While there is a range of alternative funding mechanisms for TVET, the most common is a levy-grant model.
The OECD, in preparation for the Southeast Asia Regional Policy Network on Education and Skills in Cebu, Philippines on the 11-12 October 2016, reviewed the history of funding mechanisms in technical and vocational education and concluded that:
Training levies – whereby employers contribute to a fund dedicated to training – are used or have been used in more than 60 countries throughout the world. These countries are mostly in Latin America and Africa, but sectoral training funds for enterprise training are also common in Europe (see CEDEFOP, 2008).
Asia, particularly Southeast Asia, has relatively few training levy schemes, but those in Singapore and Malaysia are often regarded as strong examples (see Whalley and Ziderman, 1990; Dar et al., 2003; Johnson, 2009; Ziderman, 2003).(OECD 2016).
A key component of their success is the orderly society in which they occur with a strong relationship between industry and government.
Training funds linked to levies are mainly used by larger employers (OECD, 2010: Johanson, 2009; Dar, et al., 2003; CEDEFOP, 2008). Smaller employers may perceive few benefits from training if trained employees are ‘poached’ by larger employers with more promotion opportunities once they have received training.
Currently, most of the in-firm training conducted in Southeast Asia is done by large firms and not by the SMEs which dominate the region. SME’s in the ASEAN member states are a major source of employment, ranging from 52% in Viet Nam to 97% in Indonesia. SMEs are by far the largest group of employers in Cambodia at 72.9% in 2011. (OECD, 2016).
Effects of Levies
Levies have diverse and, sometimes, unintended effects. As means of workforce training, there are two issues: ‘deadweight’ and ‘displacement’.
Deadweight is when the levy ends up funding training that employers would have funded in any case particularly in the case of training their own employees.
Displacement is when the levy increases the types of training meeting the funding criteria, but at the expense of other types of training.
Other potential unintended effects
Levies may create difficult-to-spend surpluses; there may be threshold effects, with firms reducing their training efforts to the minimum level required to qualify for a tax rebate or exemption.
Levy schemes cross-subsidize sectors that train intensively from sectors that train little; this is sometimes, but not always desirable.
Levy Cost to Industry
In levy-grant, Government passes legislation to require each registered company to pay into a single central fund, or into sector based funds. The amount varies between .5% of company payroll (usually per month) and 2%.
Companies apply to the fund for support for training they provide for their workers (from 50% to 100% cost recovery).
Levies require Sector Councils to be organized with members from the Industrial or Business sector. Councils approve training as requested by members. Some Councils have Union representation.
Categories of Levy
There are different forms of Levy best described by the mechanism used for the disbursement of funds.
1. Revenue-raising Levy.
Also referred to as ‘traditional’ or ‘Latin American’ schemes in which payment of the levy confers few or no special rights on the individual employer to access the training fund.
The levy is a hypothecated tax on employers, with the obtained funds dedicated to training provision. Funds are used to support initial skills development for young school leavers and labour market entrants to prepare them for jobs, and to provide in-service training for the current workforce.
Often many of the resources go towards provision by public training providers. The coverage varies, both in terms of sector and firm size, and in some countries, is restricted to the industrial sector (Dar, et al., 2003; Dougherty and Tan, 1991; Gasskov, 1994).
These revenue-raising schemes constitute a sheltered source of funding for national training systems that is more stable than public financing and increases the amount of financing available for training.
They can therefore help to build competent national training capacities, as seen in Brazil and Colombia, and enhance accountability to employers who finance them. In turn, this helps to improve responsiveness to labour market requirements.
On the negative side, it is argued that revenue-raising schemes tend to develop large bureaucracies to manage training funds; some agencies under-provide training and accumulate unnecessary surpluses using payroll funds for non-training purposes, as in Zimbabwe.
It may also be difficult to maintain employer interest, given that such schemes do not offer direct incentives for enterprise training and do not benefit employers in proportion to the amount paid to the levies.
Often, training fund agencies exclusively finance their own training institutions, crowding out private training providers. The existence of a revenue raising levy can cause government to reduce, or eliminate, its own funding of training, as in Tanzania (Ziderman, 2003; CEDEFOP, 2008)
2. Disbursement Levy.
These are sometimes called levy-disbursement schemes and occur when an employer’s payment into the levy establishes certain rights to make use of the training fund- or alternatively- the employer’s expenditure on training can be used to reduce an employer’s levy payment.
Given the focus on the individual training activities of employers, the main emphasis of such levies is usually the training of existing employees- as opposed to school leavers or those seeking employment- although in some cases it may be used to support apprenticeship (Dar, et al., 2003).
There are two main ways in which the rights of those paying into the levy can be reflected. Employers can either reduce their levy obligations by conducting training (‘train or pay’ for example Cote d’Ivoire and France) or be reimbursed from the fund for approved training (for example Kenya and Malaysia) (Dar, et al., 2003).
The advantage of this approach is that it provides a direct incentive for levy-paying employers to engage in training, and gives employers some measure of control over what types of training to provide (subject to an approval process).
Exemption procedures may also allow the transaction costs of collecting and paying the levy to be avoided.
The disadvantages are that the funding is not necessarily directed where it is most needed, claims for exemption and reimbursement may be complex and burdensome, and employers exempted from the levy (often small employers) may lack the same incentives to conduct training.
Sectoral or national training strategies designed to promote particular skills or sectors can be quite difficult to pursue, particularly with exemption arrangements (Johanson, 2009). The administrative requirements can be substantial and consume a proportion of the levy income.
3. Levy Grant.
These offer grants to employers who meet relevant criteria (such as meeting CQF standards). South Africa, Hungary and Korea up to the 1990s, are examples (Dar, et al., 2003).
The Levy-grant scheme differs from levy-exemption or reimbursement schemes in the fact that it does not have any strict criteria for ‘allowable training’; rather the administrators of the fund evaluate training schemes on a case by case basis.
This enables resources to be channeled more easily to support specific needs of the economy.
The advantage is that this approach provides a large degree of discretion and the flexibility to target priority sectors of the economy, or sub-groups of the population.
The disadvantage is that this level of discretion requires a lot of knowledge and capacity in the grant-making body to wisely exercise the use of funds.
Furthermore, the transaction costs of the case by case grant application and approval processes may be high (Johanson, 2009).
Despite the potential benefits, the case for training levies is far from clear-cut.
Under the wrong conditions, training levies can become top-heavy bureaucracies, remote from employers, fund training that would have taken place anyway, and tend to leave out SME’s, workers in the informal sector, the low-skilled, the disadvantaged and women-areas where up-skilling is needed the most.