Fourth Report of the Tertiary Education Advisory Commission - full report 11/58

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

Chapter 3: Performance of the Current Funding
System

This chapter deals primarily with the performance of the current tuition
funding systems. Chapters 5 to 9 deal with a number of specific issues relating
to the overall funding of tuition subsidies; and issues relevant to research are
dealt with in Chapter 10.

The chapter draws on qualitative and quantitative evidence. Incentives within
the funding system as they exist are discussed. A brief discussion of the
concepts that underpin the current funding system are included in order to set
the scene for the reader. A very brief description of the current funding
framework (Appendix 2 has more detail) is also included.

3.1 Description of the Current
System

The bulk of tertiary education funding is allocated to providers through the
Equivalent Full-Time Student (EFTS) system. In the last three years (1999 to
2001) the EFTS system has been uncapped. The current distribution of tuition
subsidy funding is 89 percent to Tertiary Education Institutions (TEIs), and 11
percent to Private Training Establishments (PTEs). Students are also assisted
through associated student support mechanisms.

The EFTS system is a demand-driven system (with some exceptions) in which
allocative decisions are driven by learner choice relating to volume, level,
location, and the nature of study. Autonomy over expenditure decisions rests
with providers, and their bulk funding (supplemented by tuition fees) is
intended to cover teaching, research, capital, and ancillary costs. The student
support mechanisms are intended to ensure that access to finance is not a
barrier to student participation.

Incentives exist for providers to maximise their enrolments, thereby
encouraging them to be responsive to learners demand, to improve course quality
and relevance, and to minimise costs for learners through production
efficiencies. Over the past decade, the number of courses offered by providers
has increased substantially, suggesting more innovation and increased
responsiveness to changing demands. It is not always clear, however, whether
this greater diversity reflects industry's needs for particular skills, or the
needs of providers to attract enrolments.

The funding allocated to Industry Training Organisations (ITOs) is intended
to increase the quality, quantity, and relevance of structured Industry
Training. The significant co-payments that industry makes and the brokering role
of ITOs both facilitate a closer match between required labour-market skills and
those attained through Industry Training (compared with those attained through
more traditional forms of delivery). The number of purchased places is capped,
although the level of the cap has recently been raised.

Foundation education is funded through a purchase model run by a government
agency (Skill NZ), although learners may choose their course (Training
Opportunities and Youth Training). The number of purchased places is capped.
Funding for adult literacy and Adult and Community Education (ACE) is allocated
through a broad range of mechanisms.

3.1.1 Discussion of the Current Funding
Framework

Within the tertiary funding system, each individual funding stream has
strengths and weaknesses. The EFTS system, for example, promotes a high level of
responsiveness by providers to learners. It is also a relatively simple system
to administer and is transparent, thereby reducing transaction costs; and it
respects academic freedom and institutional autonomy. Furthermore, competition
for learners provides strong incentives for providers to operate efficiently.

The EFTS system, however, provides little direct accountability to learners
or the government, can encourage wasteful duplication, and does not provide
direct incentives for co-operation and collaboration among providers.

Being almost entirely driven by learner choice, the EFTS system is reliant
upon learners making choices appropriate for their own needs and the needs of
the labour market and the wider society. The decisions that learners are making
relate to what, where, how much, and at what time in their life they decide to
study. Learners require comprehensive high-quality information to be able to
make appropriate choices. The Commission is not convinced that learners are
always able to access such information (see Chapter 15).

The justification for allowing learners the freedom to determine their course
of study is that, in a complex and ever-changing world, a series of individual
decisions rather than centrally planned decisions are more likely to match
future demands of the labour market and will better meet social needs. Learners
are also more likely to perform well in tertiary education if they study the
field in which they are interested. Furthermore, the attainment of specific
knowledge is not always the most important element of a programme. High
proportions of graduates do not work in the field in which they originally
trained. Many employers do not recruit employees with defined expertise in
particular subject areas or qualifications. Often, what is important are the
skills learned along the way (such as the ability to think critically and
analytically).¹⁸

The limited amount of research done in New Zealand suggests that, at an
economy-wide level, skill shortages are more the result of recruitment
difficulties (for example, a job that offers low remuneration or poor working
conditions) rather than absolute skill shortages.¹⁹ This implies that the decisions made by learners
about what to study have served New Zealand relatively well, although it is easy
to point to exceptions.

