Fourth Report of the Tertiary Education Advisory Commission - full report 10/58

Steve Maharey Associate Minister of Education (Tertiary Education)

Shaping the Funding Framework
Fourth Report
of the Tertiary Education Advisory Commission

Chapter 2: The Funding Framework - Principles, Incentives
and Assumptions

In approaching the development of a new funding framework, the Commission has
built upon the guiding principles11
articulated in its first report, Shaping a Shared Vision, and also on the
national strategic goals and tertiary education priorities set out in its third
report, Shaping the Strategy. In addition, the Commission has identified
a number of principles relating specifically to the design of the funding
framework - and a number of incentives that it is desirable for the funding
framework to promote. This chapter outlines those principles and incentives,
along with the assumptions behind the Commission's thinking.

2.1 Design Principles for the Funding
Framework

In order to support priority areas of the tertiary education strategy, the
Commission believes that the funding framework must be oriented in particular
directions. These directions include promotion of New Zealand's ability to
sustain world-class teaching and research capability, and the consequent
enhancement of quality in both these areas. They also include building stronger
bridges into, and alternative pathways within, the tertiary education system.

New Zealand's funding arrangements must be oriented towards co-operation and
collaboration, and the pursuit of excellence, differentiation, and
specialisation. All these directions underpin the development of the skills and
environment required to produce a distinctive knowledge society. The Commission
has used these directions to inform the design principles underlying its funding
framework.

In the Commission's view, a funding framework should have the following
design principles.

2.1.1 The Promotion of the Steering of the Tertiary
Education System in Desired Directions

The current funding framework does help to steer the tertiary education
system. The end result, however, is not always sufficiently predictable; nor is
it always desirable from a system-wide or a national perspective. The Commission
considers that any new funding framework should be designed to intentionally
produce desired outcomes, rather than create a number of accidental and unwanted
by-products, behaviours, and incentives. The steering should assist in achieving
the national strategic goals and tertiary education priorities.

2.1.2 Transparency

An open and transparent funding framework should ensure equitable treatment
for all, by promoting better decision making and planning. Transparency requires
timely, accurate and appropriate information to support and defend
decision-making and planning processes, and for monitoring and accountability
purposes.

2.1.3 Low Transaction Costs per Dollar
Allocated

The funding framework should not create administrative and bureaucratic
requirements that add unnecessarily to the cost and complexity of administering
the system.

2.1.4 Assignment of Financial Risk Where it is Most
Appropriate

The current funding framework spreads and assigns risk in a contradictory or
unclear manner. The new framework should clarify the allocation of risk, thereby
creating stronger incentives for performance, accountability, and responsible
behaviour. This principle fits well with the partnership approach advocated by
the Commission, and means that all stakeholders in the system need to be
considered in the development of an appropriate risk-allocation framework.

2.1.5 The Ensuring of Equitable Access to Lifelong
Learning

Increasing social, technological, and economic changes make ongoing access to
education - and participation in it, increasingly important. The funding
framework should promote equitable access to lifelong learning as far as
possible in the context of constrained funding, differing learner needs, and the
encouragement of excellence.

2.1.6 The Promotion of Allocative, Dynamic and
Productive Efficiency

In a climate of scarce resources every dollar must be used to best advantage.
The funding framework needs to incorporate incentives that reward providers that
are effective and efficient. While a demand-driven funding framework is often
defended on the grounds that it encourages productive and allocative efficiency,
it is unlikely to support the necessary strategic approach.

2.1.7 Recognition of, and Respect for, Academic
Freedom and Provider Autonomy

The Commission considers that academic freedom and provider autonomy are
important for both philosophical and practical purposes. A healthy democracy
should protect the freedom of staff and learners to inquire, to put forward new
ideas, and to state controversial or unpopular opinions. Provider autonomy
should also be respected on the grounds that decisions about the allocation of
resources are best made closest to their use, where information flows are
clearest and accountability links the strongest.

2.1.8 Accordance with the Principles of the Treaty of
Waitangi

The Treaty of Waitangi principles include kawanatanga, tino rangatiratanga,
and partnership, protection and participation.12 In Shaping the System, the Commission asserted
that 'an accountable approach to the Treaty will require transparency about and
within the system'.13 An accountable
approach requires consideration of the Treaty principles as part of decision
making for funding of, and within, the tertiary education system.

