Fourth Report of the Tertiary Education Advisory Commission - full report 46/58

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

Chapter 16: The New Funding Framework - Summary and
Implications

The new funding framework builds on the strengths of the existing funding
arrangements: it involves evolutionary, rather than revolutionary, change. The
framework comprises:

• the quality test and the desirability test;³¹⁸
• a Single Funding Formula;
• five dedicated Funds (which are not linked to enrolments);³¹⁹ and
• an accountability system.

The new funding framework would ensure that only quality-assured programmes,
courses and activities that can demonstrate sufficient net benefit are funded.
It would also ensure that all government-funded activities are subject to
performance measurement, and compliance regimes are based on risk and
performance rather than provider type. There would be greater funding
predictability and alignment of subsidy rates with the costs of provision, and
less undesirable competition and duplication of programmes. The new funding
framework would have a capacity to distinguish, where appropriate, between the
funding of TEIs and PTEs. It offers strong incentives for quality, efficiency,
and effectiveness while ensuring a high level of provider autonomy.

16.1 The Single Funding Formula
(SFF)

The SFF is central to the funding framework, and would allocate most of the
funding for tuition within the tertiary education system.

This funding for tuition would be largely demand driven, and would be
allocated to providers in the form of bulk grants related to the costs of
provision. The level of funding would be based on enrolments, using Register
credits³²⁰ as a common currency. The SFF
would also allow for loadings to reflect a higher (or lower) priority of
programmes, and the needs of different learners. Achieving the Commission's
goals and priorities requires a relatively complex funding formula. The proposed
'base'sSFF consists of:

• cost categories;
• an Education Subsidy Index (ESI); and
• a Priority Index (PI).

These elements combine to form funding categories. The funding categories can
be further modified to accommodate particular learner and/or provider
characteristics, by applying:

• a Learner Index (LI);
• a Learner Add-on (LA); and
• a Statutory Role Add-on (SRA).

16.1.1 Cost Categories and Funding
Categories

The Commission proposes that the current EFTS funding categories, individual
provider contracts, and Industry Training funding rates be replaced by a new set
of funding categories. Funding categories would reflect:

• the benchmark cost of delivery (the cost category);
• the proportion of the cost that the government is prepared to meet (the
  ESI); and
• the priority of the discipline in terms of national strategic goals and
  tertiary education priorities (the PI).

The funding category for a discipline would therefore be:

Cost category x ESI x PI

The Commission proposes that the new cost categories be determined by a cost
and funding category review that covers both the foundation education and
Industry Training programmes and the EFTS-based tuition subsidies. Once new cost
categories are determined, new funding categories would be derived.

The Commission proposes that a Tertiary Education Price Index (TEPI) be
developed to allow regular updating of cost categories and funding categories.

16.1.2 Learner and Provider Characteristics

The Commission has identified a need to provide incentives to providers
relating to particular types of learners. The proposed LA (Learner Add-on) can
be applied additively within the SFF, while the proposed LI (Learner Index) can
be applied multiplicatively.³²¹ Both
allow priority groups of learners to be targeted within the SFF.

The particular statutory roles of TEIs and ITOs are recognised by an SRA
(Statutory Role Add-on). This provides a per-learner funding top-up to meet the
additional costs of compliance.

The amount of funding that a provider would receive annually for a 120-credit
(full-time) learner³²² would therefore
be:

Funding category x LI + LA + SRA

16.1.3 Allocative Mechanism

As a general rule, learner choice would determine the level and pattern of
demand - and so would determine the volume and mix of programmes that are
funded. The Commission recommends that similar courses be funded at similar
rates.³²³ Providers would have autonomy
in deciding how to spend their bulk grant.

The Commission recommends that any fee-setting be at the discretion of the
provider, as providers are best placed to determine the appropriate quality/cost
trade-offs. The learner choice implicit in the system would provide a restraint
on unreasonable fee levels, and would protect the financial interests of
learners.³²⁴

Capping of enrolment numbers would be retained for high-cost areas,³²⁵ subject to a review of the level of each cap (as
discussed in Chapter 7). Almost all of the funding, however, would be demand
driven (albeit within a tighter regulatory framework), thereby preserving
incentives for innovation and efficiency and protecting provider autonomy.

The Commission recommends that funding of annualised capital costs be
included within the tuition subsidies, but that there be no differentiated
capital component.³²⁶ The Commission
recommends that current base grants be re-allocated to the Strategic Development
Fund.

16.2 Dedicated Funds

The five dedicated Funds, which are not linked to enrolments, are:

Performance-Based Research Fund (PBRF)

The Commission proposes that a PBRF be established, using the funds currently
allocated as research top-ups to the tuition subsidies³²⁷ and a minimum of $20 million in new funding. The
PBRF would provide an incentive for research excellence, and would concentrate
and focus New Zealand's research effort undertaken in tertiary providers.

Model A Centres/Networks of Research Excellence (CoRE) Fund

The Commission reaffirms its commitment to a Model A CoRE Fund identified in
its second Report, Shaping the System. These Model A CoREs would involve
world-class research at the creation/discovery end of the spectrum. The
appropriation for this Fund would increase incrementally over the next
three-years to $13.6 million per annum; and there would also be a contingency
Fund of $20 million for capital expenditure on strategic research assets. The
Commission envisages that, over time, funding for these CoREs would be subsumed
within the PBRF.

Model B Centres/ Networks of Research Excellence (CoRE) Fund

The Commission also recommends significant new funds be made available for a
Model B CoRE Fund. Like Model A CoREs, the Model B CoREs would involve
world-class research - but with an emphasis on leveraged funding and
collaborative networking with industry and other groups, and a primary focus on
national strategic goals.

