulae in
relation to provinces, districts and education facilities associated to these different levels of
service delivery;
(d) To define the articulation between education budget norms, block grants financing
education facilities, and earmarked grants addressing specific issues such as poverty;
(e) To present the best options for the selection of indicators, cost units and weighting ratios
to be used in the design of the sector budget norms formulae and ;
(f) To identify data collection requirements for the regular updating of the budget norm
formulae and their application to budget formulation at the sub-national level;
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2. 1. Background
1.1. Legal Framework
The new Budget Law considers the implementation of budget allocation norms essential as a
basis for recommending targets for the budget allocation to each province and each sector
within the framework of the consolidated state budget and as a key component of a formula
based system of intergovernmental transfers. The Prime Minister’s Implementation Decree
(No 25/PM 208) provides further guidance and gives to the Ministry of Finance full authority
for developing (a) intergovernmental transfer mechanisms through general and earmarked
grants and (b) budget norms for allocation of recurrent and investment expenditures in close
cooperation with sector ministries, the Ministry of Planning and Investment and PACSA.
Article 3 of the Revised Budget Law defines budget norms as “recommended targets in
determining allocations to sectors and localities based on characteristics, work standards
and specifics of each sector and locality” and Article 6 stipulates that “Budget allocations to
sectors and localities shall be based on the budget allocation norms”.
The Prime Minister’s Implementation Decree No 25/PM dated 14-02-2008 provides more
details. Article 11 assigns the responsibility of preparing budget norms to the Ministry of
Finance and implementation will be conducted through another Prime Minister’s Decree.
Article 19 of the Prime Minister’s Decree distinguishes between budget norms for recurrent
expenditures and budget norms for investments.
Article 20 defines the two types of grants on which the Intergovernmental Transfer System
will be based. A “General Purpose Grant” will be established for the financing of provincial
recurrent expenditure. “Earmarked Grants” will be allocated for “the implementation of
programs and investment projects assigned in addition by the Government” and for
“resolution of emergencies and urgent issues relating to natural disasters, defense, security,
and epidemics not included in the localities’ annual budget”. It is probable that the scope of
earmarked grants will need to be broadened to cover needs of some provinces in excess of
what they would received from a strict application of sector budget norms and aggregated
budget norms.
Article 23 mentions that a new revenue and expenditure assignment between provinces,
districts and cities will be prepared by the Ministry of Finance. The article mentions
specifically “(the) sharing of responsibilities for investments and development of general
education public schools, more specifically of kindergartens, primary and lower secondary
schools”. This article provides the legal basis for modifying, if necessary, the expenditure
assignment and supervisory duties between District and Provincial Education Offices, and for
introducing school block grants.
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3. Within the framework of the Budget Law, a new Prime Minister Decree will be issued for the
introduction of budget norms. It is assumed that a new decree will cover budget norm
implementation for the Education sector and the Health sector. The decree will (a) modify
some of the technical provisions of the former decree if necessary, (b) provide budget norm
formulae at the disaggregate level for the two sectors and (c) reflect policy principles that
will be established in more detail by the policy framework for budget norms and
intergovernmental transfers and (d) clarify the expenditure assignment and modify if
necessary responsibilities for planning, budgeting, managing and reporting the utilisation of
funds allocated to each sector at the sub-national level.
In a second stage, the Ministry of Finance will (a) extend the budget norm system to other
sectors and (b) prepare aggregated budget norms that will become part of the system of
intergovernmental transfers.
Additionally a Revised Education Law was promulgated in July 2007 which includes some
references to budgeting and budget norms that might conflict with the Revised Budget Law.
Article 55 of the Revised Education Law provides a definition of investment that might
include a large portion of recurrent expenditures as it includes “personal training,
construction of building, contribution in vehicles or equipments, teaching-learning materials,
other materials, teachers and learners’ privileges, etc.” Investment might also include any
expenditure that contributes to “the development of education”. It seems that the objective
of such an article is to allow the use of donor funding for recurrent expenditures other than
salaries.
Article 56 of the Laws stipulates: “The Government shall list education as one of the first
priorities and increase the rate of national education expenditure until reaching 18% and
over. The provision of the allocation budget for regular administration of the schools,
learning centres and education institutions shall be calculated with the number of learners
(per person). The Government and local authorities have the responsibilities to strictly
implement the expenditures of these allocated budgets” (unrevised provisional translation
provided by MOE).
This article has been obviously drafted in reference to ESDF’s objective of raising the share of
education spending to 18% of the national budget by 2015 and to open the way for block
grants.
1.2. Trends in Education Financing
Following the 1999- 2000 financial crisis there has been a sharp decline for the education
budget from 14% to 7.2% of the national budget and from 3% to 1.4% of GDP. There have
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4. been signs of recovery until FY 2005/06 when the education budget reached 14.8% of the
national budget, followed by two years of sharp decline and stabilization in FY2009/10 at
11% of the national budget and 2.5% of GDP.
However, if we eliminate the fluctuation in donor assistance the picture looks better. Donor
funded activities have declined from 60% of the sector budget in FY2005/06 to 37.2% in
FY2009/10. While donor contribution represented nearly 2% of GDP in 2005/06, it is now
only 1%. Recurrent expenditure is now representing 56.6% of the total budget and has
increased by 23% this fiscal year. Total government sector financing has increased from
1.24% of GDP five years ago, to 1.59% this fiscal year. However, although the trend is
positive, the ratio remains far below all other neighbouring countries except Myanmar.
At the provincial level, on average, non-wage expenditures have dropped in FY2008/09 to
13% of the education budget, with considerable across provinces going from 45% in Attapeu
to 2% in Luangphrahbang. This budget decline has been partially offset by an increase in
parental contributions which might represent 14% of the education spending according to
assumptions made for the preparation of the Education Sector Development Plan.
The Government of the Lao PDR considers that the introduction of non-wage budget norms
and block grants offers a good opportunity to reverse that trend and with Nam Theun 2
revenue and contribution the Fast Track Initiative (FTI) is confident that the past negative
trend will be corrected. It will be the responsibility of MOF’s Fiscal Policy Department to set
objectives compatible with the Government’s fiscal policy and with the objectives of the 6 th
Five Year Plan.
Additionally, MOF is committed to use a significant part of any additional treasury support
funding received through The Second Programmatic Series of the Poverty Reduction Support
Operation (PRSO) to support the education sector.
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5. EDUCATION BUDGET TRENDS
2005/06 2006/07 2007/08 2008/09 2009/10
(actual)
GDP 33,222.00 38,409.00 43,287.00 50,325.58 54,100.00
GDP Growth 13.34% 15.61% 12.70% 16.26% 7.50%
Population 5,595,066 5,732,649 5,873,616 6,000,379 6,144,388
Total State Budget 6,942.90 7,913.00 8,884.00 10,026.10 12,470.43
Budget Growth 13.97% 2.24% 12.86% 24.38%
Budget/GDP 20.90% 20.60% 20.52% 19.92% 23.05%
Education Budget (Central+Local) 1,026.40 1,155.80 1,140.53 1,088.30 1,366.33
Education/Total Budget 14.78% 14.61% 12.84% 10.85% 10.96%
Education Budget/GDP 3.09% 3.01% 2.63% 2.16% 2.53%
Education spending per capita 183,447 201,617 194,179 181,372 222,370
Recurrent Budget 377.90 421.80 552.44 628.73 772.75
Recurrent Budget/Sector Budget 36.82% 36.49% 48.44% 57.77% 56.56%
Recurrent Budget Growth 11.62% 30.97% 13.81% 22.91%
Recurrent Budget/GDP 1.14% 1.10% 1.28% 1.25% 1.43%
Recurrent spending per capita 67.54 73.58 94.05 104.78 125.77
Investement Budget 648.50 734.00 588.09 459.57 593.58
Domestic Investment 33.6 40.2 47.1 54.5 85.2
Donor Funded projects 614.9 693.9 473.0 405.1 508.3
Donor Funded projects/sector Budget 59.91% 60.03% 41.47% 37.22% 37.20%
Donor Funded projects/GDP 1.85% 1.81% 1.09% 0.80% 0.94%
Investment/Sector Budgdet 63.18% 63.51% 51.56% 42.23% 43.44%
Government Sector Financing 411.54 461.96 599.56 683.19 858.00
Government Sector Financing / GDP 1.24% 1.20% 1.39% 1.36% 1.59%
2. General Policy Framework for Budget Norms and Intergovernmental Transfers
The development of budget norms for the education sector has to be put in the perspective
of “The Policy Framework for the Implementation of a Budget Norm System and a System of
Unconditional and Conditional Intergovernmental Transfers” developed by the Ministry of
Finance for guiding the development of sector norms.
