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