Fourth Report of the Tertiary Education Advisory Commission - full report 15/58

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

Chapter 5: Integration of the Tertiary Funding
System

This chapter examines a variety of issues relating to integration of the
funding framework. These are:

• issues arising from the current funding systems (discussed in greater detail
  than in Chapter 3);
• proposed integration of the funding system (including the development of a
  Single Funding Formula);
• proposed changes in eligibility for fully subsidised foundation
  education;⁵⁵
• treatment of ACE; and
• supporting the structural change required for an integrated system.

5.1 Issues with the Existing Funding
Systems

Broadly speaking, there are two approaches⁵⁶ to funding currently taken within the tertiary
education system (as covered in Appendix 2 of this report). Ministry of
Education funding (that is, the EFTS system), is largely a bulk-funding subsidy
entitlement, linked directly to student demand. Skill NZ funding⁵⁷ is based on a tight purchase model whereby
specific education and training places are purchased from providers to meet
specified outputs. As discussed in Chapter 3, these two methods have their
respective strengths and weaknesses.

Operating two funding systems side by side under different rules has led to a
number of undesirable outcomes. Firstly, the tight eligibility criteria around
foundation education programmes leads to inequitable treatment of learners. For
example, learners with two School Certificate passes, or who are still in the
compulsory system, can access fully subsidised learning opportunities, while
those who have three School Certificate passes cannot. As a result, foundation
education programmes are largely perceived as being for those who have failed in
the mainstream education systems, and as being primarily a means of preparing
people for employment. Increasingly, however, these programmes also support
achievement of desirable education outcomes such as re-engaging learners in
tertiary education. Foundation education represents an important part of the
tertiary education system that is easily overlooked.

Foundation education programmes are typically 26 weeks in duration and
learners on these courses do not pay fees. Given their emphasis on employment
outcomes, these programmes do not always provide a pathway to other tertiary
education programmes and learners often leave their programmes without
completing them. This may lead to difficulties in learners completing useful
qualifications or being able to transfer their learning into higher-level
programmes.

The perception of foundation education programmes as employment interventions
for under-achievers means that some eligible learners do not take them up -
because they do not want to be classified as poor achievers, or be unable to
transfer their learning. Instead these learners enrol in an EFTS-funded
programme, pay fees and may incur a debt which can adversely affect their
ability to progress in the tertiary education system.⁵⁸ Anecdotal evidence suggests that this trend to
study in EFTS-funded courses, rather than in programmes funded by Skill NZ, is
particularly prevalent for Maori and Pacific learners.

Operating two funding systems side by side also leads to a lack of
transparency in funding rates for providers, differences in levels of
accountability for delivery of similar outcomes, and different funding
structures for similar programmes. These disparities impact on the quality and
volume of education delivered in the separate components of the tertiary
education system and, in turn, on the ability of learners to engage effectively
with it.

Under the EFTS system, once a learner has passed the period of time set by
the provider for full withdrawal from their course of study, the provider
retains the funding for the duration of the course regardless of whether the
learner continues to study or withdraws. Under the purchase system,⁵⁹ however, providers receive their funding in
monthly instalments based on the continued weekly attendance of learners. Thus,
if a learner withdraws (even if this is the result of gaining a job - a positive
outcome in this system), the provider loses funding for that learner.⁶⁰ This can impact on the viability of some
programmes and make it difficult for providers to retain high-quality staff.

The purchase system as operated by Skill NZ (in concert with its regional
networks), is an effective means of providing tailored solutions for local
labour-market issues. It also enables different needs in regions and industries
to be reflected through varying funding rates. In addition, the purchase system
allows Skill NZ leverage to ensure providers are effective and efficient.

There are downsides to this system, however. The purchase system performs
poorly against the principle of transparency because the funding rates are set
by region, by industry and by individual providers. The different funding rates
also mean that there is not necessarily relativity in subsidies for a given
discipline or programme. In addition, the costs of operating the purchase system
are high (as shown in Table 5.1). Although some of the differences in operating
costs can be explained by the economies of scale associated with the different
systems, the overall scale of difference is notable.

Furthermore, it could be argued that because foundation education programmes
deliver education to learners who require greater support and assistance, these
programmes are more expensive to deliver. Nevertheless, under both the EFTS and
purchase systems, providers must attract learners who wish to enrol. Although
there are some direct placements into programmes by organisations such as
Workbridge and the Accident Compensation Corporation, learners eligible for the
foundation education programmes can (as a general rule) choose which accredited
provider they enrol with. The majority of the transaction costs associated with
the purchase system stem from managing the provider/purchaser relationship
rather than directly supporting learners.