The objectives of the budget norm system are defined as follows:
(1) Ensure that the rational distribution of fiscal resources across sub-national
jurisdictions is done in a transparent equitable manner;
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6. (2) Ensure that fiscal resources allocated to sub-national jurisdictions (provinces and
districts) are administered in line with the Government development objectives.
(3) Ensure that all provinces and districts receive sufficient funding to deliver public
services with equal standards according to the mission given to them by the central
Government and in a manner that takes into account the characteristics of the
population to be served and the cost of service delivery in each geographic area;
(4) Improve financial management at the local level, including planning, budget
formulation, budget execution and reporting;
When applied to the education sector these principles mean:
 Correcting existing vertical imbalance will require the introduction of a sector ceiling
that will apply to both the central government and the provinces;
 Equity of fund allocation between provinces and districts must be ensured;
 Mechanism for a better alignment of sub-national planning and budgeting with
national priorities and policies must be put in place;
 Other aspects of the expenditure assignment must be clarified;
 The Government must ensure that sufficient funding is channelled to local schools
and educative institutions for them to accomplish their mission within the constraints
of the fiscal capacity of the provinces and of the central Government.
 The introduction of budget norms and block grants should be conducive to the
complete waiving of user fees in primary schools. For other types of schools (pre-
schools, secondary schools, etc.), a clear policy will be defined and put in place,
including rules for managing and reporting collected funds.
The system will use three types of norms:
(a) Sector budget norm(s) used for the calculation of each sector budget for each
province;
(b) Budget norms that provinces will use for allocating funds by economic categories
to the various types of schools and educational programmes;
(c) Budget norms that will apply to line-ministries at the central level and that will not
be part of the Intergovernmental Transfer System.
The objective is to develop a transfer system that will be based on the following
components:
(a) One single unconditional transfer covering the total recurrent budget (General
Purpose Grant).
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7. (b) A number of conditional grants to cover additional recurrent expenditure for a
limited number of provinces such as:
(i) Provinces having sectors with structural expenditure needs above the level of
funding provided by the unconditional grant;
(ii) Provinces facing temporary revenue shortfall;
(iii) Provinces having unexpected expenditure needs due, for example, to natural
calamities
(c) Conditional grants for financing large investments or specific programmes managed
vertically but implemented at the provincial level.
The calculation of the General Purpose Grant will be based on an aggregated norm formula
that will reflect the different sector components of the grant. The total amount of the
General Grant will not be less than the aggregated amount of sector budgets based on
budget norms.
The general purpose grant will be either the result of the aggregation of all sectoral budget
norm formulae or a more aggregated formula that will not necessarily reflect the different
sub-formulae.
3. Scope of budget norms
There will be two sets of budget norms: one for provincial budgets and one for the central
budget of MOE.
Regarding the provincial budgets, the budget norm system will cover all programmes. This
includes the following MOE’s programmes:
1. Kindergarten and Pre-primary (Early Childhood Education)
2. Primary School
3. Lower Secondary School
4. Upper Secondary School
5. Non-Formal Education
6. Technical and Vocational Education
7. Education administration
8. Higher education
9. Teacher training
For the purpose of budget norms, programmes will be aggregated in three sets:
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8. Set 1: Early Childhood Education + Primary Education + Secondary Education + Non-
Formal education
Set 2: Technical and Vocational Education
Set 3: Higher Education + Teacher Training
Non-formal education has been added to set 1 because its cost unit is close to primary
education. However, MOE at the moment is unable to provide statistics on non-formal
education enrolment and it is possible to use the formula without taking into account this
number.
At this stage it was decided to join higher education and teacher training together because
they have similar cost unit. However, user fees play a role in financing university and
therefore we expect that higher education might have the same cost unit as vocational
education.
Cost of education administration will be covered by the provincial budget calculated on the
basis of budget norm formula without having a component in the formula. Cost of education
administration will have to be deducted from total provincial education budget before the
budget can be disaggregated into block grants.
In a first stage the introduction of budget norms will cover only non-wage expenditures for
MOE central budget as well as provincial education budgets. However, a model will be
developed in parallel to prepare the next stage combining both wage and non-wage with the
objective of preparing comparative costing and identifying potential issues.
Non-wage expenditures are defined as all line-items of chapter 12 of the budget
nomenclature and line-items of chapter 16. Non-wage expenditure for the education sector
also includes development of education (13.03.01.). More discussions are required to
determine if “other unforeseen expenditures” (Chapter 15 of the budget nomenclature)
should be included. The present view is that “unforeseen expenditure” should be managed
centrally at the provincial level without any allocation to any sector.
4. Sector ceilings and fiscal policy planning
The development of budget norms must start from the calculation of an earmarked fiscal
envelope. Determining the size of the fiscal envelope available for non-wage budget norms
and for aggregated norms requires sector ceilings which are normally based on the national
Medium Term Fiscal Framework (MTFF). In the absence of a formal MTFF, sector ceilings can
be determined by percentage of GDP and percentage of the total national budget. However,
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9. MOF’s Fiscal Policy Department is already engaged in the process of developing a MTFF and
we can expect that it will become operational by the time budget norms are implemented.
Budget Norms Formulae will be used to ensure a better linkage between planning and
budgeting. It will link together the different planning and budgeting tools.
 MOF will be responsible for developing and maintaining the Medium Term Financial
Framework that will be used to determined sector ceilings.
 The education sector ceiling will be disaggregated into two sub-ceilings: one for the
Education Ministry that will be binding, and one for provinces that will be indicative.
 MOE will be responsible for preparing a costed and prioritized multi-year budget
forecast based on its own Medium Term Expenditure Framework resulting from an
expenditure need assessment carried out in every province, following the
methodology already put in place on a pilot project basis.
 At the beginning of the budget preparation cycle, MOF will communicate to MOE the
annual sector ceiling. On the basis of that ceiling MOE will revise its Medium Term
Expenditure Framework (MTEF).
 Based on the MTEF and the sector ceiling MOF will prepare every year the budget
norms using the same formula structure.
In the absence of a MTFF, MOF’s Fiscal Department will need to project sector ceilings
starting from FY 2010/11 as the reference year, up to FY 2013/14.
The introduction of sector ceilings in Lao PDR is a difficult issue because of the changes it
requires in current practices of budget formulation and the contradiction between provincial
autonomy and the fiscal discipline required for the implementation of national policies. The
Ministry of Finance will need to move gradually away from the current budget preparation
methodology based on economic categories to start allocating budget on a sector basis with
the possibility to isolate within the budget, a number of specific programmes requiring
earmarked funding. A better synchronisation between the budget formulation cycle at the
national level and at the provincial level will be necessary (the present time lag is of five
months, despite the fact that provinces start their planning process much earlier than line-
ministries). Changes in budget preparation methodology at the provincial level will be also
necessary.
The existing constraints imply that sector ceilings needs to be disaggregated into two sub-
ceilings, one for the Education Ministry at the central level and one for the province. As the
provinces, under the existing budget law, are free in their allocation of funds to the sectors,
and as budget norms are purely indicative, there is no mechanism that can ensure that the
total of provincial allocations to the education sector will fit within the sector ceiling. As a
consequence the education sector sub-ceiling for central spending will be a binding ceiling
while the sub-ceiling for provinces will be an indicative ceiling.
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10. In that context, budget norms will become the most important instrument of fiscal discipline
and the Government’s meeting or not meeting its targets will depend on how effective the
fiscal discipline is at the provincial level.
Disaggregation of the Education Sector Ceiling
Education Sector Ceiling
Central Ceiling Provincial Ceiling
(binding) (indicative
For the sake of budget norm preparation, in the absence of a MTFF, MOF’s Fiscal
Department will project sector ceilings starting from FY 2010/11 as the reference year, up to
FY 2013/14. These sectors ceilings will be entered in the macro-fiscal model that will be
used for testing and selecting budget norm formulae. The ceilings at this stage are purely
indicative and should not represent a commitment from MOF.
Based on sector ceilings, MOF will recalculate each year’s budget norms using its macro-
fiscal model. The formula structure and the various ratios will remain unchanged. Only the
fix amount per student will be adjusted.
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11. MTFF Fiscal Planning Process
Sector Ceiling Provincial Ceilings
MTEF Budget Norms Provincial Budget
Sector Provincial Plan Cost Units
5. Sector Assessment and Education Development
Overall progress in the education sector, despite budget constraints, is impressive. Broadly,
during the past five years there are more children enrolled in schools, more classes and
schools have been open and more teachers have been recruited and trained. However
progress on the qualitative aspect of education has not been realized as fast as quantitative
aspects.
