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Cablegate: Mcc - Indonesia's Education Spending

VZCZCXRO4375
PP RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJA #3137/01 3170740
ZNR UUUUU ZZH
P 130740Z NOV 07
FM AMEMBASSY JAKARTA
TO RHEHNSC/NSC WASHDC PRIORITY
RUEHC/SECSTATE WASHDC 7015
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHKO/AMEMBASSY TOKYO 1094
RUEHBJ/AMEMBASSY BEIJING 4468
RUEHBY/AMEMBASSY CANBERRA 1533
RUEHUL/AMEMBASSY SEOUL 4284
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 02 JAKARTA 003137

SIPDIS

SIPDIS

AIDAC

MCC FOR MARIA LONGI
DEPT FOR EAP DAS MARCIEL AND EB/IFD DAS DIBBLE
AID FOR ANE/AA-KUNDER
TREASURY FOR A/S LOWERY AND IA-BAUKOL
SINGAPORE FOR SBAKER
DEPT PASS USTR FOR WEISEL
DEPT FOR EAP/MTS AND EEB/IFD/ODF - MCC
DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO FOR FINEMAN

E.O. 12598: N/A
TAGS: EFIN KMCA SCUL PGOV KPAO ID
SUBJECT: MCC - INDONESIA'S EDUCATION SPENDING

JAKARTA 00003137 001.2 OF 002


1. Summary. The Millennium Challenge Corporation (MCC) requires GOI
to report annually a set of indicators, and to provide explanation.
This cable explains the challenging methodology in properly
capturing education expenditures, as well as issues and progress
concerning the sector. We believe the Government of Indonesia is
spending over 17% of its budget on education or about 1.96% of GDP
in 2007, putting it almost on at par with other developing, as well
as some OECD countries. End Summary.

Background: Primary vs. Basic Education
---------------------------------------

2. In 2006, the MCC scorecard for Indonesia showed weak public
expenditures on primary education. There was a serious reporting
challenge as the values reported to the United Nations Educational,
Scientific and Cultural Organization (UNESCO) and MCC, only
reflected national expenditure on education and missed the
significant portion of sub-national expenditure. The GOI had
difficulty isolating expenditure on primary from lower secondary
education, because MCC and UNESCO definition's of "primary"
education is years one-to-six and is out of synch with GOI's
definition of "basic" education of years one-to-nine. Adding to the
complexity, five separate sections of the central government are
involved in the funding streams affecting education expenditure at
various levels: Ministry of National Education (MONE), Ministry of
Religious Affairs (MORA), Ministry of Finance (MOF), Ministry of
National Development Planning (BAPPENAS), and Ministry of Home
Affairs (MOHA). The magnitude of under-reporting on the MCC
indicator because of these challenges was not previously clear.

More Accurate Methodology Finds
Increased Public Expenditure on Education
-----------------------------------------

3. In 2006, the USAID-funded Decentralized Basic Education (DBE)
project developed a model which more accurately represents the total
public expenditure on primary education. The more accurate
methodology found significant education spending at the local level.
The USAID DBE project worked with 26 local governments to identify
actual education expenditure and calculated how much of the
districts total spending was on education as a whole, and what share
within education was specifically on primary education.

4. USAID found that the Ministry of Finance (MOF) tracking for the
education sector at the sub-national level misses significant
portions of de facto education expenditure. In many districts, the
largest education cost items are non-discretionary items like paying
teachers' salaries and repairing school buildings, but these costs
often appear under other sectors, and there is no standardization
between districts. For example, costs of school building
rehabilitation in one district may appear under the coding
"Education Sector" while in another district it may show up in the
public works operating unit.

Revised 2006 Education Spending
-------------------------------

5. The USAID analysis in 2006 confirmed that local governments have
significant expenditure on education, and that at the primary
education level that was intended by the MCC indicator, expenditure
at the sub-national level by provinces and district/city governments
actually contributes twice as much as the national expenditure by
the two main ministries (MONE and MORA). Therefore any improvement
of the tracking of sub-national expenditure would lead to
significant increases in the value to be reported in the future to
MCC and UNESCO.

6. Based on the assessment, USAID assisted GOI to formulate a more
accurate estimate of education expenditure to support their
reporting to MCC in 2006. As a result of this methodology, a
revised estimate of "public expenditure on primary education" for
2006 was reported through USG cables to MCC: 1.70% of GDP from
previously reported 0.35%, much closer to the targeted threshold in

JAKARTA 00003137 002.2 OF 002


2006 of 2.0%.

GOI Exceeds Threshold Criteria:
1.96% of GDP for 2007
-------------------------------

7. In 2007, the National Planning Ministry (BAPPENAS) was again
responsible for reporting key indicators to MCC, including the
public expenditure on primary education. MONE led the analytical
work and followed the approach developed with USAID support. The
total public sector education spending for 2007 was USD $150.6
million, with the share for primary $74.9 million. This primary
share is 1.96% of 2007 GDP, which is a significant increase from the
value the Government of Indonesia reported in 2006. The MCC target
threshold for this indicator in 2007 has also changed, actually
falling in value to 1.67%. For both of these reasons, the value
reported by the Government of Indonesia exceeds the threshold
criteria for this key indicator, and Indonesia moved from having one
of the lowest reported values to being just above the median. In
addition, GOI estimates will likely to increase in the future for
another reason. The estimates will include more
centrally-administered programs that reside outside MONE and MORA,
such as GOI conditional cash transfer program called Program
Keluarga Harapan which provides incentives for primary school
enrollment.

Spending Is On Par With Regional Trends
---------------------------------------

8. Both the World Bank and USAID have found that even though
district governments spend the majority of the total education
budget, it is mostly nondiscretionary routine expenditures. In many
districts, the largest education cost items are paying teachers'
salaries and repairing school buildings. Decentralization formally
devolved the responsibilities for education from central level to
sub-national level, but majority of development expenditures is
still spent by the central government. Despite their large
participation in the sector, local governments have little
discretion in managing funds and shaping the key education sector
decisions.

9. Based on our discussion with the World Bank, we conclude that the
level of education spending is not significantly below an optimal
level relative to the overall national budget. The GOI is spending
over 17% of its budget on education, putting it almost on at par
with other developing, as well as OECD, countries. Significant
differences in educational access and quality across the country
remain and effective targeting of additional resources is required
to provide lagging district and provinces with sufficient funds to
catch up with better performing regions. Indonesia also faces a
problem with an oversupply of teachers at the primary level in urban
areas, whereas many remote, rural areas have a shortage.

HUME

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