7.1 Distribution of education transfers as a zero-sum game

and municipalities. It is not currently using School monitor, however, the system that contains information on school needs and areas of improvement, to target resources, programs, or projects aimed at improving education outcomes, which may cause misalignments between targeting and needs.

Although the transfer system in Colombia appears to feature characteristics of a high-performing system (such as per capita amounts, formula-based transfers, and incorporating equity and performance in its formulas), its implementation limits the effectiveness of these features. We discuss these limitations next.

Main design and implementation issues for fiscal transfers for education Transfers are a zero-sum game: resources for the provision of service, quality, and gratuity transfers compete with each other . The allocation of education-specific transfers (provision of service, quality, and gratuity) is a zero-sum game14 because the amount of resources available for all transfers is predetermined exogenously at 56.16 percent of GPS (see box 7.1). Any increase in budget for one of the three allocations must be subtracted in whole or in part from one or both of the other two. Although this design feature has the advantage of creating fiscal stability, its main disadvantage is that the budget for investments by municipalities and schools competes with the budget for provision of service transfers, a budget that has been increasing due to increasing salary expenditures. These increases are likely to continue to put pressure on the transfer system, absorbing resources for service provision and reducing resources for both quality investments and gratuity transfers to schools.15

With 88 percent of service provision transfers spent on salaries in 2018,16 increases in salary expenditures put significant pressure on the transfers. We used available data to calculate a rough approximation of the cost of the two main agreements—the 12 percent salary increase for all teachers and the new evaluation for promotion. (See World Bank (2021) for a detailed explanation of

BOX 7.1

Distribution of education transfers as a zero-sum game

Zero-sum games are interactions in which what one actor wins, another loses (mas-Colell, Whinston, and Green 1995). The distribution of transfers among provision of service, quality, and gratuity can be considered a zero-sum game because each of them is allocated mostly to one group in the education sector: teachers (the main beneficiaries of the provision of service allocation), local mayors (quality transfers), and education communities from each school (the main beneficiaries of the gratuity transfers). The final distribution of total transfers (which is a fixed amount) is the result of the interaction among these three actors and the political power they hold when dealing with the central government. Consequently, each of these groups faces different collective actionproblems (Olson 1965) (that is, even though it is desirable for the group as a whole to push for more favorable policies, it might not be in the interest of some individual group members to do so). Collective action problems can be overcome when the group is small or well-organized (Krugman and Obstfeld 2006). Each of the groups that interacts in the distribution of fiscal transfers for education in Colombia represents constituencies of different sizes (teachers or mayors or education communities from each school) and has different capabilities and resources to organize as a group. Therefore, each group has a different level of political power to negotiate and push for policies that benefit its interests before the national government, which ultimately affects the final distribution of education transfers.

the methodology.) Together, these two agreements total almost US$487 million, which represents 8 percent of the total education-specific transfers made through the GPS in 2017. Because our calculations are for only one year and do not take into account any promotions that may have taken place since 2016, this number is likely a lower bound.

The competition between the different transfer budgets can be expected to get worse in the upcoming years because the formula to determine total transfers was changed in 2016, and it no longer guarantees a yearly real increase. Under this scenario, if the new formula—average growth in national current income over the previous four years—results in lower transfers, the provision of service budget will take up an increasing share of the available resources, thus severely limiting the amount available to municipalities and schools to invest in quality and pedagogical investments.

The existence of the complement limits the incentives for efficiency improvements embedded in the per capita formulas. The effectiveness of formula funding is undermined by the complement, the additional transfer local governments receive if the amount allocated for service provision does not cover salary costs. Between 2013 and 2014, the complement represented 7 percent of total education transfers, but that amount declined after the introduction of a cost-based formula (see figure 7.14). In 2018 and 2019, when additional resources beyond the education budget were transferred to cover CTEs’ payroll expenses, the complement increased. In 2019, reflecting in part negotiated salary increases, the complement amounted to 13 percent of total education transfers, and 89 percent of CTEs received a complement. The importance of the complement is likely to increase in upcoming years.

The existence of the complement negates the purpose of having a formula-based funding system. After the complement, resources received by CTEs do not depend on the formula but on their actual costs. Thus, the formula is meaningless for the 89 percent of CTEs that received the complement in 2019. Additionally, the complement eliminates the incentive for efficiency embedded in per capita formulas. Because the formula incorporates the “efficient” number of teachers that each CTE should have, local authorities should have an incentive to manage their teaching staffs efficiently to release resources for other expenses. The existence of the complement, however, eliminates this incentive. Since CTEs do not suffer the financial consequences of not managing their teaching staff efficiently, they have no incentive to do so.

Human resources management is highly inflexible in other ways. Even if CTEs had the incentive to manage human resources more efficiently, they would still need to have the ability to do so. Unfortunately, there are other impediments to flexibility in managing their teaching staff. Teacher transfers are not transparent and are difficult to implement. Legally, CTEs have the authority to transfer teachers according to their needs. There is evidence, however, that they are unable to exercise this authority. Estimates from the national government show that, in 2017, over 10,000 teachers (3 percent of the total) could have been reallocated (5,451 within their jurisdiction and 4,705 between jurisdictions), which would have yielded yearly savings up to Col$ 0.461 billion (about US$136 million) or 2.26 percent of total education transfers. Administrative and political economy barriers might be preventing CTEs from reassigning teachers (ministry of Finance and Public Credit 2018). Teacher hiring is done transparently and