Transaction costs are also high for providers, and these, along with the
uncertainty and decreases in funding rates that have occurred, have driven many
of the polytechnics to offer less bureaucratic EFTS-funded programmes. One
effect of some polytechnics not offering Industry Training or foundation
education programmes is that the range of learning pathways available to
disadvantaged learners has been reduced.

Table 5.1 Comparison of Transaction Costs for Purchase
and EFTS Systems

The EFTS system is strong on transparency, has low transaction costs, and
respects provider autonomy and academic freedom. It also supports access to
lifelong learning to some degree, in the sense that it subsidises all places in
quality-assured programmes. The EFTS system, however, does not provide the
desired steering mechanisms, nor does it support provider accountability (and
hence financial risk sharing), as it lacks immediate sanctions for poor
performance.

Overall, two main differences stand out between the EFTS and the purchase
systems from a provider perspective. Providers of foundation education
programmes are highly accountable, are required to focus on the delivery of
positive outcomes for learners, and must meet tightly defined performance
criteria in order to retain their funding. The EFTS system, on the other hand,
rewards high participation rather than positive outcomes, and it funds every
learner who enrols with the provider, regardless of whether they complete or
pass their course/programme.

There is a further difference between the two systems in relation to the
autonomy that providers have over the use of the funding they receive. Under the
EFTS system, providers are free to use their funding as they see fit provided
they comply with the Public Finance Act 1989, and their Statements of Service
Performance meet formal accountability requirements. Under the purchase system,
however, providers' use of funding is controlled by the terms of their
contracts. For example, providers must provide a minimum of 30 hours of learning
time per week for the duration of the programme and staff are restricted to six
to 10 days professional development leave.

Under the two different funding systems, programmes that are essentially the
same can be funded through different funding streams at different funding rates.
An example of this is in Industry Training programmes. ITOs funded through the
purchase system receive an average of $2,800 per Standard Training Measure (for
one full-time equivalent trainee contracted with a training contract from an
ITO), while an EFTS-funded provider receives $7,721 to deliver the same amount
of training (to a trainee without a training contract). According to Ministry of
Education statistics, in 1999 the government funded the equivalent of 7,151
full-time trainees through the EFTS system in types of training similar to that
delivered by industry. Funding these dual routes of training increases the cost
to the government and does not optimise the use of ITOs' skills and knowledge.
Youth Training rates averaged $220 per trainee per week for 1999/2000 while
Training Opportunities rates averaged $216 per trainee per week. These are not
easily compared with EFTS rates due to the tight criteria associated with the
delivery of Training Opportunities and Youth Training.⁷¹

The impact of the widespread exit of TEIs from programmes funded by Skill NZ
has been that the tertiary education system has increasingly developed into
stand-alone sectors which do not support seamless learning or equity for
learners. Recognition and portability of learning has also been made difficult
by the refusal of some providers to recognise NQF credits, as well as by
programme-design issues over how unit standards are packaged for delivery.

5.2 Developing a Coherent Funding
System

The Commission believes that developing a coherent funding system is
essential for reducing the inequities and perverse incentives which currently
plague both learners and providers. In particular, introducing a coherent
funding system across all components of the tertiary education system would
allow for greater transparency in funding, and more comparable accountability
regimes and improved performance measures across the tertiary education system.
Furthermore, a common funding model would require less administration than
operating two or more systems in tandem, and so would incur fewer transaction
costs for providers and the TEC.

Before considering what form a single coherent funding system should take,
two fundamental questions need to be answered:

• Which of the current funding systems delivers the best performance when
  measured against the Commission's principles for a desirable funding framework?
• Is there any strong and compelling policy reason to retain different funding
  systems or methods for different parts of the tertiary education system?

When measured against the Commission's principles, neither the purchase
system nor the EFTS system provides a perfect answer. The purchase system has
the potential to promote steering and achieve productive efficiencies - but it
may not support allocative or dynamic efficiency, as the positive impacts of
competition may be moderated through the action of the purchase agent (who can
exercise strong control of the market). Similarly, while the purchase system
allows funding to be linked to performance measures, in practice the holding of
poorly performing providers to account has been somewhat uneven.⁷² Finally, the purchase system currently operates in
the context of tightly rationed supply, which limits its ability to promote
equitable access and meet learner demand.

There are a number of possible arguments that could be advanced in relation
to the second question. The key argument for recognising different funding
systems is that different parts of the tertiary education system have different
roles and goals. For example, 'higher education' (that is, degree-level
education) is about building analytical skills and social awareness, and so it
largely benefits all of society. Industry Training is about building training
cultures within enterprises and lifting firms' skill levels. Industry is a key
beneficiary of this, and should therefore make a corresponding contribution to
this type of education.