Problems of the education sector are both structural and local. Because budget norms will
be used for determining local budget, it is important to assess whetherthey are the proper
instrument to address local issues or if other instruments, such as special grants should be
developed. This problem centres mostly on the relation between poverty and education
development. This question is also linked to the relation between local planning and the
Education Sector Development Framework (ESDF) that will be addressed in the next
sections.
5.1. Sector Structural Issues
 Enrolment rates, which had been growing steadily during the past decade, still need
to grow further, especially among ethnic minorities and in remote areas. Growth will
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12. be moderate in Primary education until 2013 when primary school enrolment is
expected to stabilize, but enrolment growth will remain strong for secondary
education. MOE is also planning strong enrolment growth in early childhood
education, but reaching the objectives will be difficult due to fiscal constraints.
 Gender balance in enrolment and drop-out rates remain important issues.
 Integration of ethnic minorities in the education system remains a challenge.
 Emphasis in the forthcoming years must shift from enrolment to better education
quality, especially in primary education.
 Lao PDR still has a low completion rate, notably in primary and secondary education.
Repetition and drop-out remains high, especially for boys.
 There are widespread disparities in education access, especially in the poorest
districts and in areas with high percentage of ethnic minorities.
 The number of manuals in schools remains insufficient and access of student to
books of general interest beside manuals is an important issue.
 Although important progress has been made in the compilation and processing of
statistical data at the national level, provinces do have the tools and the capacity to
analyse statistical data and to relate it to their policy.
5.2. Sector Budgetary issues
The sector structural issues are linked to budgetary issues and cannot be addressed properly
until the sector fiscal problems have been solved.
 The portion of the general budget allocated to the education sector, while improving,
remains low compared to other countries of the region or countries with a similar
level of development.
 Budgetary flow to local schools remain insufficient to reach MDG objectives
 The mismatch between national priorities set out by MOE and budget allocation by
provinces highlight an important weakness of the public finance management
system.
 Salaries and investments absorb most of the sector fiscal envelope
 Teachers salaries remain too low to attract quality people and to retain them
 Too high a proportion of education spending is made of capital spending, most of it
financed by donors.
 Provincial authorities do not have the planning and management capacity to relate
educational objectives to the allocation of fiscal resources or to monitor the benefits
or impact of expenditures.
 Budget cuts made by MOF are not policy based. They are made by economic
categories. MOF does not avec a sector approach of provincial budgets.
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13.  Expenditure for Non-Formal Education (for literacy and skills development), as a
proportion of total recurrent spending still needs to increase significantly.
5.3. Horizontal Imbalance
Horizontal Imbalance, the disparity in fund allocation between provinces, has always been
high in Lao PDR. Its correction is one of the objectives of the introduction of budget norms.
The table below shows a trend toward a reduction of horizontal imbalance.
From FY2005/06 to FY2009/10 the imbalance index has been reduced from 2.9 to 1.9. It
means that the province that allocated the highest budget per capita to the education sector
allocated 1.9 times more per capita than the province with the lowest allocation per capita,
against 2.9 times more two years ago.
However, when measured for the recurrent budget, if we do not take into account the
special case of Bolikhamay, the imbalance index has remained stable at 2.0 showing that the
adjustments result from a better policy in investment and allocation of donor funding.
FY2005/06 FY2008/09 FY2009/10
Total Recurrent Horizontal Horizontal Total Recurrent Total Recurrent
Spending Horizontal Spending Imbalance Imbalance Spending Horizontal Spending Horizontal Spending Horizontal Spending Horizontal
Provinces per Imbalance per Index Index per Imbalance per Imbalance per Imbalance per Imbalance
capita Index capita 1 2 capita Index capita Index capita Index capita Index
Vientiane Capital 49,663 1.0 44,712 4.2 1.2 81,713 1.2 73,126 1.1 131,133.80 1.43 73,697.63 1.00
Xayabury 97,691 2.0 65,998 6.1 1.7 132,130 1.9 100,346 1.5 101,966.22 1.11 92,775.92 1.26
Bolikhamxay 75,764 1.5 10,767 1.0 N.S. 101,745 1.5 85,407 1.3 108,480.88 1.18 104,555.87 1.42
Vientiane Pro. 100,751 2.0 79,836 7.4 2.1 118,107 1.7 113,048 1.7 108,386.35 1.18 102,225.67 1.39
Champasak 65,013 1.3 60,839 5.7 1.6 93,181 1.3 84,141 1.3 123,249.63 1.34 118,322.71 1.61
Xiengkhuang 91,635 1.8 69,635 6.5 1.8 125,393 1.8 120,697 1.8 106,894.24 1.16 86,801.59 1.18
Khammouane 73,537 1.5 45,404 4.2 1.2 174,151 2.5 106,121 1.6 141,436.21 1.54 134,913.01 1.83
Luangphrabang 82,993 1.7 58,266 5.4 1.5 101,683 1.5 98,427 1.5 96,899.38 1.06 91,114.91 1.24
Oudomxai 57,871 1.2 38,808 3.6 1.0 129,526 1.9 77,284 1.2 148,664.64 1.62 123,022.12 1.67
Savannakhet 59,165 1.2 51,396 4.8 1.3 100,982 1.4 82,782 1.2 157,369.81 1.42 134,185.36 1.82
Bokeo 89,147 1.8 54,114 5.0 1.4 100,911 1.4 91,358 1.4 163,902.73 1.48 126,336.96 1.71
Houaphan 106,366 2.1 69,983 6.5 1.8 186,489 2.7 109,590 1.6 110,455.24 1.00 102,570.91 1.39
Luangnamtha 118,053 2.4 70,889 6.6 1.8 203,739 2.9 134,754 2.0 137,373.83 1.24 126,799.41 1.72
Xekong 145,855 2.9 78,509 7.3 2.0 168,767 1.3 119,690 1.8 148,635.95 1.62 147,997.12 2.01
Attapeur 72,075 1.5 51,553 4.8 1.3 145,140 1.1 117,855 1.8 91,765.72 1.00 87,601.97 1.19
Saravanh 61,848 1.2 38,423 3.6 1.0 69,673 1.0 66,552 1.0 170,364.90 1.86 137,674.45 1.87
Phongsaly 77,982 1.6 64,681 6.0 1.7 125,635 1.8 110,814 1.7 156,015.09 1.70 152,366.92 2.07
AVERAGE 83,842 1.7 56,107 5.2 1.5 126,998 99,529 1.5 2,202,994.58 1,942,962.51
The differences in the imbalance index across provinces might not only reflect different
local sector priorities, but also difference in compensation of teachers and differences in
the cost of service delivery. Disparities in recurrent spending allocation reflect for a great
part the difference in teacher compensation policy across provinces.
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14. 5.4. Education Development Index
MOE has prepared an Education Sector Development Plan which is based on the Education
For All Framework for Action adopted by the international community in 2000 during
UNESCO Conference held in Dakar. This document commits governments to achieving
quality basic education for all by 2015, with particular emphasis on girls' schooling. In order
to measure progress toward the EFA objective, MOE has started to measure the Education
Development Index (EDI) which will become the most important performance indicator to
measure progress in the education sector.
The Education Development Index (EDI) reflects four of the six EFA goals: universal primary
education, adult literacy, quality of education and gender parity. Each of these goals has an
indicator and the EDI is the arithmetic mean of the observed value of all four indicators.
Since the four indicators are expressed as percentages; the EDI value can vary from 0% to
100% or, when expressed as ratio, from 0 to 1.
 Universal primary education is measured by the total primary net enrolment ratio
(NER) which reflects the percentage of primary school-age children who are enrolled
in either primary or secondary schools.
 Adult literacy is measured by the Adult Literacy Rate (ALR) measuring the percentage
of people over the age of fifteen who can read.
 Quality of education can be measured by several proxy indicators the percentage of
students who complete grade 5 also called the ‘survival rate to grade 5’.
 Gender parity is measured by a composite index, the gender-specific EFA index (GEI)
that takes into account two sub-goals: gender parity per se (achieving equal
participation of girls and boys in primary and secondary education) and gender
equality (ensuring that educational equality existing between boys and girls).
The measure of the EDI in Lao PDR produces very optimistic results when compared with the
objective social-economic situation observed in the field. This is not an uncommon situation
in developing counties as the measure of the EDI different components raises considerable
methodological issues. Overestimation of the EDI is due to several factors:
 The enrolment rate in primary education does not reflect necessarily the attendance
rate.
 There is a lack of consensus on the definition of primary school completion
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15.  The measure of the literacy rate is based on conventional methods not using test.
International experience shows that in developing countries when methods using
tests are substituted by conventional methods, the literacy rate drops.
