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close this bookPlanning and Financing Sustainable Education Systems in Sub-Saharan Africa - Education research paper No. 07 (DFID, 1993, 32 p.)
close this folderPart I: Issues
View the document(introduction...)
View the documentA. Introduction and background
View the documentB. Resources, costs and data
View the documentC. Alternative sources of education finance

C. Alternative sources of education finance

Although it is by now universally recognised that public education systems in most African, South Asian, Caribbean and Latin American countries are severely underfunded in relation to what they are trying to achieve, the mechanisms for improving efficiency are not in place. Progress can only be made if planning and budgeting are improved, and this cannot happen while ancient and inappropriate government financial and planning approaches and systems remain. In general, governments must follow one or both of two types of policy to improve the quality and level of provision of education. On the one hand existing resources must be used more efficiently, and on the other resources must be augmented. A necessary condition for both must be the development of realistic budget and expenditure control systems for all government expenditures which work hand in hand with better planning.

The necessity of a public subsidy to education is justified by the presence of constraints on private credit (individuals often cannot borrow to finance education); imperfections in the availability of information (parents may systematically underestimate the value of education because of lack of information); externalities (such as the apparent relation between length of primary schooling and reduced fertility rates); and the public good aspect of education. Public goods are goods which, because they cannot be withheld from one individual without withholding them from all, must be supplied communally. Access to basic education might qualify as a public good. The presence of any of these conditions indicates 'market failure', and as they are all to a greater or lesser degree applicable to education, subsidies to the provision of education services can be justified on economic grounds. At the same time, funds for education, whether from tax or non-tax sources, are not infinite, and will always be rationed. The case for providing a fully subsidised service is thus undermined by the inability of net fiscal sources (ie taking also into account direct and social costs incurred in providing subsidies out of taxation) to satisfy the social optimum, taking into full account the various external benefits to education. Even were sufficient funds to be available to support a fully subsidised system, bureauaatic inefficiency in unaccountable education services leading to 'government failure,'33 would have to be taken into account. A balanced approach is therefore needed.

Efficiency. Much of the literature considers the option of reducing unit costs.34 But improvements in efficiency can take place, with or without reductions in unit costs. If we use the average cost per student as a measure of efficiency, then clearly costs may be reduced by reducing the quality of the product. It is difficult to see how average costs can be reduced in many African countries without further deterioration in the system. Some components of average expenditures should be reduced, but should result in transfers to other components in order to increase average expenditures per pupil or teacher. This is contrary to the view of those who believe that the greater role of the market permits governments to save money.35 The problem for the public sector is to raise average expenditures within the constraint of existing total public expenditures: and for the education system as a whole, total and average expenditures must be increased within the constraint of net additional private resources.

Embedded in the proposition that unit costs can be reduced is the inescapable need for the scope and volume of publicly financed activities to be reduced. 'Efficiency' measures will yield some transferable funds in the form of available cash. This is important. For example, many education projects have had as their stated aim the increase in pupil-teacher ratios in order to reduce the total number of teachers, the resulting 'savings' then to be applied to other parts of the sector. In reality, under the usual budgeting systems, what savings that are made are rarely identifiably transferred in the form of extra cash for, say, books. They are translated into a reduced rate of growth of the education budget: increments on non-salary charges are held at the 'normal' rate. In the context of extreme underfunding it is not clear how significant such transfers will be. Sources of additional funding will tend to be found outside the normal tax system in the foreseeable future.

The 'liberalisation' of the education market, the encouragement of private schools and the formalisation of cost-recovery schemes are expected to go a long way to bridge the finance gap. Most countries expect a growing proportion of total expenditure on education to come from non-fiscal sources. The main point to be made at the policy level is how far user fees can and should augment, and how far substitute for, public resources, assuming, of course, no deterioration in the quality of the product. There is relatively little evidence on which to base confident predictions of the extent to which expenditures on education can be increased through allowing a market in education service provision to develop. The development of such a 'market' would be through (a) the introduction and expansion of 'user fees'; (b) the expansion of the private education sector; and (c) the greater use of non-government sources of specific goods and services.

