1. The document analyzes the budgetary requirements and implications of implementing the Lao PDR Education Sector Development Framework (ESDF) from 2000-2015. It finds that the ESDF will require significant increases in the education budget as a percentage of GDP to meet its targets. 2. Full funding of the ESDF appears impossible without massive donor assistance given budget constraints. Revisions may need to be made to the ESDF or MTEF to better align plans with available resources. 3. Primary school enrollment figures in the ESDF may be inflated and unreliable. Clarifying enrollment methodology and monitoring is needed before budgets can be accurately determined.

1. BUDGETARY ANALYSIS OF THE EDUCATION SECTOR DEVELOPMENT FRAMEWORK (2000-2015) IN
THE LAO PDR
Jean-Marc Lepain
Public Finance Specialist
Intergovernmental Fiscal Advisor
Ministry of Finance
October 9th 2009
Executive Summary
 The ESDF Model calls for a very significant budgetary effort from the Lao PDR Government.
After three years of decline, the model requires that education budget increase immediately
to 3% of GDG to reach 4.6% by 2015. Without such an effort the Lao PDR will not be able to
meet the Millennium Development Goals and is unlikely to leave the group of the least
developed countries.
 Financing the model should be considered more as a political decision than a budgetary one.
But covering to total shortfall seems impossible without massive donor assistance.
Considering that ESDF is part of PRSO triggers, MoF has the choice either to revise its
budgetary priorities or to ask MoE to revise the model.
 Due to low implementation capacity, the model might be over ambitious for the year
2009/10 and 2010/11.
 As it appears unlikely that MoE will get the funds it needs for FY2009/10. We recommend
that, based on negotiation between MoE and MoF, a more realistic Medium Term
Expenditure Framework (MTEF) be prepared for the years starting in FY2010/11 to FY
2013/14 (the current MTEF is developed without consultation with MoF). The MTEF will not
only guide allocation of multi-year fiscal envelopes, but become the basis for calculating
budget norms and block grant formulae. The MTEF can become part of the implementation
roadmap required by PRSO. It should be stressed that an MTFEF not endorsed by MoF would
be useless.
 With the decision to limit budget norms to non-wage expenditures, the budget norm
formula will become the block grant formula after deduction of the cost of the feeding
programme and scholarships which probably will be financed by donors.
 The enrolment figures for primary schools appear very high and it seems necessary to clarify
the methodology for tracking school enrolment. Without a reliable tracking system the
introduction of block grants or budget norms will be difficult.
 The high priority given to kindergarten and play groups should be questioned. Although it
makes a lot of sense in pedagogical terms, in budgetary term the cost appear high. Putting
more funds in primary school recurrent budget might be a more attractive strategy.
 Primary school non-wage expenditures, after deduction of the feeding programme, remain
too low at around 9%-10% of recurrent expenditures while it is considered that 20% would
be a minimum. At 10% of recurrent expenditures, non-wage budget will be totally absorbed