However, based on the assumption that the same methodology has been used across all Lao
provinces, the methodological weaknesses of the EDI do not affect comparisons between
provinces.
EDI has been measured in FY2005/06 and FY2008/9. During these three years important
progress has been made. The lowest ranking province in FY2005/06, Saravanh, has move
from an EDI of 0.61 to 0.76. If we exclude Vientiane Capital, improvements, in general, range
from 7 base points (Houaphan) to 25 (Oudomxay which moved from the 15 th position to the
9th).
5.5. Relation between the Education Development Index and the Human
Poverty Index
Determining the relation between the Education Development Index (EDI) and the Human
Poverty Index (HPI) is an important step in defining which factors could be used in the
budget norm formula. Surprisingly the relation between the two indexes appears relatively
weak as shown in the table below.
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16. COMPARISONS BETWEEN HPI AND EDI
Poverty EDI EDI
Provinces Index 2005/06 2008/09
Vientiane Capital 1.17 0.91 0.96
Xayabury 1.25 0.85 0.93
Bolikhamxay 1.29 0.82 0.92
Vientiane Pro. 1.19 0.85 0.92
Champasak 1.18 0.79 0.88
Xiengkhuang 1.42 0.79 0.88
Khammouane 1.34 0.73 0.86
Luangphrabang 1.23 0.71 0.85
Oudomxai 1.45 0.60 0.85
Savannakhet 1.43 0.71 0.85
Bokeo 1.21 0.67 0.81
Houaphan 1.52 0.73 0.80
Luangnamtha 1.23 0.67 0.78
Xekong 1.42 0.66 0.77
Attapeur 1.44 0.64 0.76
Saravanh 1.54 0.61 0.76
Phongsaly 1.51 0.62 0.71
AVERAGE 1.32
A number of rich provinces perform surprisingly low in terms of education. This is the case of
Bokeo that ranks 4th on HPI but 11th on EDI, Luangphrabang and Luangnamtha that rank 5th
on HPI but rank respectively 8th and 13th on EDI.
A number of poor provinces perform very well in terms of education. It is the case of
Xiengkuang that ranks 11th on HPI but 6th for EDI.
One explanation is that Lao PDR remains chiefly a rural country where agricultural activities
are important and where the level of living of the population depends mostly on geographic
conditions, such as the abundance of water and fertile land. Additionally the existence of a
border with Thailand and China also plays an important role by allowing the development of
trans-border trade and the development of small industries. For the time being, these
factors are not very much influenced by the level of education. However education plays an
important role in the transition from a rural society to a more urban society.
16

17. 5.6. Relation between education development and level of spending
The same way that there is a weak correlation between the Human Poverty Index and the
Education Development Index, there is a weak correlation between education development
as measured by EDI and the amount of spending per capita. Of the three factors that
contribute to education development, namely good policy, good management and sufficient
funding, policy and management appear more important than funding.
BUDGET ALLOCATION PER CAPITA AND CHANGES IN EDI
Total Recurrent Investment Total Recurrent Investment Growth Growth Growth
EDI Spending Spending Spending EDI Spending Spending Spending EDI Total Recurrent Recurrent
Provinces 2005/06 per per per 2008/09 per per per Differential Spending Spending Spending
capita capita capita capita capita capita per cap. per cap. per cap.
Vientiane Capital 0.91 49,663 44,712 4,951 0.96 81,713 73,126 8,587 0.05 64.5% 63.5% 73.4%
Xayabury 0.85 97,691 65,998 31,693 0.93 132,130 100,346 31,784 0.08 35.3% 52.0% 0.3%
Bolikhamxay 0.82 75,764 10,767 64,997 0.92 101,745 85,407 16,338 0.10 34.3% 693.2% -74.9%
Vientiane Pro. 0.85 100,751 79,836 20,915 0.92 118,107 113,048 5,059 0.07 17.2% 41.6% -75.8%
Champasak 0.79 65,013 60,839 4,174 0.88 93,181 84,141 9,040 0.09 43.3% 38.3% 116.6%
Xiengkhuang 0.79 91,635 69,635 22,000 0.88 125,393 120,697 4,696 0.09 36.8% 73.3% -78.7%
Khammouane 0.73 73,537 45,404 28,133 0.86 174,151 106,121 68,030 0.13 136.8% 133.7% 141.8%
Luangphrabang 0.71 82,993 58,266 24,727 0.85 101,683 98,427 3,256 0.14 22.5% 68.9% -86.8%
Oudomxai 0.60 57,871 38,808 19,063 0.85 129,526 77,284 52,242 0.25 123.8% 99.1% 174.0%
Savannakhet 0.71 59,165 51,396 7,769 0.85 100,982 82,782 18,200 0.14 70.7% 61.1% 134.3%
Bokeo 0.67 89,147 54,114 35,033 0.81 100,911 91,358 9,553 0.14 13.2% 68.8% -72.7%
Houaphan 0.73 106,366 69,983 36,383 0.80 186,489 109,590 76,899 0.07 75.3% 56.6% 111.4%
Luangnamtha 0.67 118,053 70,889 47,164 0.78 203,739 134,754 68,985 0.11 72.6% 90.1% 46.3%
Xekong 0.66 145,855 78,509 67,346 0.77 168,767 119,690 49,077 0.11 15.7% 52.5% -27.1%
Attapeur 0.64 72,075 51,553 20,522 0.76 145,140 117,855 27,285 0.12 101.4% 128.6% 33.0%
Saravanh 0.61 61,848 38,423 23,425 0.76 69,673 66,552 3,121 0.15 12.7% 73.2% -86.7%
Phongsaly 0.62 77,982 64,681 13,301 0.71 125,635 110,814 14,821 0.09 61.1% 71.3% 11.4%
AVERAGE 83,842 56,107 27,735 126,998 99,529 27,469 51.5% 77.4% -1.0%
Another explanation could be that the EDI captures only partially the real improvement in
education quality.
The most significant number is the recurrent expenditure per capita. The most populous
provinces; Vientiane Capital, Champassak, and Savannaketh are those spending the less per
capita without any noticeable deterioration of their education system. Poor provinces like
Phongsaly, Attapeu, Xekong and Houaphan spend more than the national average with good
progress of their EDI except for Houaphan. By contrast, Saravanh is still very below the
national average but has shown good progress of its EDI (+15 base points).
Xiengkuang is a relatively poor province (HPI: 1.42) but ranks 6th in terms of EDI performance
(EDI: 0.88) with a progression of 0.9 base points over three years. The province has one of
the highest level of recurrent spending with 120,700 kips per capita.
The counter-example is Luangnamtha that is a relatively rich province (HPI: 1.23), but ranks
13th in terms of EDI performance. The province has had good progression of its EDI (11 base
points) with a very high level of recurrent spending reaching 134,750 kips per capita.
A few conclusions can be drawn from that table:
17

18.  Poor provinces, with only a few exceptions have higher service delivery cost for
education
 The level of recurrent spending per capita is not the main factor that explains
6. Expenditure Need Assessment and sector planning
The Ministry of Finance has decided to opt for a top-down approach of budget norms
reflecting the fiscal capacity of the Government. However, as seen in the section on fiscal
policy planning, we expect that sector ceilings will take into consideration both the fiscal
constraints existing at the central level and the financing needs existing at the local level.
In the absence of a full-fledge expenditure need assessment or of an inventory of local needs
based on multi-year plans such as those required by the MTEF, it has been decided to use
The Education Sector Development Framework (ESDF) as a substitute for the expenditure
need assessment. However this approach gives only a partial view of local needs. The ESDF
Financial Model is a planning tool based on a top-down macro-economic approach that does
not integrate the fiscal capacity of the Government nor the specific situations that might
exist at the local level. It is not a budgeting tool but the best substitute we have until the
MTEF is fully developed.
As a budgeting tool the ESDF Model displays a number of weaknesses:
 It is a macro-economic approach and the model cannot be disaggregated by
province;
 The model is not prioritized and does not reflect the overall fiscal capacity of the
country;
 Absorptive capacity of the provinces is not taken into consideration;
 Provinces do no implement the plan at the same pace and human resource is an
important constraints. It is not possible to measure the achievement of the
provinces against the model.
 The ESDF model does not distinguish between the different sources of founding
and in particular the issue of recurrent expenditures financed by donors. We will
address this issue in the next section of the expenditure assignment.
 The ESDF Financial model requires raising the education share of the national
budget from 12% in FY2009/10 to 18% in FY2015/16 without indication if this
level is attainable. Even after this very significant effort there will be a financing
gap in the amount of 242.6M USD.
It is clear that the introduction of budget norm in FY2010/11 will require a better
prioritization of the ESDF Financial Model. MOE will reach this objective through the
18

19. preparation of a three year costed and prioritized budget plan. Cost units of this budget plan
will reflect a fiscal sustainable level of budget norms.