(a) User Pees end 'Cost-Sharing'

It seems to be widely accepted that subsidies should be focused on primary education, and that the higher up the system the lower the subsidy should be.36 However, because of higher costs, the ratio of subsidy to private contribution generally increases the higher up the education pyramid a student climbs.37 Whereas direct parental contributions finance up to half or in some cases even more of the total expenditure at the primary level, this share falls rapidly at the public secondary level. At the university level direct and indirect parental contribution as a proportion of total expenditure is often very slight. In order to reduce the burden of subsidy at higher levels many countries have introduced compulsory fees for secondary and tertiary education.38

User fees may replace government subsidies to education, they may augment them, or they may partly replace and partly augment at the same time. Most proponents of fees assume that fees should and will augment total expenditures. In general it seems that the approach proposed by Thobani39, which has influenced the thinking of international agencies involved in education, is most widely accepted: fees should be increased so long as there is 'excess demand' for the service. As I have noted, however, deterioration in the education system changes the product and 'excess demand' has little meaning. Excess effective private demand for 'education' as a service which will clearly benefit its 'users' by enabling them to learn will not be observed because of this. In a number of African and South Asian countries parents are withdrawing their children from school because of poor quality and because they do not consider schooling relevant to their needs.

Clearly, where there is substantial underfunding combined with deteriorating quality, gains from increased user fees may generate resources for expansion and quality improvement, and add significantly to total resources expended on education. However, it is not at all evident that sufficient attention is given to substitution effects. If household budget ceilings are fixed, the requirement to pay fees could well mean that money which had previously been spent on children and schools (for example, on books and construction), would be switched to fee payments, and parents would expect a greater level of public provision to provide what they themselves had previously provided. This means that no augmentation of total expenditure on education would take place. Similarly, little is known about the opportunity costs of fees paid by the 'rich' for higher education, though much is written about the need to lower taxes to promote investment by the 'rich'.

It is thus necessary to distinguish between compulsory fees and voluntary contributions, and to understand the degree of substitutability between them. Where compulsory fees are concerned, a distinction must be made between fees collected by the school and used in the school, and those collected and administered centrally. Compulsory fees are in effect 'earmarked' taxation, that is, taxes collected for a specific purpose,40 where they are for compulsory education. As I have noted, taxation has its own associated costs, and therefore the result of charging fees which cause households to transfer expenditure from direct voluntary contributions to compulsory fees could result in a net decrease in education expenditure due to the costs of fee collection and administration.

In addition, many fee proposals may not have sufficiently considered the effect on households of the combination of user charges and the tax system. The collection of fees and non-fee contributions for compulsory education outside the tax system, either through coercion or through deliberate starvation of subsidies forcing up private contributions, can increase the regressive nature of the tax system.41

Two broad justifications are commonly advanced for 'cost-sharing' policies. The first is that governments have insufficient revenue expenditure to finance education services fully; and the second is that a decreased reliance on 'government' revenues will promote competition and therefore efficiency. In so far as 'cost-sharing' in education has any meaning at all it refers to the sources of finance for education. Sources may be discretionary or non-discretionary for both household and government budgets. Both governments and households have limitations on what resources they can budget for any given activity. For individuals and households there are three types of 'cost-sharing': (a) voluntary contributions; (b) obligatory charges which do not go into government revenues but are retained, for example, at the school; and (c) obligatory charges which go into government revenues. Voluntary contributions may be correctly considered as cost-sharing while obligatory charges must be considered as taxes. However, where government allows for a certain level of 'voluntary' contribution by deliberately reducing subsidies, even voluntary contributions become obligatory.

The basic question is what affects the relative levels of voluntary and obligatory expenditures. Taxes and compulsory fees paid by individuals are obligatory (non-discretionary) they must be paid - and hence there is no essential distinction to be made between them. Where fees are used directly for a specifically identified purpose, unlike most taxes which go into a common pot, they may be considered as earmarked, but they are nevertheless obligatory. 'Cost-sharing' does not therefore signify a division of financing responsibility: revenues still derive from citizens. Rather it signifies a redistribution of financing shares.