2. by large urban schools, living district and village schools without financing unless a system of
block-grant, with budget execution control, guarantees that funds reach all schools.
 As parent contribution represents 0.3% of GDP in FY2008/09, it is critical to develop a better
monitoring system for school fees. A policy paper should be prepared and new regulation
should be drafted in relation with other sectors such as health and transport.
Introduction
The ESDF model is a model that has been created by MoE at the request of donors and is one of
PRSO 5 triggers. PRSO 6 objectives already include the implementation of the ESDF model. If MoF
decided that ESDF cannot be implemented, then either PRSO 6 triggers must be revised or the model
must be adjusted.
The ESDF Models exist in two versions. The first version is the one approved by the Prime Minister
and the donors. The second version has been released a few months ago with three main
differences: (i) budget figures for 2008/09 are based on actual budget figures; (ii) enrolment plans
for pre-schools have been increased from year 2009/10 as well as the non-wage recurrent budget.
Non-wage recurrent expenditures per student in pre-schools go from 373 thousand kip in the
approved model to 428 thousand kips in the revised model, including the feeding programme; (iii)
enrolment number have been increased in all major programmes from FY2010/11 onward.
The ESDF Plan recognises that the resource disparity across provinces is an obstacle to its
implementation and requires reviewing “the financial arrangement and mechanism introduced in
support of decentralization”. It stresses the necessity “to return some education functions from the
provinces to the Ministry”, to clarify expenditure assignment (p. 35 §63), and to revise budgeting
procedures (p.34).
1. Required level of funding
In general, the ESDF Model requires a very significant budgetary effort from the Lao PDR
Government that will reverse the current budgetary trends. Education budget has declined from
3.1% of GDP in 2005/06 to 2.2% in 2008/09, and from 14.8% of the national budget to 10.8%. The
ESDF Model assumed that this negative trend will be reversed and that the education budget will be
restored to 3.1% of GDP in 2009/10 an will grow faster than GDP in FY2011/12 and FY2012/13 to
reach 4.15% of GDP in 2015/16
This scenario is very much what donor had in mind when the PRSO Agreement was put in place.
However, donor assistance, as it could be expected, has not grown as fast as the national budget and
the Government has kept it contribution around 1.1%-1.2% of GDP. As a consequence, the education
budget has not been growing as fast as the general budget resulting in a virtual transfer of 49M
USD from the Education Sector to other sectors for last fiscal year only. Obviously Nam Theun 2
additional revenue will not cover that gap.

3. 2. Pro-poor policy
The ESDF models envisaged four types of pro-poor measures:
 A robust scholarship system is proposed for securing improved student retention and cohort
survival rate;
 Waiving of parent contribution for primary schools and lower secondary schools;
 Incentive programmes for recruiting and retaining very good teachers in the poorest
districts;
 A children feeding programme;
3. Introduction of school block grants
The ESDF Model is based on the introduction of a school block grant system which is one of the
objectives assigned by the Poverty Reduction Strategy Operation and a trigger of PRSO 6. PRSO 6
gives as objective: “MoE and MoF agree to pilot formula-funded school grants for non-wage
recurrent expenditures, with allocations in the FY2010/11 budget”.
However, because of the spit between salaries, non-wage and investment budgets, the block grant
system is limited to non-wage expenditures. With the decision to limit budget norms to non-wage
norms, de facto, the budget norms formula becomes the block grant formula.
4. Enrolment Figures
Kindergarten and Play Groups: An increase of 28% of enrolment was planned in 2008/09 and we
will need confirmation that it has taken place. Enrolment is expected to grow by 31% in FY2009/10
and 25% in 2010/11. To keep such a growth rate will represent a serious challenge and enrolment
growth should be closely monitored.
Primary Enrolment: A number of objective elements seem to indicate that enrolment figures for
primary education have been inflated.
 The ESDF Model establishes enrolment at 898 thousand children for year 2009 when other
reports from the statistic department put that number to 878 thousand (-1.9%)
 The ESDF Model put the total primary school age population at 990 thousand. This represent
16.5% of total population; something biologically impossible. Data from MPI suggest that
school age population is around 897 thousand children.
 ESDF Model puts child enrolment in public schools at 90.2% plus 2.1% for private enrolment.
An enrolment rate of 92.3% looks highly improbable compare to neighbouring countries and
does not seem compatible with the drop-out rate observed in rural area. The enrolment rate
rises to more than 100% of the school age population according to MPI numbers. In a survey
the Word Bank has estimated that only two third of students entering grade 1 reach Grade
5. Even if the rate has improved it cannot be higher than 80%.

