10 years and that, upon certification, they will receive a professional allowance equivalent to their base salary plus a functional allowance equivalent to 50 percent of their base salary.35 The law also specifies a special area allowance, which will be given to teachers in conflict, natural disaster, remote, and other hardship areas. Approximately 10 percent of teachers are expected to receive this special area allowance. Assuming that the teaching workforce remains the same and that all teachers become certified, the professional incentive will actually be greater than the current expenditures on teacher salaries because private school teachers are also eligible for the professional incentive.<sup>36</sup> The special area allowance will result in some teachers be receiving over three times their current base salary (base salary plus professional incentive plus special area incentive plus functional incentive).

Total expenditures on teachers will double within 8 years and exceed total education spending in 2005. Spending on the professional incentive will increase gradually each year as more teachers get certified (Figure 11). By 2016, an estimated Rp. 102.7 trillion will go toward salaries and 37 incentives (130 percent of the entire 2005 national spending on education). MoNE may be using the professional allowance to justify allocating more of the overall budget to the education sector. This action was stipulated in the Education Law’s “20 percent” regulation, especially since these “allowances” are not to be labeled as “salary expenditures”.

Increasing teacher salaries upon certification seems justified. However, if these increases crowd out other recurrent education expenditures, they are likely to negatively affect education outcomes. To reduce potential inefficiencies and lower the burden of increased teacher compensation, simultaneously tackling the oversupply of teachers is advised.

Figure 11 Estimated Financial Cost of Teacher Salary and New Stipulated Incentives <!-- Start of picture text --> 120<br>100<br>2005 National Education<br>Expenditures<br>80<br>60 2005 Education Exp.<br>Professional Incentive<br>40 Special Area Incentive<br>Functional Incentive<br>20 Teacher Salary Cost<br>2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016<br>Trillions of Rp.<br><!-- End of picture text --> _Source:_ World Bank staff estimates using MoNE 2004–05 teacher data. _Note:_ The amount and recipients of the functional incentive are still being discussed. See annex 4 for details 35 The functional allowance is still being determined and details are to be specified in a ministerial decree. An October draft version of regulations which are expected to be passed in December 2006 specified that the functional allowance of 50 percent base salary would be given to certified teachers. This amount has now been removed from a November draft of the regulations. It has also been debated that the allowance will be given to all teachers and may be between Rp. 100,000 to 300,000 per month.

36 This assumption is potentially inaccurate because, while the law states that all teachers are required to be certified within 10 years, it also requires that teachers hold an S1 or D4 degree before they can go through the certification process. Currently, only 20 percent of teachers in primary and secondary are at this level and many teachers are well below (for example, would need to get the equivalent of an additional 3-4 years of schooling).

37 This estimation does not include district and school incentives, which are sometimes given to teachers.

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