The basic relation between public expenditures on education on the one hand and direct payments households may make apart from their normal tax obligations on the other is that the payments that households make are generally residual, that is, after public subsidies are taken into account citizens are asked to-make up any shortfalls. There is therefore a clear relationship between public sector efficiency and the level of 'private' contribution: parents may be required to pay more to support government or private sector inefficiency. How can I, as a parent, influence the costs of the education which I am obliged to cover, directly or indirectly, whether for public or private education, if I want my children to be educated? Can I say 'reduce the number of subjects so at least some are well-resourced'; or 'in our school we can't afford all the teachers we are allocated'; or 'change the school year and modify the examination system to fit into the fishing calendar so my children can help in the fishing season'? I can't, of course. The whole construct of the 'market' is that it creates competition and choice, but it is obvious to nearly every parent, particularly those without much money, that in reality there is not much choice, and hardly any at all where the determinants of the costs of education are concerned.

There is a major need for research into the relation between the costs of schooling and how people can pay them. At the household level expenditures may be made from current income, from borrowing, and from sales of assets. Nearly all surveys of household expenditure assume expenditures to be from current income. But if the sum total of current income is insufficient to cover household expenditures, whence comes the income to make up the difference? It must come from debt or from sales of assets. If it comes from other members of the extended family it may come from current income, or from debt, or from sales, but in aggregate the total incomes and expenditures must balance.

Assets such as cows or taxis earn income. It may make sense to sell them if they finance higher yielding assets, rather than if they finance consumption. If households sell assets to finance education, assuming education to be investment and not consumption (many, if not most, surveys treat education expenditure as consumption expenditure), it is, in effect, a switch of investments out of cows or taxis into human capital. Thus, where individuals are required to purchase education, it is necessary to understand the sources of finance used for the purchase. If I believe my children will earn more from having attended school, the additional future earnings might enable me to buy two cows or two taxis, and my short-term hardship might be justified. If in fact they do not earn sufficient to have made my sacrifice worth while, I have made a serious loss. Moreover, society has also made a loss.

In the past budget deficits were financed by government borrowing and foreign aid. In principle there is nothing wrong with a deficit as long as people are willing to finance them. As governments are no longer able and/or willing to finance deficits, households and firms are being asked to do so. If individuals wish to receive education and an academic certificate they will have little choice but to pay increasing levels of fees, regardless of the efficiency of government provision. This is the logic of the Thobani 'rule'.

As I have mentioned, the argument is that at the primary level parental contributions should in general augment public resources, while progressively at the higher levels they may to some degree substitute for public resources, but in order to redirect the resources to basic education. In reality, this is hard to achieve. Higher government expenditure on primary education might, for example, enable poor households to release money used to finance education for other equally important uses. Furthermore, in countries where equity considerations are important in policy making, it is possible that focused subsidies such as scholarships will reduce net revenues from fees, as the costs of subsidies are balanced against the extra revenue from fees.42 Where fees substitute for public finance, it is assumed that the public finance thus released will be returned to the education sector in other areas. This, as I have noted, is one of the basic justifications underlying fee proposals such as those found in the cited World Bank literature,43 but it is by no means clear from this literature that it actually happens. I suggest that it is unlikely to happen in the absence of appropriate planning and reformed budgeting systems.

(b) Private Educational Provision

Much of Africa's 'modern' education system up to independence was private in the sense that it was run by missionaries. The secularisation of education and the perceived need for nation-building, as well as in some cases political activities of churches, led to an almost total take-over of educational institutions by governments. Missionary schools were not profit-making, but aimed for self-sufficiency, depending on local and foreign contributions.