4.  The ESDF report says “Net enrolment rate in Vientiane City and Vientiane Province is above
90%. The net enrolment rates in Luangnamtha, Pongsaly and Saravanh are around 50%” and
add that 57% of primary schools are incomplete and unable to teach up to grade 5.
 Data communicated by the provinces seems also inflated. Considering the average fertility
rate (31.6 per 1000) and infant mortality (63.2 per 1000), the school age population should
not exceed 15% of population, but 14 provinces reported higher enrolment rates, sometime
as high as 19.6%. Oudomxay is the province that reports the highest enrolment rate after
Luangnamtha and Oudomxay.
Principles under which enrolment is reported should be checked before the correct level of financing
per student and per programme can be decided. MPI data have also their own discrepancies.
Whereas MPI estimates age 0-4 and 10-14 at 13.4% of total population, age 5-9 is only 12.6%. MPI is
not able to give any explanation for this loss of 100 thousand children. But even if we correct school
age population by adding 100 thousand children, enrolment numbers appear still too high. The only
other possible hypothesis is that MPI underestimates total population by half a million.
Lower Secondary Enrolment is planned to increase 33% in 2009/10. As the school year starts in
September, MoE should be able to confirm if the increase has taken place. In 2008, enrolment in
lower secondary education represents 30% of enrolment in primary. To raise that ratio to 40% in one
year seems very ambitious.
Upper Secondary Enrolment: We do not have enough information to understand the numbers.
Enrolment is supposed to decrease by 22% in 2009/10 and increase by 23% in 2010/11. This seems
to be correctly reflected in salaries.
Teacher Training: An important recruitment of nearly 3,000 teachers is supposed to take place in
2009/10. We will need confirmation from MoE that it goes according to plan.
No significant increase is scheduled for non-formal education, technical and vocational and higher
education.
5. Priority given to pre-school
The ESDF Model reflects a high priority given to kindergartens and play groups with a growth rate of
25% to 30% from year 2009. The very high figures of the ESDF model (enrolment growing to 117
thousand in 2009) cannot be correlated to the Education Sector Baseline MTEF that shows an
enrolment of 28 thousand children. We are in process of clarifying this point with MoE and expecting
more information.
The plan gives priority to enrolment over quality. With non-wage expenditures fluctuating around
10% of the recurrent budget (not including the feeding programme), it would be almost impossible
to provide the required pedagogical materials.
The high priority given to kindergarten and pre-schools can easily be understood in pedagogical
terms. However, due to budget constraints, the development of pre-schools seems to impact

5. negatively the development of primary education that will continue suffering from a chronic lack of
non-wage resource well after 2015.
6. User Fees and Parent Financing
Registration and instructional fees for schools have been identified as one of the main cause for low
enrolment and high drop-out. The objective of MoE is to waive all user fees for primary and lower
secondary education as soon as possible. The ESDF model sets the objective for FY2009/10 for
primary education and 2010/11 for lower secondary education. However if after budget negotiation
the ESDF model is not completely funded, MoE might decide to keep parent contribution.
In kindergarten and upper secondary education parent financing is expected to play an increasing
role. In kindergarten and play groups parent contribution is in expected to rise from 8.2% of
recurrent expenditures in 2009, to 13% in 2011 and 22.2% in 2015. In upper secondary education
parent contribution represents 23.4% of recurrent expenditures in 2008/09. ESDF sets an objective
to reduce that ratio to 16.7% in 2009/10 and to stabilize it around 17.6% by 2011/12. However it
should be noted that by 2015/16 parent contribution will exceed non-wage expenditures, meaning
that parent contribution will finance a portion of salaries. In Technical and Vocational Schools,
parent contribution has nearly doubled from 56% in 2007/08 to 103% in 2008/09 and 107% in
2009/10.
Regarding higher education, parent contribution is expected to reach 244% of the total education
budget (recurrent + investment) in 2015/16. At this level of financing, the affordability of higher
education will certainly become an issue for many families and there will be strong pressure on the
Government to develop a strong system of scholarship.
The importance that parent contribution plays in education financing calls for more regulation from
MoF. In 2008/09 parent contribution represented 28% of all local budgets with large regional
disparities and 0.3% of forecasted GDP. However, parent contribution does not appear as a resource
in MoE budget and technical fees only capture a very small portion of the total amount. The
importance that parent contribution plays in education financing call for strict accounting and
reporting rules and a clear policy established jointly by MoE and MoF. The fact that MoE envisages
to use parent contribution in future to finance salaries is questionable and will require, if
implemented, very strict regulation.
7. Feeding Programme
The Children Feeding programme is an important component of MoE’s pro-poor policy and an
important measure to reduce drop-out rate.