This prioritized budget plan should take into consideration three new factors: (i) revenue
from Nam Theun 2 do, (ii) donor funding made available through the Fast Track Initiative
(FTI), (iii) additional funding made available through the Poverty Reduction Support
Operation (PRSO) |[under negotiation].
7. Integrating the ESDF in MOF’s fiscal policy
As a planning tool the ESDF financial model tells us what it would cost to implement MOF
strategy. It tell us how many teachers must be recruited and trained, how many schools
must be built, how much should be invested in renovation, what programme must be
expended, etc.
MOE considers that the ESDF having been approved by the Prime Minister and its objective
of raising the share of education spending to 18% of the Government’s Budget has been
written into the Education Law should be considered binding on MOF. However the situation
is complicated by the fact that there is a growing gap between the model and reality.
Defining the status of ESDF and its implication is an important fiscal policy issue that needs
clarification. The present view of MOF is that the ESDF Model, not taking into consideration
the Government’s fiscal capacity, should not be considered as binding. MOF currently does
not have the tools to integrate ESDF into its fiscal policy and developing these tools should
be considered as a high priority assignment for defining a sector financing strategy.
The issue should be addressed in two steps. The first step consists in analysing the financial
gap of the model and prioritizing its objective. The second step consist in preparing a three
year prioritized budget plan approved by MOF and revised every year that will be based on
actual enrolment figures and take inflation into account.
8. Sector Financing Strategy
The ESDF Model is based on a fiscal strategy consisting in raising the share of education
spending in the Government’s budget from 6.7% in FY2007/08 to 18% in 2015/16. Even after
this important effort, the model still have an important cumulated shortfall estimated at
2,659 billion kips (243.5 M USD) over seven years. The real gap is in fact more important
because the model does not integrate inflation.
19

20. The ESDF Model was designed with an important fiscal gap even after increasing
substantially the share of education spending in the Government’s budget.
Nam Theun 2 revenue projections have already been integrated in the Government’s fiscal
policy but are clearly insufficient for reaching the ESDF objectives. FTI funds will play a more
important role. 65M USD will be made available over a period of three years (2010-2112),
but these funds cannot be used for routine recurrent expenditure. Additionally, it is
expected that some of the funds granted by the donors for General Budget Support (GBS)
will be allocated to the education sector through the Poverty Reduction Support Operation
(PRSO). The PRSO agreement includes a variable tranche related to specific education and
health sector indicators. These additional funding ensures that the very limited expected
cost of expenditure equalization and implementation of budget norms can be easily
absorbed. The performance indicators will track the level of recurrent expenditure, the
provision of textbooks, recurrent financing for schools in priority districts, and the
comprehensiveness and timeliness of EMIS data and reporting.
The way the budget norm system has been designed takes into full consideration the policy
objectives of the ESDF. This includes the use of block grants for financing schools, free
distribution of books for poor districts and school feeding programmes and scholarship
programmes as poverty alleviation instruments.
The Ministry of Education and the Ministry of Finance note that in the future it will be
necessary to develop better techniques for expenditure need assessment reflecting local
needs and priorities.
9. Capacity Building
It should be underlined that financial resource is not the only requirement for ESDF
implementation. Capacity building is also a major element, and the lack of human resources
has been one of reasons for slow ESDF implementation in the past. Capacity building
initiatives will have to be prioritized using the Capacity Building Framework of the ESDF. A
basic understanding of ESDF across all MOE’s Department and Provincial Education Offices is
of the utmost importance to extract priority needs and align them to the next Five Year Plan.
The introduction of block grants will require another significant investment in long term
capacity building. Training mechanism should cover all aspects of the management
dimension of the expenditure assignment such as planning, budgeting, accounting reporting
at all levels of the education organisation.
20

21. 10. Policy regarding parental contribution
The objective of the Government is to phase out parental contribution for elementary
schools in FY2011/12 and lower secondary schools in FY2012/13. The final decision will be
coordinated with the introduction of budget norms and block grants with the intention that
block grant will compensate schools for the waiving of parental contribution.
The policy for parental contributions will be formalized into a joint regulation issued by MOF
and MOE. For schools not benefiting from the waiving of parental contribution such as pre-
schools and upper secondary schools, user fees will be budgeted, recorded in the accounting
system and, above a certain cash limit, deposited into a bank account, especially in urban
areas. In rural areas where there is no access to banks they will be considered as ‘community
funds’. MOF in consultation with MOE will prepare a policy paper to set more precise
objectives and later an implementation decree will be issued.
11. Articulation between budget norms and block grants
Block grants, if implemented for all education levels should represent more than 90% of the
non-wage provincial budget for education. However, block grants will be implemented
gradually, starting with primary school in FY2010/11 or FY2011/12 and to be extended to all
types of schools (pre-schools, lower and upper secondary schools, vocational school, etc.) in
FY2011/12 or FY2012/13. The reason for a gradual implementation is that we must be sure
that the total of block grant to be delivered will not exceed either the total of the provincial
non-wage budget for education. The block grant will be mostly driven by the number of
registered students with a minimum allocation for small schools (see section 11). As we do
not have data to determine the number of schools that might benefit from the minimum
allocation, it is not possible at this stage to calculate precisely the envelope required for all
schools. There are also some elements of uncertainty regarding the cost of books that must
be integrated in the block grants
Block grant can be implemented in two different ways: either centrally by MOE as a specific
purpose grant in accordance with Article 20 of the budget law or by the provinces as an
apportionment of their education budget calculated in the basis of a budget norm formula.
In both cases each school grant will be calculated using the same block grant formula.
It should be noticed that the implementation of general block grants does not preclude the
introduction of more specific grants targeting educationally disadvantaged districts that
could be used for specific programmes such as school feeding programmes, scholarship
programmes and other programmes targeting ethnic minorities, remote areas, etc. As we
will see in sections 12 and 14, rather than introducing variation in budget norms and block
21

22. grant formula, these situations are better addressed either by an education improvement
grant or by specific grants linked to specific programmes. The education improvement grant
and Donors/FTI funded grant will be managed centrally by MOE.
The Ministry of Finance has a preference for the second option but recognizes that a final
decision will require further discussion with donors as it involves the use of Nam Theun 2
funds and of TFI funding. Provinces need also to be associated to the final decision. In case
that an agreement on this point cannot be reached before June 2010, the implementation of
block grants for elementary school will be delayed until FY2011/2012.
At this stage of the discussion, MOF expresses a strong preference for a decentralised option
that will leave the apportionment of block grants to the provinces for several reasons:
 Considering that provinces have little control over the wage budget and that block
grants are likely to represent more than 90% of the education non-wage recurrent
budget, this amount to a de facto recentralisation of the education budget which is in
contradiction with the spirit of the budget law.
 Data for the allocation of block grants are only available at the district level. A
complete centralisation of data, school by school will be a huge enterprise that
cannot be managed within a short span of time.
 Managing centrally block grants will require a dedicated complex organization that
will be expensive and unlikely to be put in place in a short period of time. It will
include increase in which MOE has little expertise.
If block grants are introduced centrally, a budget norm formula will still be necessary
because block grants will cover only primary schools. However when block grants will cover
all types of schools, the budget norm formula will become redundant and it will be necessary
to remove it.
If block grants are managed at the provincial level, it will be important to determine the
source of funding which can involve funds passing through the investment budget. A non-
conditional grant could be given to finance the portion of budget norm base budget needed
for block grants. Even if MOE will have a certain control on the grant, it would be better to
let provinces calculate the total amount of the grant as part of their budget request.
12. Budget norm and poverty reduction strategy
An important issue with the development of the budget norm formula is the poverty
reduction dimension.
22

23. There are 47 poor districts in the Lao PDR but 53 educationally disadvantaged districts
identified by MOE using an Education Index which seems to be a better indicator than the
Human Poverty Index. There is no doubt that disadvantaged districts should receive more
attention from MOE which might translate into additional cost for service delivery. If we
exclude the case of Saravanh, the five provinces with the lowest EDI spend 27% more per
capita on education than the six most advanced provinces and 30% more than the group of
five intermediary provinces.
When integrating the poverty reduction dimension in a budget norm formula, a number of
issues should be looked at:
 Lao children deserve the same quality teaching wherever they live. Poor areas do not
need necessarily more books, more notebooks and more teaching materials. Money
should not be allocated in the name of poverty unless we are certain that it will be
used for remedying the consequences of poverty in the education sector in an
efficient manner.