The relativities between the EFTS funding categories and the costs of
delivery have been eroded over time. This has led to cross-subsidisation of
certain courses.²⁰ Cross-subsidisation is
not necessarily a problem, but, if excessive, it may adversely affect quality
and lead to discord within providers. This is discussed further in Chapter 6.

The lack of predictability around future funding levels also makes it
difficult for learners to gain any security about their expected level of
investment (see Chapter 8). As the New Zealand University Students' Association
(NZUSA) noted in one of its submissions to the Commission:

The current model may partly explain why fees have increased so
much - to protect institutions from possible drops in student numbers and the
corresponding fall in funding. Institutions have become extremely vulnerable to
fluctuations in student numbers, and this has had severe impacts on smaller
provincial polytechnics such as Wairarapa.²¹

The funding of research through the EFTS system provides poor levels of
accountability and few incentives for excellence. It also provides limited
stability or certainty for researchers, since funding is allocated on a
shortterm basis and tied to student choice. This is of particular concern when
research of high quality or significant national priority is being undertaken in
areas where learner enrolments are declining (stability in research funding is
discussed in Chapters 10 and 11). For example, Victoria University of Wellington
was recently forced to consider closing its Antarctic Research Centre, a world
leader in its field, owing to a decline in the numbers of learners enrolling in
earth science courses.

None of the funding methods provide any direct incentive for high-quality
learning and teaching. Indeed, under the current funding arrangements, the
incentives for high-quality teaching and research are largely 'reputational'.

The programmes funded by Skill NZ (including Industry Training, Youth
Training, Training Opportunities and Skill Enhancement) promote greater levels
of accountability than the EFTS system does. All providers and ITOs funded
through Skill NZ are subject to some form of performance measurement, and are
better placed than other providers to demonstrate their efficiency and
effectiveness.

This enhanced accountability does, however, come at a considerable price. The
administration costs for Youth Training (YT), Training Opportunities (TO) and
Skill Enhancement (SE) are significantly higher than those of the EFTS system,
and the process of purchasing training can be intrusive and can undermine
provider autonomy. Moreover, the systems used to allocate funding through Skill
NZ lack transparency. Each provider or ITO is funded at its own rate, without
direct reference to similar providers or organisations.

A particular weakness of funding arrangements for YT and TO programmes is
that numbers of places are tightly capped. The Commission sees an anomaly in
restricting entry to foundation education while allowing open access under the
EFTS system to mainstream tertiary education. In this report, the Commission
recommends that caps on these foundation programmes be progressively removed
(see Chapter 5).

3.2 Participation

The most pressing issue for tertiary education prior to the implementation of
the Learning for Life reforms and the current funding framework was New
Zealand's abysmally low participation rate, comparable with Portugal's and
Turkey's on OECD rankings. This issue has been largely overcome.

The tables below demonstrate that New Zealand's indicators of participation
in both Tertiary-type A (theoretical)²²
and Tertiary-type B (vocational) education have improved to the extent that they
are now significantly higher than the OECD means. Care must be taken when
interpreting data and drawing conclusions based on international comparisons, as
the different environmental and policy contexts of different countries may
affect how data are gathered and presented.²³

New Zealand rates well (see Table 3.1) in terms of expected years of
participation24 in tertiary education, being better than or equal to OECD means
in all areas and levels.