Foundation education programmes, by comparison, are particularly about
building individual self-esteem for disadvantaged learners and integrating them
back into education and the workforce. These learners are often educationally
disadvantaged, have been out of the education system for a long time, and may
have poor literacy, numeracy, employment, and social skills. The programmes and
delivery mechanisms in this area must be designed to deal with the broad range
of social and educational issues and additional support is required from
providers to ensure that learners continue to engage in the programmes.

All these points could justify different funding rates, but do not
necessarily justify different funding methods or systems. It is also important
to note that the type of separation described above is overly simplistic. In
reality, all education and training is about building the skills and knowledge
of learners - and increasingly, in the knowledge society New Zealand is striving
for, such divisions within the tertiary education system are unhelpful.

The Commission therefore recommends that a new more integrated funding
framework be developed. At the centre of this funding framework is a formulaic
mechanism for distributing funds to providers, called the Single Funding Formula
(SFF).

Recommendation 4

The Commission recommends that the funding framework continues to allocate
most funds for teaching purposes through a formulaic bulk provider grant by a
mechanism called the Single Funding Formula.

Recommendation 5

The Commission recommends that both the 'tight purchase' and the 'subsidy
entitlement' approaches be abandoned for a Single Funding Formula that combines
profile negotiations with a bulk-funded formula, preserving the strengths of
both approaches.

5.3 The Role of ITOs

As discussed previously, the different components of the tertiary education
system manage enrolment processes differently. In most parts of the system,
learners largely choose where they enrol. In the Industry Training part of the
system, however, an ITO manages a learner's education and training - including
placing the trainee in a training site, providing support for the employer,
undertaking workplace assessment, and managing training records. Where a
tertiary education provider is used for off-job training, it is the ITO that
contracts the provider and places the trainee in the course or programme.

ITOs also develop unit standards and qualifications to cover their
industries, and undertake planning for their future needs. The close association
of ITOs with their industries ensures that the training benefits the industry
concerned. For this reason, the Commission wishes to see that ITOs retain their
ability to broker education on behalf of trainees (along with their other
statutory obligations). It is likely that without ITOs to broker and support
training, the amount and quality of Industry Training undertaken would be
less.⁷³

The Commission also wishes to see the retention of the requirement for
industry co-payment of governmentsubsidised Industry Training. This is because
of the benefit from the trainee's contribution in the workplace, which accrues
directly to the employer.

Recommendation 6

The Commission recommends that ITOs retain a brokering role for contracted
trainees, and that the requirement for industry to contribute to the training of
trainees as a precondition of access to public funding be retained.

---

Footnote(s):

55

The Commission has defined foundation education as covering learning at
levels 1 to 3 of the NQF. As such it covers Youth Training and Training
Opportunities programmes.

56

The ACE sector uses a mix of the two approaches. This sector is discussed
separately later in this chapter.

57

The main programmes funded by Skill NZ are Industry Training, Youth
Training, Training Opportunities, and Skill Enhancement.

58

There is also anecdotal evidence that some learners enrol in EFTS-funded
programmes for social reasons.

59

In this chapter the funding system used by Skill NZ is referred to as the
purchase system. The EFTS-funding system (which is a form of bulk subsidy), is
referred to as the EFTS system.

60

Skill NZ can continue to pay the provider for up to one month after the
learner has left the course as long as the learner has been in the programme at
least 16 weeks, is going to a job, and is not replaced by another learner on
that programme.

61

EFTS places and STMs are equivalent measures of the volume of education. One
EFTS and one STM both equate to 120 registered credits (that is, credits on the
New Zealand Register of Quality Assured Qualifications / National Qualifications
Framework). The transaction costs fall slightly differently between the EFTS
system and the purchase systems. In particular, some costs incurred by providers
under the EFTS system are incurred by Skill NZ. This is not expected to
materially alter the results shown in the table.

62

The Treasury (2001a), Vol 1, p. 403.

63

Ibid., p. 371.

64

Estimate (includes Tertiary Resourcing and TAMU in the Ministry of
Education).

65

The Treasury (2001a), Vol 1, p. 391 (Modern Apprenticeships assessed at 500,
highest estimated figure taken for Skill Enhancement, Youth Training, Gateway
and Industry Training).

66

Ibid., p. 368.

67

Ministry of Education and Skill NZ (2001).

68

Department of Work and Income and Skill NZ (2001).

69

Ibid.

70

Ibid.

71

For 52 weeks of training a provider would in theory receive $11,440 per
Youth Trainee and $11,232 per Training Opportunities learner. In those 52 weeks,
a provider would need to deliver 30 hours of learning per week. In addition,
providers cannot charge fees. A typical EFTS-funded academic year is
approximately 36 weeks.

72

New Zealand Association of Private Education Providers (1999), pages 10 and
11.

73

ITOs could also take on the role of supporting trainees in the Modern
Apprenticeships and Gateway programmes. ITOs already support regional
co-ordinators and funding them to support these programmes is a natural
extension of their current role.