The reasons for encouraging the development of private schools in less developed countries generally lie with the inability of governments to provide sufficient student places from tax finance. Like fees, it is a way of capturing more private finance outside the tax system. This is deemed to be more efficient in the sense that it avoids the costly public bureaucracy necessary to administer the public system. However, it is necessary to take into account the costs of regulation.44 At the same time private schools, particularly in that they operate for the most part within education systems in Africa which are geared to getting pupils through examinations, may, if left sufficient flexibility, serve as centres of innovation, even to the point of shortening the length of the primary or secondary school cycle with no loss of examination success. The European experience, particularly in Scandinavian countries, provides interesting examples of this phenomenon.

There is an important distinction to be made between profit-making and non-profit private schools. In the case of private profit-making schools there is no reason to suppose an equally proportional relationship between rises in household spending on schooling and total expenditure on education because of the profit which school owners take out. It is thus by no means axiomatic that the replacement of public schools by private schools will result in an equal augmentation of resources, particularly when regulation costs are taken into account.45

The privatisation of education may not necessarily favour the better off by the creation of elite private schools access to which is restricted by price, as is often believed. There may be significant incentives to compete for subsidised school places, which are allocated on entry requirements which include academic performance as measured by examinations. Examinations have distorted education systems and equated examination passes with education. To the extent that there is a relation between examination success and relative social advantage, examinations become a rationing device for future study, and favour the better off in their search for publicly subsidised school places. More importantly, whatever the economic status of students, those with lower academic achievement, which is not the same as saying those with less academic ability, may have less access to good schools.46

There is undoubtedly an important role to be played by private schools in African countries. How important remains to be seen. Private schooling should not be seen as a panacea, and its potential as a future demand on government obligations under multi-part systems must be borne in mind: where private schools may suffer financial problems there may be strong calls for government help.47 Private systems are often subsidised directly or indirectly, and may account for a proportionately larger percentage of total expenditure than of total enrolments. Indeed, the real issue is how subsidies to 'private' schools are operated, as in most countries they operate through the tax system or directly though grants. In many ways it is unhelpful to be constrained by the term 'private', and perhaps we should consider the issue more in terms of diverse forms of state funding. To realise the possibilities that exist significant changes would be required in how government budgets for education are made up and regulated.

(c) Alternative Provision of Goods and Services

Many countries have now contracted the publishing of school books to private sector publishers, and are contracting teachers and others to work on curriculum development, in contrast to previous reliance on Ministry of Education units to do this work. There has been less experimentation in some of the other parts of the education service, particularly in high cost areas such as the training of teachers. As teachers make up the single greatest cost component of primary and secondary education, and, at the same time, in nearly all countries perceive themselves to be underpaid and working in poor environments, a prime concern must be to improve their conditions. To achieve this they must (a) have more capital to work with (better buildings, books and equipment, etc); and (b) in most countries have improved salaries. Yet because teachers are in most cases only supplied by government which is constrained by public expenditure ceilings, neither of these improvements are likely to be achievable in most Sub-Saharan African countries in the near future.

In addition, the cost of teachers to schools is fixed by centrally determined norms, expressed both in salary scales and levels of qualification. In many countries the problems of poor quality in schools are also found in teacher training institutions, and the professional capability of teachers suffers. Put another way, although teachers may possess appropriate paper qualifications attesting to years of training, they are not axiomatically well-trained teachers. This would explain to a large degree the findings of researchers which suggest that the level of training of teachers may not be significantly associated with pupil performance in many countries, particularly in primary schools.48

Any discussion of education fees and private schooling in Africa is likely to end indeterminately as most countries have little experience of the complex interaction between household and government expenditures and the quality of educational provision. The relevance of the issue to public budgeting is the need for planners to determine the amount of private finance available to supplement government finance at all levels, and to determine the effects of the distribution of subsidies on the availability of education to all income groups. The foregoing brief discussion of approaches to augmenting the resources which are available to support the development of educational systems highlights the problems facing planners in the implementation of the proposed 'new priorities'. While several key policy targets are proposed, they are often based upon assumptions that have not yet been tested and which have a number of practical difficulties attached to them. Countries should not accept such policy advice without giving careful thought to how it should be initiated and tested. This involves setting place the appropriate mechanisms to allow them to do so effectively.