Recommendation 2

The Commission recommends a desirable tertiary funding framework should:

  • promote the desired steering of the tertiary education system;
  • be transparent;
  • have low transaction costs per dollar allocated;
  • assign financial risk where it is most appropriate;
  • ensure equitable access to lifelong learning;
  • promote allocative, dynamic and productive efficiency;
  • recognise and respect academic freedom and provider autonomy; and
  • accord with the principles of the Treaty of Waitangi.

2.2 Desired Incentives for the Behaviour of
Stakeholders

Ideally a funding framework should provide incentives to modify and encourage
desired behaviour on the part of the government, providers, learners, and
employers. The particular behaviours a funding framework should encourage are
outlined below.

2.2.1 Incentives for the Tertiary Education
System

There exist a range of desired results or behaviours that cut across the
tertiary education system and that cannot be assigned to one stakeholder. They
include the following:

  • Diversity of provision - the funding framework should encourage
    diverse provision so that learners and employers can engage with a provider, or
    a series of providers, in a manner that best meets their needs.

  • A sense of ownership and responsibility - if the tertiary education
    system is to raise its contribution to New Zealand's social and economic
    development, then everyone in the system should take responsibility for
    communicating their needs and preferences and for finding ways of achieving
    them.

  • Risk-taking - responding to emerging and future skill needs and
    undertaking leading-edge research, requires stakeholders to take risks. The
    funding framework should be designed so that a reasonable level of risktaking
    can occur in the tertiary education system.

2.2.2 Incentives for the Government

The government (in the widest sense, which includes government agencies) is a
participant in the tertiary education system. The design of the funding
framework should provide incentives for the government to adopt the following
behaviours:

  • Administering the funding framework efficiently and protecting ownership
    interest     - this includes managing the tertiary education system effectively
    and continuously searching for, and implementing, more efficient ways of
    administering the system.

  • Being responsive to innovation - this means maintaining flexibility
    as far as possible within the funding framework in order not to stifle
    innovation and responsiveness in the tertiary education system.

  • Acting as steward of the tertiary education system as a whole - this
    involves taking steps to ensure that the funding framework maintains and lifts
    system capability. The funding framework needs to include a series of measures
    that mitigate the risk of provider failure, that ensure appropriate auditing and
    monitoring of the system, and that provide appropriate quality-assurance
    processes.

2.2.3 Incentives for Providers

The ability of providers to gain access to public funding should be
positively related to their ability to:

  • Being cost-aware and containing costs - the ability of any policy to
    successfully increase the contribution of the tertiary education system to New
    Zealand's social and economic development will be strongly influenced by the
    level of institutional costs. Being cost-aware better enables institutions to
    minimise costs and to make sound economic decisions about different types of
    provision.

  • Continuously improving quality and promoting higher-quality learning
    experiences     - this is likely to be achieved, in the first instance, through
    the quality-assurance and audit processes already in place. It would be
    supported however, through the funding framework's ability to sanction and to
    reward.

  • Being responsive to the education preferences of learners and to the
    current and future skill and research needs of society and the economy     -
    providers' decisions about the location, content, and mode of delivery for
    teaching programmes and about future research directions should be informed by,
    and be responsive to, the current and expected future needs of learners,
    employers, and other stakeholders.

  • Being innovative - funding arrangements must encourage providers to
    be continually searching for improved ways of delivering education, conducting
    research, and managing their organisations. For instance, new technologies may
    offer cheaper or more effective means of communicating information to large
    audiences, thus enabling new options for disseminating content to learners and
    freeing academic staff time for improving the quality of support for learners.
    Incentives should also encourage collaboration between providers, such as
    sharing expensive support services like libraries, or collaboratively developing
    curricula and course material.

2.2.4 Incentives for Learners

The funding framework should be designed in such a way that it encourages
learners to engage in the following behaviours:

  • Participating and achieving - a learner's participation and
    achievement will be directly related to the level and distribution of government
    funding (including student financial support) and to each individual's ability
    or opportunity to access this.

  • Making informed educational choices - this is critical to ensuring
    that both public and private investments in tertiary education generate positive
    and strong economic and social returns.

  • Making sound decisions about the financing of their education - the
    nature of the government's investment in tertiary education has implications for
    the decisions that learners make about their own investment (such as the level
    of indebtedness they wish to take on). Provision of adequate information for
    learners to make informed decisions is crucial.

