# **<mark>1. Introduction</mark>**

<mark>Children growing up in many developing countries today start school earlier and stay longer than their parents and grandparents. Average levels of educational attainment in developing countries rose from 4 years to 7 years between 1980 and 2010 and over the same period many countries also narrowed the attainment gap with more advanced nations (Lee and Lee 2016). These improvements have come about through significant increases in government investment in education. For example, government spending on education in low- and middle- income countries doubled in real terms between 2000 and 2014 (Education Commission 2016).</mark> <mark>A substantial proportion of these additional resources have been allocated to building and equipping new schools and hiring teachers. Increased funding, has also been used, particularly in basic education, to reduce the costs of schooling through targeted cash transfer schemes and school grants. Typically, governments have provided grants as part of fee reduction policies and to compensate schools for the associated revenue loss.</mark> <mark>However, despite increased spending, student learning outcomes remain low in many countries. Recent evidence shows that in many countries, overall increases in public education spending are only loosely related to improved learning (OECD 2013). Moreover, impact evaluation studies across different countries have also shown that increases in spending that merely provide more school level inputs frequently fail to improve learning (Glewwe, Hanushek et al. 2011, McEwan 2013).</mark> <mark>Indonesia is no exception to these broader global trends. Between 2000 and 2012, the number of years of schooling the average adult obtained increased from 6 to 8 years (World Bank 2013). The government tripled education spending in real terms between 2001 and 2011 and used part of these increases to introduce a nationwide school grants program in 2005.</mark><sup>1</sup> <mark>While attainment has improved, the 2015 OECD PISA results show that almost 70 percent of Indonesian students fell below the basic level of proficiency in mathematics required to participate fully in modern society (OECD 2016). Moreover, there has been no significant change in learning outcomes since 2006.</mark> <mark>In the nation’s capital, Jakarta, the low returns from large increases in public education spending have led to a renewed focus on the effectiveness of school financing. For many years, the Jakarta city government has provided per-student operational grants to support school level improvement. However, a recent public education expenditure review highlighted the limited impact of this additional funding on school performance (World Bank 2014). In response to these findings, the government adjusted their operational grant allocation formula in 2014 to include a component that linked school grants to performance.</mark> <mark>This paper evaluates the impact of the introduction of this performance component of the grant on learning outcomes. It identifies the impact by exploiting geographic differences in program coverage as well as by comparing schools that received the additional performance award with schools that did not.</mark>

> 1 Per student spending in primary and lower secondary schools also increased over this period and has continued to grow UIS (UNESCO Institute for Statistics) (2017). “Education (database).”. Montreal **:** http://data.uis.unesco.org/.

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