 Poverty measured at the provincial level is not a good indicator. Poverty is essentially
a local phenomenon that should be measured and addressed at the district and
village level. As a result a budget norm formula does not appear as a good instrument
to address all types of poverty issues.
 Allocation of funds for poverty reduction must aim at several objectives: (1) to
provide incentives to family for sending children to school, (2) to offer additional
compensation for teachers for accepting positions in poor areas or for providing
additional teaching to children with special needs, (3) to allow education provincial
and district offices to give more support to poor areas, (4) to buy additional
pedagogical materials to address certain cultural issues linked to poverty.
 Allocation of funds for poverty reduction should be clearly and strictly linked to
certain programmes and activities with measurable outputs.
 The current system of budgeting in Lao PDR does not allow the mixing of government
and donor funding for recurrent activities.
Of the four objectives of poverty reduction in the education sector, only objectives (3) and
(4) can be integrated in a budget norm formula. Objectives (1) and (2) can be better reached
through earmarked grants such as school development grants. As a consequence the
poverty reduction component in the education budget norm formula should be kept
relatively small.
MOE has designed two main programmes to address poverty issues: the school feeding
programme and the scholarship programme. Both of them are designed to provide incentive
to poor family for sending their children to schools.
23

24. The issue must be addressed through a specific grant that should be modelled along the
same principles as Education Development Grant Facility which is made of two
components, the scholarship program and the Education Development Grant. This enlarged
Education Development Grant could address poverty issues in general as well as issues
specific to certain districts much better than a budget norm formula or a school block grant
formula could do.
An alternative to this policy that is considered by MOE is to use school block grant in non-
poor district and school development grant in poor district. The implication is that the school
development grants will not only cover poverty reduction programmes, but also basic non-
wage need covered in non-poor district by school block grants. There will be several
advantages to that approach:
 It will be a way to use donor funding for recurrent expenditure and therefore to ease
the pressure on the recurrent budget;
 If school development grants were managed centrally it will be only a temporary
duration to the principle that provinces are responsible for formulating and
managing their recurrent budget, as in the long term school development grants will
disappear when poverty condition improved and be replaced by school block grant.
13. Structure of the budget formula
13.1. Level of disaggregation of the budget
Although each education programme has different unit costs, it is expected that a budget
norm formula will be highly aggregated as there is no need at the provincial level to reflect
the different cost components. Many countries used a single cost unit such as total
population, school age population, or number of enrolled students. The budget norm
formula will be used to calculate the provincial fiscal envelope, while the different block
grant formulae will be used to disaggregate the fiscal envelope by school types and by
location.
After much discussion it has been decided that the formula will be made of three segments
or components reflecting the different costs of service delivery:
 First component: for pre-schools, elementary schools and lower and upper secondary
schools and informal training programmes
 Second component: all higher education institutions under the authority of MOE
including teacher training
 Third component: all vocational training schools
24

25. 13.2. Selection of the cost unit
Due to the fact that there are important differences in population age structure and
enrolment rates across provinces, it has been decided that the cost unit used by the budget
norm formula will be the number of enrolled student as recorded the previous year. For
example, for preparation of FY2011/12 budget, enrolment number of school year 2010/11
will be used.
This choice raises several issues:
 The number of enrolled students in the current year must be known when
preparation for the next year’s budget starts. The school year commences in
September, but MOE finishes the collection of enrolment data in April, and
compilation and analysis of data might not be completed before mid-may. Numbers
are officially not available before mid-June when they have been formally approved
by the Education Minister and the provinces. For the sake of budget preparation, it
would be better to accelerate the compilation and analysis of enrolment number to
have the data ready by mid-March or earlier.
 The enrolment number might not reflect the attendance number, because some
enrolled children, never start school or because they dropped out during the school
year. In some regions, it is the habit for some under-age children to attend school
with their siblings. This issue will have to be dealt with through the introduction of
report-cards.
 Some provinces might be tempted to increase artificially the number of enrolled
student to increase their budget. The problem must be deal with a more efficient
statistical system based on report cards.
An analysis of enrolment numbers in comparison with total population show considerable
variation across provinces.
The country average enrolment rate is 22.6% of the total population. 11 provinces have
enrolment rates above the national average which is artificially low because of the special
situation prevailing in Vientiane Capital where the average age of the population is older
than all other provinces and where more children are attending private schools.
Whereas we could expect the enrolment rate to decrease when the poverty index increase,
it is often the opposite that happens, although there does not seem to be any rule.
25

26. Enrolment seems also to decrease with the size of the population. In general small or poor
provinces, such as Xekong (enrolment 18.2% poverty index 1.42), Houaphan (enrolment
27.5% - poverty index 1.52) or Oudomxay (enrolment 19.3%- poverty index 1.45) tend to
have a higher enrolment rate than more prosperous provinces such as Luangphrabang
(enrolment 16.8% - poverty index 1.23 ), Bokeo (enrolment 15.4 , or Vientiane Province. Two
large provinces, Savannakhet and Champasak have a very low enrolment rate around 20.5%
despite the fact that they have very different human poverty index (1.43 and 1.18
respectively). Differences in age structure and fertility rate do not appear sufficient as data
explaining such variations.
ENROLMENT NUMBERS FOR YEAR 2008/09
Source: MoE Statistic Department
Popul a tion Huma n Number Pre-s chool Number Pri ma ry Number Seconda ry Tota l Number Number
Provi nces MPI Poverty of Students / of Students / of Students / of Student/
Es tima te Index Pre s chool Tota l Pri ma ry Tota l Lower & Upper Tota l Students Popul a tion
Students Popul a tion Students Popul a tion Seconda ry Popul a tion
Students
Vientiane Capital 740,010 1.17 6,191 0.84% 56,113 7.58% 58,406 7.89% 120,710 16.31%
Savannakhet 874,660 1.43 9,537 1.09% 123,097 14.07% 46,365 5.30% 178,999 20.46%
Cham pasak 634,756 1.18 6,588 1.04% 84,153 13.26% 39,202 6.18% 129,943 20.47%
Kham m ouane 360,304 1.34 4,000 1.11% 56,168 15.59% 23,927 6.64% 84,095 23.34%
Luangphrabang 431,439 1.23 6,258 1.45% 72,312 16.76% 30,206 7.00% 108,776 25.21%
Bolikham xay 248,378 1.29 1,769 0.71% 40,753 16.41% 21,328 8.59% 63,850 25.71%
Houaphan 302,809 1.52 2,436 0.80% 57,035 18.84% 23,690 7.82% 83,161 27.46%
Oudom xai 285,874 1.45 2,921 1.02% 55,303 19.35% 18,034 6.31% 76,258 26.68%
Xayabury 360,195 1.25 5,132 1.42% 49,290 13.68% 28,567 7.93% 82,989 23.04%
Xiengkhuang 257,683 1.42 2,459 0.95% 44,123 17.12% 26,463 10.27% 73,045 28.35%
Vientiane Pro. 454,660 1.19 5,193 1.14% 68,630 15.09% 41,866 9.21% 115,689 25.45%
Bokeo 157,422 1.21 2,134 1.36% 24,325 15.45% 9,502 6.04% 35,961 22.84%
Phongsaly 172,286 1.51 2,313 1.34% 29,257 16.98% 7,953 4.62% 39,523 22.94%
Luangnam tha 156,667 1.23 2,389 1.52% 25,228 16.10% 10,648 6.80% 38,265 24.42%
Saravanh 349,478 1.54 2,142 0.61% 52,759 15.10% 14,265 4.08% 69,166 19.79%
Attapeur 121,134 1.44 1303 1.08% 20,678 17.07% 6,459 5.33% 28,440 23.48%
Xekong 92,624 1.42 1134 1.22% 19,267 20.80% 5,699 6.15% 26,100 28.18%
TOTAL 6,000,379 1.32 63,899 1.06% 878,491 14.64% 412,580 6.88% 1,354,970 22.58%
Several factors might explain why some of the poor provinces have higher enrolment rate:
(i) birth rate is higher in poor provinces, (ii) children might be automatically enrolled by the
head of village although they do not attend school, (iii) underage children go to school to
accompany their siblings because there is no one to take care of them at home, (iv) a high
repetition rate has the consequence that a number of children attend primary school well
beyond the usual age. Statistical mistakes cannot be excluded either for calculating the
enrolment numbers or by underestimating the total population.
26

27. 13.3. Cost factors and poverty reduction strategy
A number of cost factors and measures of expenditure needs have been reviewed for their
potential use by the budget norm formula. These cost factors include the number of
students per teachers, the urbanization rate (urban schools are more expensive than rural
schools), the number of students per class room, poverty, remoteness and minority
presence.