2.2.5 Incentives for Employers

Generally, in employer-supported education (including formalised Industry
Training) the desired behaviours for employers are as follows:

  • Participating and achieving - the extent of industry participation in
    provider decision-making about what types of skill development will be offered,
    their availability (such as location, duration, and course content) and the
    types of research undertaken could be greater. This participation should include
    firms or industry groups forming closer alliances with various providers - for
    example, undertaking collaborative ventures (including co-payments) and
    providing scholarships.

  • Making sound decisions about their level of financial involvement -
    provision of adequate information for providers is essential.

2.3 The Commission's Assumptions

The Commission's consideration of funding issues and options has been
informed by a number of assumptions that are set out below:

  • Growth projections for learner demand - given current policy
    settings, the Ministry of Education expects growth in full-time learner places
    of around 2 percent per annum, with this rate increasing around 2008 because of
    demographic changes. This estimate, however, may be conservative.14

  • Fiscal constraints - over the medium/longer term there will be only
    very limited new funding available for the tertiary education system in real
    terms.15

  • Fee levels - the present government wishes to see a reduction in the
    level of student fees, or at least a stabilisation of fee levels in real terms.
    The Commission has assumed that future governments will remain sensitive to
    significant fee increases, given that fees now represent a significant portion
    of tuition costs.

  • Priorities in the Commission's third report - the Commission gave
    priority over the medium term to boosting the quality of learning and research
    in the tertiary education system relative to a further expansion in quantity
    (that is the volume of enrolments). Achieving this will require an increase in
    real levels of funding per fulltime learner. To ensure that any increase in
    government funding for tertiary education is not simply allocated to fund an
    expansion in quantity, some means of curbing increases in the number of funded
    places may well be required.

  • Scope for efficiency gains - the Commission assumes that there is
    only limited scope for further efficiency gains.16 It notes, however, that the government is
    currently reviewing the efficiency of tertiary education provision.

The Commission in its deliberations in all of its reports, has considered the
appropriate role for tertiary education, teaching and research. The Commission
recognises that this role is broader than contributing to economic goals: in
Shaping the Strategy, the Commission identified the broader contribution
that the tertiary education system makes and developed a Tertiary Education
Scorecard17 to enable this contribution to
be measured. The funding framework should support Tertiary Education Providers
(TEPs) in achieving the national strategic goals and in maintaining a robust and
diverse tertiary education system. The funding framework, in particular, should:

  • support activities related to research, scholarship, and programmes that are
    in accordance with the statutory requirements of providers (including their role
    as 'critic and conscience of society');
  • sustain research and programmes in the arts, humanities, and social
    sciences;
  • preserve important fields of study (such as languages);
  • support environmental education and sustainability;
  • encourage co-operation with community educators;
  • foster capacity building for Maori and Pacific peoples; and
  • support academics who are in the process of developing their research
    potential.

Recommendation 3

The Commission recommends that the tertiary education funding system in
general provide for, in addition to teaching and research, the following:

  • activities related to research, scholarship, and programmes in accordance
    with the statutory requirements of providers including their role as 'critic and
    conscience of society';
  • sustaining of research and programmes in the arts, humanities and social
    sciences;
  • preservation of important fields of study (for example languages);
  • supporting environmental education and sustainability;
  • encouraging co-operation with community educators;
  • fostering capacity building for Maori and Pacific peoples; and
  • supporting academics who are in the process of developing their research
    potential.

Footnote(s):
11
Shaping a Shared Vision, pages 12 and 13.
12
Shaping the System (2001), p. 24. These principles are further explained in
Appendix 1.
13
Shaping the System (2001), p. 25.
14
The Commission notes that, during 2000, EFTS-funded places increased at
around 4 percent.
15
During the 1990s, part of the cost of growth in EFTS places was met by
reductions in the real value of tuition subsidies and commensurate increases in
tuition fees. (A similar approach was also used in many other countries.) See
Table 3.7 in Chapter 3.
16
A recent British review of funding options for higher education suggested
that efficiency savings of 0.5 percent per annum would not appear unreasonable.
A small percentage saving on the total expenditure in tertiary education would
still yield significant amounts of funding for reallocation. London Economics
(2000), p. 51.
17
Shaping the Strategy, pages 30 to 36.