6. In 2009/10, 43,508 M kips are allocated to the kindergarten feeding programme, representing 52%
of recurrent expenditures and an amount of 372,663 kips of per student declining to 208,458 kips in
2015.
As only a small proportion of primary student are expected to benefit from the feeding programme,
the cost per capita is much lower, but still the cost of the programme represents 27% of the
recurrent budget in 2009/10 and decline to 16% in 2015.
Three questions should be raised:
 Can the feeding programme be financed by donors? It seems that it is what MoE expects but
it requires confirmation.
 Are the donors ready to make a multi-year commitment?
 Is the logistic of the programme ready, and what will be the expected starting date if the
financing is secured?
If donors financed the feeding programme, the cost of budget norm will be significantly reduced.
8. Scholarship system
A scholarship system is already in place for technical and vocational education, teacher training and
higher education. It is planned to expend this system to primary education in 2010 and upper
secondary education in 2011. The additional cost will be 5,447 M kips (0.6M USD) in 2009/10 and
20,141 M kips in 2010/11 (2.4M USD).
Scholarship programmes will be targeted at around 20% of projected enrolment including Grade 4
and 5 enrolment.
9. Books
Books are considered as part of the investment budget.
PRSO 6 includes the following objective: “MoE and MoF agree to provide one set of textbook per
student for grade 1-5, including free distribution to poorest students, and reflect this in the
FY2010/20011 budget”. The indicator is the average student / textbook ratio in 47 priority districts.
The current target is to have at least 3 essential textbooks for each child in primary school and 4
textbooks for each secondary school student.
Provision of free textbooks is already in pilot phase. However first results seem to indicate that a
high proportion of textbook are either lost or damaged every year. A better book management
system is required. A solution could be to give a budget to schools for textbook replacement.
Textbook budget should be included in the school block grants. Textbooks as a free resource do not
encourage good management. MoF should ensure that financial resources allocated for textbooks
are managed in a responsible manner.

7. 10. Teacher Salary increase
Proposed salary increase is set at around 10% per annum and will be linked to the capacity
development framework. As teachers are public servants, strategies for securing the salary outcome
will need to be worked out between MoE, MoF and PACSA.
11. Realism of the ESDF Model
In terms of budgeting technique, the ESDF Model is a first class tool even if some of the assumptions
can be questioned. It is an ambitious model, and considering that the future of the country is at
stake it is worth to be considered by the Government for financing. One of the assumptions that
underpins the model is that the Lao PDR will reach the Millennium Development Goal by 2015.
However, considering delays in providing adequate funding to basic social programmes one can
wonder if it not already too late.
Because of the constrains put by the Millennium Development Goal, the ESDF model might be too
ambitious. Even if the Government provide the funding it seems that the model requires doing too
many things too fast. High enrolment rate in several sectors will require a very significant effort to
build facilities and to recruit teachers. As it appears unlikely that MoE will get the funds it needs for
FY2009/10, we recommend that a more realistic Medium Term Expenditure Framework be prepared
for the years FY2010/11 to FY 2013/14.
12. Costing and budget gap
The ESDF Model is based on its own macro-economic assumptions which are difficult to reconcile
with MPI and MoF data. The development of a common MTEF should solve this problem. In any
case, the shortfall is important and is equivalent to 243.6 M USD from now until 2015. This is
probably an underestimation. Budget restrictions for FY2009/10 might increase significantly the
shortfall for that year estimated at 43.6 M USD by MoE. Donor efforts to cover the shortfall are likely
to be proportional to the efforts made by the Government. Certainly MoE will need to produce an
annual implementation plan with less ambitious targets. Finance is not the only constraints. Capacity
constraints might also delay the implementation and reduce the required funding.