Table 3.1 Average Years of Participation in Tertiary
Education (1999 data)²⁵

New Zealand performs well in terms of both participation and achievement, and
is one of only three OECD countries (others are Finland and the United Kingdom)
for which both entry rates and survival rates²⁶ for Tertiary-type A education are above the OECD
mean.²⁷

New Zealand also rates well (see Table 3.2) in terms of Type A completions
measured by tertiary graduation rates, except for advanced research degrees
(Ph.D. or equivalent). It is, however, below the mean for vocational education
completions.²⁸

Table 3.2 Total Graduation Rates in Tertiary Education
(1999 data)²⁹

As well as considering aggregate tertiary graduation rates, it is also useful
to examine graduates in specific fields of study (see Table 3.3) to identify
potential fields of over- or under-production compared with OECD norms.

Table 3.3 Qualification in a Field of Study as a
Proportion of Total Graduates (1999 data)³⁰

By OECD norms, New Zealand produces relatively fewer graduates in
mathematics/computer sciences and engineering/manufacturing/construction and
produces relatively more graduates in sciences/agriculture and
humanities/arts/education.

Responsiveness to learner demand has benefited all learners including those
from under-represented groups. The rate of increase in participation in tertiary
education by Maori has, for example, been twice the rate of increase in
non-Maori participation,³¹ and is
particularly apparent in the growth of enrolments in wananga in comparison with
other TEIs.

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Footnote(s):

18

The somewhat limited New Zealand evidence available suggests that the cost
of study is not a major factor in determining selection of the course or
discipline for study. By far the strongest determinant of a learner's study
choice is the perception of employment prospects on completion of the course
(for example, employment with high financial prospects or in a field that
interests the learner).

19

Business and Economic Research Limited (1999).

20

For example, an early submission to the Commission from the New Zealand
Association of Scientists (2000) noted that science degrees at Massey University
in 1997 were being underfunded by an average of $3,662 per EFTS, and were
sustainable only by cross-subsidisation.

21

New Zealand University Students' Association (2001a), p. 3.

22

Refer to the Glossary for the Organisation for Economic Co-operation and
Development definitions of Type A and Type B.

23

Apparently similar data sets may not be similar at all, or may not be a
complete record of all the data relating to a particular dimension. The
Organisation for Economic Co-operation and Development methodology and data sets
(the source of much of the data in this chapter) are relatively robust, and
every effort has been made to ensure that data sets are as internationally
comparable as possible. Nevertheless, national differences do affect how data
should be interpreted. For instance, research is funded in different ways in
some overseas jurisdictions. Large research budgets in countries like the USA or
Scandinavia (which are mainly allocated to the universities) may be excluded
from calculations of public expenditure on tertiary education, and the omission
of such data may skew results. Obtaining comparable and objective measures of
efficiency of a tertiary education system is also a challenging task. There is a
danger that scrutiny of standard performance measures of efficiency will be
considered in isolation, based on an assumption that there has been no change in
quality. This assumption may well be unfounded, and any conclusions reached may
be misleading if apparent improvements in efficiency occur at the same time as
there is a decline in overall quality.

24

Expected years of participation in tertiary education is an estimate of the
number of years of full-time and part-time tertiary education a person is
expected to engage in over their lifetime. Since average duration of schooling
is affected by participation rates over the life cycle, they underestimate the
actual years of schooling in systems where access to education is expanding.

25

Organisation for Economic Co-operation and Development (2001), p. 156.

26

Survival rate is the proportion of new entrants to programmes who graduate
successfully from them (averaged across all programmes). Organisation for
Economic Co-operation and Development (2000), p.163.

27

Organisation for Economic Co-operation and Development (2000), pages 162 and
163.

28

There may be classification inconsistencies. Vocational degree-level courses
offered by many New Zealand polytechnics could be classified as either
'vocational' or 'theoretical'. Tertiary education completions are indicators of
the current production rate of higher-level knowledge, and are influenced both
by the degree of access to tertiary programmes as well as the demand for higher
skills in the labour market. The net graduation rate is the percentage of people
within a particular age cohort who obtain a tertiary qualification, and is
unaffected by changes in population size. The total graduation rate is a
synthetic measure calculated by adding the net graduation rates for each year.

29

Organisation for Economic Co-operation and Development (2001), p. 169.

30

Ibid., p. 171.

31

Derived from Ministry of Education statistics (2001).