The main cost factor that seems to explain budget variation across provinces is the number
of teachers and the number of teachers is often correlated with the urbanization rate (urban
schools have more student than rural schools). Urban schools are also more expensive to run
than rural schools. Like for enrolment, it appears that there is no correlation between the
number of teachers and the level of poverty, as seen below:
Number Number
Provinces Poverty Student/ Students
Index Population per
teacher
Vientiane Capital 1.17 16.24% 18.2
Cham pasak 1.18 20.28% 27.9
Vientiane Pro. 1.19 25.56% 27.6
Bokeo 1.21 22.90% 28.4
Luangphrabang 1.23 25.09% 34.5
Luangnam tha 1.23 24.44% 24.0
Xayabury 1.25 22.96% 27.8
Bolikham xay 1.29 25.92% 36.6
Kham m ouane 1.34 23.28% 33.6
Xiengkhuang 1.42 28.32% 28.2
Xekong 1.42 28.31% 32.6
Savannakhet 1.43 20.36% 33.5
Attapeur 1.44 23.52% 28.6
Oudom xai 1.45 26.70% 40.1
Phongsaly 1.51 22.67% 23.9
Houaphan 1.52 27.49% 36.7
Saravanh 1.54 19.81% 40.2
Clearly richest provinces have a better teacher/students ratio, with the exception of
Bolikhamxay. Provinces with a high enrolment rate usually do not have a good
teachers/students ratio such as Houaphan, Xienkhuang, Oudomxai and Xekong.
27

28. Looking at the teacher/students ratio by province might not be significant because such a
ratio is only an average and urban areas have a better ratio than rural areas. Provinces with
a good ratio are provinces which are more urbanized. This reflects the inefficiency in staff
allocation as well as the difficulty to recruit teachers to teach in remote areas.
Although the number of teachers appears to be an important cost factor, it is not possible to
link it to other cost factors such as poverty, population density or remoteness.
Poverty level does not appear a good indicator of education needs, as some very poor
provinces have better education infrastructures as compared to better off provinces.
The table below shows also that there is a very weak correlation between the number of
students per teacher and the quality of education as measured by the EDI.
Number
Students
EDI per
Poverty 2008/09 teacher
Provinces Index
Vientiane
Capital 1.17 0.96 18.2
Xayabury 1.25 0.93 27.8
Bolikhamxay 1.29 0.92 36.6
Vientiane Pro. 1.19 0.92 27.6
Champasak 1.18 0.88 27.9
Xiengkhuang 1.42 0.88 28.2
Khammouane 1.34 0.86 33.6
Luangphrabang 1.23 0.85 34.5
Oudomxai 1.45 0.85 40.1
Savannakhet 1.43 0.85 33.5
Bokeo 1.21 0.81 28.4
Houaphan 1.52 0.80 36.7
Luangnamtha 1.23 0.78 24
Xekong 1.42 0.77 32.6
Attapeur 1.44 0.76 28.6
Saravanh 1.54 0.76 40.2
Phongsaly 1.51 0.71 23.9
Bolikhamxay ranks third on EDI despite showing 36.6 students per teacher when Phongsaly
ranks last despite 23.9 students per teacher.
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29. However these results cast a doubt about EDI as a good indicator of the quality of education.
There are methodological issues that need to be looked at if MOE decides using EDI as the
main education quality indicator.
The possibility of integrating the number of teachers in the budget norms formula has been
considered. Integrating the number of teachers in the formula might have several
advantages:
 It reflects better the actual operating cost of the schools;
 It reduces the impact of distortions in enrolment number that we have considered in
section 12.2;
 It favours urban schools that might be underfinanced under the present
arrangement.
On the negative side, several points have to be taken into consideration.
 It impacts negatively the budget of provinces which have multiple class teaching;
 It goes against the policy of MOE to give priority to small rural schools versus large
urban ones
Several formulae using different weighting for the number of teachers have been tested on
the macro-fiscal model. Although integrating the number of teachers in the formula produce
some small improvements in the fiscal results, MOE has not considered that the
improvements were not significant enough to justify using a more complex formula, and
taking the risks of having conflicting policy objectives in relation to staffing and staff
compensation.
13.4. Budget Norm Formula
After considering several possible structures for the education sector budget norm formula,
MOF and MOE have agreed that the best formula for the time being is a formula based on
the number of students.
The formula has three components: one for general education, one for universities and one
for vocational trainings and other training.
PEA is the provincial allocation for the education sector
(St) is the number of students in all educational programmes except universities and
vocational training (but including informal education).
(StU) is the number of students in higher education.
(StI) is the number of students in vocational training and other types of training
(A) is the allocation per student as defined by (St).
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30. (B) is the allocation for students studying in universities under the supervision of MOE at the
provincial level. That excludes student studying in school and universities under the
supervision of other ministries such as medical faculties, nurse schools or military
schools, or universities financed by the central budget of MOE.
(C) is the allocation per student in informal education and other types of training
p1, p2 and p3 are expenditure need ratios based on the Education Development Index (EDI).
Provinces have been grouped in three categories:
Category 1 for more advanced provinces with an EDI above 0.87
Category 2 for intermediary provinces with and EDI between 0.87 and 0.81
Category 3 for less advanced provinces with an EDI below 0.81
The expenditure need ratio will be used only with the students enrolled in pre-schools,
primary schools and secondary schools. It will not apply to higher education, vocational
training and informal education.
Although informal education and vocational training should be part of any poverty reduction
policy, it appears that there is no uniform policies applying to all provinces that could justify
a modulation in the level of spending per student and that the problem could be better
addressed by earmarked grants.
The final formula is:
PEA = p(St x A) + (StU x B) + (StI x C)
Tests conducted on a fiscal model show that there is no need to disaggregate student
allocation by type of school as the budget is calculated at the macro-level. Block grants will
disaggregate the budget at the school level.
14. School Development Grants and other earmarked grants
The recurrent budget calculated on the basis of the budget norm formula will not be the
only source of funding of schools. As explained in section 12, poverty issues will be
essentially addressed through a School Development Grant which for the time being will
cover essentially the school feeding programme and the scholarship programme. Because
these two programmes are financed by donors, the School Development Grant will be
considered as part of the Development Budget. The possibility that the Government will use
its own funds to expend these programmes is under consideration. In that case the
segregation of the source of funding will be maintained by deciding which provinces are to
be funded from Government sources or from Donors sources.
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31. 15. School Block Grants
15.1. Objectives of block grants
The primary purpose of the block grant system is to ensure that every school will receive
sufficient funding for utilities, the maintenance of buildings, the purchase of teaching
materials and other needs.
Secondary objectives are:
 Improving quality education through better access to teaching materials and a better
school environment;
 Improving access to education by removing user fees,
 Increasing community involvement in schools
 Introducing more accountability for school directors and provincial authorities
15.2. Expenditure coverage
The block grants will have the same expenditure coverage as non-wage budget norm defined
in section 3 of this concept note, namely line-items of chapter 12 and 16 plus line-item
13.03.01.
15.3. Block Grant Management Manual
MOE will be responsible for issuing and regularly updating a Block Grant Management
Manual. However the manual will have to be approved by MOF.
15.4. Structure of the block grant formulae
At this stage we will only take into consideration the block grant formula for primary schools
for introduction in FY2010/11. Other formulae for secondary education and other types of
schools will be developed for implementation in FY2011/12.
There are two traditional approaches for block grants, one based on a fixed amount by
school type, and one based on a fixed amount by student. It appears that in Lao PDR it is
better to combine the two approaches.
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32. MOE is only considering two categories of schools in the formula structure: schools with less
than 50 children and school with more than 50 children.
All schools will receive a fixed amount around 2 millions kip plus a fixed amount per student.
The fixed amount for school with less than 50 students will be more than the fixed amount
for schools with more than 50 children.
If Block Grant A is the block grant for schools of ≥ 50 students
If Block Grant B is the block grant for schools of ≤ 50 students
(G) is the fixed amount per school
(St) is the number of student
(a) is the fixed amount per student for schools of ≥ 50 students
(b) is the fixed amount per student for schools of ≤ 50 students
Then:
Block Grant A = G + (St x a)
Block Grant B = G+ (St x b)
The fixed amount per (G), (a) and (b) will have to be determined when the fiscal envelope for
non-wage recurrent expenditure will be known.
16. Block Grant funding model
Beside block grants type A and B, there will be different block grants for the 47 poor
districts.
Block Grants type A and B will be funded from the Government general budget. Block grants
for the 47 districts will be funded from FTI grants. FRT grants will be have the same formula
structure, but variable (G), (a) and (b) will have different value.
17. Financing of text books
The printing and distribution of text books will no longer be financed by the investment
budget and is now transferred to the recurrent budget.
