Fourth Report of the Tertiary Education Advisory Commission - full report 22/58

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

Chapter 6: Funding Categories and a Single Funding Formula
(Cont...)

6.4.3 Distinguishing Public from Private Provision on
the Basis of Ownership

The Commission gave careful consideration to the issue raised by a number of
submissions of whether or not the funding framework should differentiate on the
basis of a provider's ownership. Specifically, two opposing views emerged from
the submissions and from the Commission's deliberations:

• The government should give preference to TEIs in order to reflect its
  ownership interest in TEIs and their particular community-service obligations.

• The government should fund PTEs on the same basis as TEIs, on the grounds
  that PTEs add diversity to the system, are responsive, meet equity goals, have
  to report against similar statements of service performance, and because
  learners at PTEs should not be disadvantaged relative to learners at TEIs.

The Commission believes that there are clear and distinct differences, in
terms of the government's interests, between public and private providers
despite the fact that some TEIs (in particular the universities) dispute Crown
ownership.

Although TEIs are Crown entities under the Public Finance Act 1989, the
underlying issue of ownership is contentious. The legal ownership of TEI assets
can be grouped into various categories: the Crown clearly has legal title over a
large proportion of the TEIs' assets; the balance is either owned by TEIs
themselves, has been gifted or endowed to TEIs and is now held in trust by them.
The contention surrounding ownership of TEIs arises in respect of the ultimate
ownership of the TEIs themselves (and thus the assets they immediately own).

In its deliberations, the Commission took extensive note of current domestic
and international experience. Background information on the PTE sector, the
interrelationship between public funding of PTEs and TEIs in New Zealand, and
some international precedents for the respective roles of public and private
providers in publicly funded tertiary education can be found under 'Issues' on
the Commission's website.¹²⁷

In addressing the matter of whether or not to differentiate between public
and private providers according to ownership, the key issue is on what grounds
such differentiation could be justified.

Funding system differentiation

A number of potential rationales for differentiating the funding of TEIs and
PTEs were identified by the Commission from statements made in submissions.

One claim to the Commission is that the quality of education and research
conducted in PTEs is of a lower standard to that offered in TEIs, and should
therefore not be funded (or should be funded at a lower rate). In practice,
however, evidence to support this argument is weak at best. Indeed, quality
weaknesses have been found in TEIs, as evidenced in part by the number of
lawsuits brought by students. Furthermore, quality issues are more appropriately
dealt with by using measures specifically designed to address quality, rather
than by differential funding.

Another claim is that TEIs have certain statutory obligations and roles that
PTEs do not have. The Commission accepts the force of this argument and has
recommended that the Statutory Role Add-on be included in the Single Funding
Formula.

That some providers make a private profit from tertiary education activities
is sometimes seen as a reason why the government should not fund for-profit
providers, or at least not fund them on the same basis as not-forprofit
providers. Objections to funding for-profit providers are based around the
notion that the profit motive is likely to shape the whole character of the
educational enterprise - including its degree of academic freedom. Being a
private provider, however, does not automatically mean that it is for-profit,
and attempting to distinguish for funding purposes between for-profit and
not-for-profit providers may create perverse incentives and encourage avoidance
behaviour. Discriminating against for-profit providers on this basis alone,
certainly at lower levels of the NQF, may also be in conflict with the
government's paramount interest in tertiary education to obtain high-quality
education for New Zealanders.

A further claim is that PTEs should not receive a government contribution
towards their capital costs. If part of the current tuition subsidy were to be
split off into a separate capital component, there would be a question about
whether or not this should be provided to PTEs. Access to some or all capital
funding, for example, could be limited to TEIs, in recognition of the Crown's
ownership interest, the need to maintain the public's existing investment in
TEIs, and the desire not to make capital contributions towards private
organisations. There appears to be no clear advantage in restricting access to
the capital component in government funding solely to TEIs. The practical
reality is that capital is a necessary cost that all providers must face.

PTEs are sometimes seen as directly competing with TEIs - and so, on this
argument, the government should not support activities that put its ownership
interests (and the public's investment) at risk. Hard evidence of such
competition is, however, somewhat difficult to find. A Ministry of Education
analysis of PTE-TEI provision suggested that the apparent level of direct
head-to-head competition where PTEs and public providers are delivering the
equivalent courses in the same location is relatively low - between 1 and 2
percent.

Similar difficulties were experienced when examples of 'cherry-picking' were
sought that would suggest that PTEs are only providing the profitable courses.
The picture appears to be more complex than this, however, because some PTEs
have filled the less certain and less profitable niches vacated by polytechnics.
The uncertainty of contracts and pricing may have caused some polytechnics to
move out of Industry Training provision. Some PTEs have filled this vacuum, for
example, in agriculture and horticulture.

Submissions to the Commission also noted that TEIs compete with each other.
The Commission believes that, where the government's ownership interest is put
at risk by competition, this risk will be minimised by the existence of the
desirability test, and by more effective institutional governance.

After considerable debate, most Commissioners concluded that significant
differentiation of the funding system could not be sustained solely on the basis
of arguments that distinguish between private and public provision of tertiary
education.

The Commission was more comfortable with the TEC, through the desirability
test, giving some preference to TEIs over PTEs. After careful deliberation it
has concluded that, where the desirability test reveals undesirable duplication
at a programme level between a TEI and a PTE, no funding for the relevant
programme is to be extended to the PTE unless it is able to demonstrate that the
programme in question is clearly more desirable in relation to the criteria that
have been specified.¹²⁸

The Commission notes that this recommendation reflects a change from its
earlier view (recorded in Shaping the Strategy) that ownership should not be a
consideration for the desirability test.¹²⁹ This change reflects the Commission's further
deliberation and a convergence of opinion in favour of applying the desirability
test to protect the government's ownership interest in TEIs.

Recommendation 28

The Commission recommends that where the desirability test reveals
undesirable duplication between a PTE and a TEI, no funding be extended to the
private Tertiary Education Provider unless they are able to demonstrate that the
programme or activity offered is clearly more desirable in relation to the
specified criteria.

Minority View

One Commissioner believes that this recommendation does not go far enough.
This Commissioner appreciates the way that the Commission has tried to balance
the legitimate role of PTEs with the government's special obligation to a system
that it has been funding for more than a hundred years. For this reason, the
onus has been placed on PTEs, through the desirability test, to demonstrate that
they are performing a complementary role.

The Commissioner believes, however, that the desirability test is a blunt
instrument which is unlikely to correct the large 'blow out' of PTE funding that
has occurred in the past two to three years (Table A2.4 in Appendix 2). In the
light of the history of tertiary education funding, it seems clear that the
post-2000 extension of equal EFTS funding to PTEs failed to acknowledge the
capital component that had been built into it and that originally applied to
TEIs only. Thus the extension of this notional component to PTEs as a right
seems an anomaly. The Commissioner points to a comparison with the funding of
integrated schools, which receive operational funding but not capital funding.

Submissions made to the Commission have indicated that some PTEs are
fulfilling an important social need, particularly in relation to Maori and
Pacific peoples. These PTEs will benefit from the removal of caps and the
retention of the full subsidy at the bottom. The Commissioner would therefore
propose that the capital component of the tuition subsidy not be normally
available to PTEs, but that the TEC have discretion to make capital grants for
equity reasons.

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Footnote(s):

127

http://www.teac.govt.nz also available from the Commission on request.

128

In this context, 'clearly more desirable' may well take many forms,
including catering for particular groups of learners.

129

Shaping the Strategy, p. 49.