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33. In accordance with PRSO agreement, text books for Grade 1-5 have been provided to all
students in all schools in the country by financing the Education Development II – EDP II
project. The replacement cost per year has been estimated at 11% per year and this cost will
be integrated into block grant to allow schools to replace worn out books.
18. Budgeting technique and mechanism for fund transfers
There can be two different ways to manage school block grants and to transfer the funds to
the province. MOF thinks that whatever way is chosen the allocation of block grant should
be reflected in provincial budget and appropriate budget techniques will have to be devised.
(1) The first approach is to let the fund transit through MOE central budget before being
allocated to the province. It requires that the transfer to provinces become an
earmarked block grant under the supervision of MOE. It should be noted that if the
Budget Law under Article 23 allows earmarked grants, these grants are seen as the
exception and not the rule. Transferring the essential part of non-wage recurrent
budget as an earmarked grant seems to contradict the general spirit of the law that
decentralises the budget. Additionally, the law does not say anything about
earmarked grants managed by line-ministries. As a consequence, if technically it
appears possible to manage block grants centrally through earmarked grants, it
implies a political risk and will require new regulation. This new regulation implies a
complete revision of the expenditure assignment. It will need to carefully identify the
respective responsibilities of MOF and MOE in approving and managing the grants.
(2) The second option is to let the provinces include the block grants in their annual
budget requests and to let them allocate the funds to the schools through the
Provincial Education Office and District Education Office. This option involves less
political risks because it will involve Provincial Governors. It requires less additional
regulation and no modification of the expenditure assignment. The risk involved here
is that provinces will not use the additional funding for block grants. This problem can
be overcome by creating a legal obligation for the provinces for earmarking the funds
and depositing them into a separate account supervised by the provincial treasury
office.
19. Budget Norms for central education budget
A non-wage expenditure norm will be implemented for FY2010/11 or FY2011/12 budget.
This expenditure norm will be expressed in percentage of wage expenditures calculated as
the sum of expenditures under chapter 10 and 11 of the budget nomenclature. The
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34. calculation of the norm will take into consideration three factors: (i) historical trends, (ii) the
fiscal capacity of the government (iii) budgetary needs of MOE at the central level. The norm
will be revised every year.
20. Revision of the expenditure assignment
There is a consensus that budget norms must be implemented on the basis of the existing de
facto provincial expenditure assignment. However clarification of the expenditure
assignment is the first and fundamental step in the design of any system of
intergovernmental finance. An effective system of budget norms will not be able to function
unless there is clarification of the various levels of responsibility, especially in the areas of
planning, budgeting and reporting.
Expenditure and responsibility assignment can be broken down in four components or
dimensions: (1) responsibility for delivering services, (2) responsibility for administering the
service, (3) responsibility for financing a service and (4) responsibility for setting standards,
regulations or policies guiding the provision of services.
Under the Circular number 1500 (Circular MOE, Personnel Dep. 02, “Instruction for
Decentralization in the Education Sector”), Dimensions (1), (3) and (4) of the Expenditure
Assignment are relatively clear, but like other sectors the management dimension (2) will
require important revision to make budget norms effective.
In the case that the Government decides that block grant will be managed centrally, this will
affect the third dimension (financing responsibility). Important additional regulation will
have to be issued and the Budget Law Implementation Decree of 2008 might have to be
revised.
Responsibility for delivering services and financing can remain unchanged for all education
programmes except higher education. Provinces have an obligation to finance universities
which in practice can be seen as centrally managed with an unclear sharing of
responsibilities.
However, most of the issues in expenditure assignment focus on the second dimension,
namely the management responsibility. The Circular on Education Decentralization says very
little on the subject and there is not a coherent body of regulation. This affects, in particular,
the linkage between planning and budgeting.
One of the weaknesses of the present planning process is that there is no strict distinction
between policy planning, which should be the responsibility of MOH at the central level, and
implementation planning, which should be the responsibility of the provinces. There is no
obligation of the provinces to follow national policies.
34

35. Planning at the provincial level appears disconnected from planning at the central level due
to the absence of common tools and to the large autonomy of provinces. This is precisely
what makes the implementation of block grants in a decentralized manner difficult. In
theory, provinces must be guided for planning and budget preparation by the Five Year Plan
and by national policy; in practice because there is no quantitative objectives assigned
centrally to provinces, there is little incentive for provinces to align their planning activities
with national priorities.
Provincial planning is also disconnected from national budgeting and as a result provincial
budgets suffer from systematic cuts that force districts to go through an additional revision
phase of their plan when budgets are announced. The provincial planning and budgeting
process is probably one of the longest in the world and in the base case scenario lasted
fifteen months.
The introduction of the Education Sector Development Framework is an essential step in the
right direction, but there is little understanding of the ESDF in the provinces and the roles
and responsibilities of the different provincial departments in ESDF implementation are yet
to be clarified and identified. As the model cannot be disaggregated by province it seems to
have little relevance for the provincial authorities which are not capable of developing ESDF-
driven activities in each sub-sector. The development of the Medium Term Expenditure
Framework based on multi-year sector development prepared by the provinces will provide
an essential budgeting tool with a link to the ESDF. Full integration will be reached when,
MOE on the basis of the MTEF and of ESDF will be able to produce a costed and prioritized
annual work plan that could be used for budget norm preparation. Although MOE is working
on such a plan, because the MTEF is not yet fully developed, an essential link between
planning and budgeting is still missing.
The introduction of budget norms will require changes in budget procedures and this should
be taken as an opportunity to bring more clarity in policy formulation, planning budgeting,
accounting and reporting. As budget norms will be based on policy priorities, programmes
and objectives defined at the central level, it is important that proper mechanisms are in
place to ensure that province budgets are in line with national priorities and objectives. This
could be partially achieved through a multi-year budget plan that will require approval of
both MOE and MOF as part of the sector MTEF, already under development. MOE should
also be given a role in monitoring provincial budget implementation.
Other issues must be taken into consideration, including:
(a) a clarification of the mechanisms to channel funds to the provinces and the
districts based on a better definition of recurrent and investment expenditures and a
realistic approach of expenditure needs,
(b) a more uniform management policy in line with higher principles defined by MOE
and
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36. (c) a more homogeneous use of budget classification.
Provinces do not always have the same understanding of how the expenditure assignment
links to sector policies, and have a very disparate approach to budget preparation and
execution, resulting in a confusion of roles. Among the issues mentioned during the different
interviews and meetings conducted for the preparation of the Concept Note, a few points
deserve attention.
Additional regulation will have to be issued to clarify the expenditure assignment. These
instructions should address three broad issues:
(a) the articulation between policy planning and service delivery planning,
(b) the revision of the budget formulation forms and procedures, and
(c) the reporting requirements between districts, provinces and MOE.
Revising the Circular on Education Decentralization will be necessary. More than a change of
principles, the circular required to be enlarged to cover management issues and to provide a
better articulation between the respective responsibilities of MOE and the provinces.
21. Budget classification
The introduction of budget norms will increase the contradiction between the Chart of
Accounts and Budget Classification, because budget norm requires data that can be
produced by the chart of accounts but not by the Budget Classification.
Budget norms are policy driven and need based while the current budget classification is
input driven. Budget norms require a functional classification and the possibility to identify
programmes. While the Chart of Accounts provides a functional classification and the
possibility of using programme and project codes, this is not reflected in the budget
classification. As a consequence it is not possible during budget preparation for MOF to
identify the sub-budget for pre-school education, primary education, secondary education,
etc. For example, it is not possible to identify wage and non-wage expenditure for primary
schools.
In the long term a revision of the budget classification is unavoidable. In the short term an
element of line-item budgeting must be introduced in the budget classification without
changing the current structure.
The Ministry of Education has already recognised the need for line item based budgeting.
The ESDF Model does not use the current budget classification. The new format for the
Medium Term Provincial Education Plan used the budget classification corrected by some
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37. element of line-item budgeting or functional classification and we recommend following the
same model for budget norm preparation.
Functional classification can be simply introduced by putting under the chapters and sub-
chapters of each economic category line-items specific to the education sector and
representing the different programmes.
22. Future of the system
The implementation of budget norms for the education sector should be regarded as an
important step toward the development of a full-fledge system of Intergovernmental
Transfers based on a General Purpose Grant and earmarked grants. This will probably
require minor adjustments in the budget norms formulae. Sector budget norms will be used
then to disaggregate the General Purpose Grant. This will have to be put into the wider
context of a complete revision of the expenditure assignment, a consolidation and
harmonization of the existing legislation and regulation, and a complete reform of the
budget formulation process which will have to move from an approach by economic
categories to an approach by sector with a better integration between the budget
formulation cycles of the provinces and the Government.
37