Strategic Development Fund (SDF)

The Commission proposes an SDF to encourage co-operation, collaboration,
differentiation, capability, innovation, quality, strategic development, and the
achievement of equity objectives. The SDF is intended to be used to facilitate
the efficient restructuring of the tertiary education system. The Commission
recommends that the base grants and Maori and Pacific peoples'sSSGs be
incorporated into the SDF; it also envisages that the SDF would require
additional funding of around $50 million.

Adult and Community Education (ACE) Fund

Currently, there are a number of funds for ACE. The Commission recommends
that these various funds be incorporated into a dedicated ACE Fund. The total
current appropriation for ACE is $38.28 million.

16.3 Major Benefits of the Funding
Framework

16.3.1 Steering the System

The quality and desirability tests would be applied at a programme level, and
would act as a 'fund/not-fund switch'sfor funding. These tests are designed as
supply-side constraints and would be instruments for steering. The quality test
would determine whether a provider's programmes and activities are of sufficient
quality to warrant funding; the desirability test would determine whether
particular proposals provide sufficient net benefit to warrant funding.

Neutrality between the funding of different provider types is proposed,
although there would be differences in the application of the quality and
desirability tests. More specifically, when a PTE is considered to be in
undesirable competition with a TEI, then the onus would be on the PTE to
demonstrate that its programme is clearly more desirable than the TEI's.

The indices and add-ons within the SFF would also allow steering of the
tertiary education system, by enabling particular disciplines, programmes, and
learner types to be treated differently.

16.3.2 Boosting the Quality of Teaching and
Research

The Commission has made a number of proposals to improve the quality of
teaching and research:

• the introduction of the quality test;
• the introduction of performance measures and incentives/sanctions across the
  entire system;
• the application of a higher merit-based entry standard for all
  under-graduate degrees;
• the use of the SDF to improve the quality of teaching and assessment;
• the restriction of post-graduate programmes to academic units that meet a
  specified quality threshold (using the PBRF);
• the establishment of the PBRF;
• the establishment of Centres/Networks of Research Excellence of two
  different types; and
• the amendment of the present legislative requirement for degree-level
  courses to be 'taught mainly by people engaged in research'.³²⁸

Introducing a higher merit-based entry to under-graduate degrees would
improve the quality of learning and research: first, by offering a more
stimulating learning environment (which is more likely to exist in a cohort of
higher-quality learners); and, second, by generating savings that can be
re-allocated to improve the learning environment.

Amending the current legislative requirement for under-graduate teaching
would ensure both teaching and research are appropriately resourced, bring
greater emphasis to the teaching task and would allow polytechnics to focus on
the delivery of applied, vocationally-orientated programmes (including
under-graduate degrees) that meet the needs of industry, professions, employers
and employees - and that increase the quality of teaching.

Improved performance measures are crucial to boosting the quality of research
and teaching - and so one of the Commission's key recommendations is that
providers that fail to meet their performance targets be subject to a one
percent reduction of their bulk funding for tuition.

16.3.3 Equity and Participation

The Commission believes that stringent use of charters and profiles is the
most appropriate means of ensuring equity and participation. If a provider fails
to meet its performance targets in terms of responsiveness to Maori and Pacific
peoples'sneeds, the Commission recommends that financial sanctions be imposed on
that provider.

Reflecting the Commission's priority of improving the bridges into tertiary
education, it proposes that the caps on enrolments in foundation education and
Industry Training programmes be progressively removed.

The Commission also recommends that student allowances be comprehensively
reviewed to ensure that funding is used in ways that actively advance equity and
participation. Such a review should take into account the effectiveness of
scholarships, mentoring, and bridging programmes as alternatives or complements
to allowances paid to students.

Participation goals would continue to be supported through a student loan
scheme with income-contingent repayments as at present. The Commission
recommends, however, that the policy of writing-off loan interest while students
are studying be amended so that, as a minimum, the incentives for arbitrage are
removed. The resulting savings should be re-allocated within the tertiary
education system.

16.4 Need for a Review of the New Funding
Framework

The Commission is aware that the introduction of the proposed new funding
framework will have dynamic effects - and that other effects may occur over time
as a result of changes or developments that cannot be foreseen at present. For
this reason, the Commission recommends that the new funding framework be
reviewed five years after its full implementation, to assess whether the
Commission's goals and priorities are being achieved.

In such a review, particular attention should be given to issues such as the
balance of funding between tuition and research, the transaction costs of the
system, the overall adequacy of funding, the costs to learners, the
implementation of the desirability test, the implementation of the Priority
Index, the predictability of funding, and the effects on providers.

Recommendation 76

The Commission recommends that the new funding framework be reviewed five
years after full implementation, to assess whether the Commission's goals and
priorities for the tertiary education system are being achieved. Particular
attention should be given to the following:

• the balance of funding between tuition and research;
  
• the transaction costs of the system;
  
• the adequacy of funding;
  
• the costs to learners;
  
• the implementation of the desirability test and Priority Index;
  
• the effects on providers; and
  
• the predictability of funding.

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Footnote(s):

318

The quality test is described in Chapter 12 of this Report; the desirability
test is described in Chapter 8 of the Commission's third report, Shaping the
Strategy.

319

These are: a Performance-Based Research Fund (PBRF); a Fund for Model A
Centres/Networks of Research Excellence; a Fund for Model B Centres/Networks of
Research Excellence; a Strategic Development Fund; and a Fund for Adult and
Community Education.

320

New Zealand Qualifications Authority (2001).

321

An additive relationship allows for the ability to add a certain dollar
amount to a provider's funding, while a multiplicative relationship allows the
funding rate to be multiplied by a chosen factor.

322

A learner enrolled in a programme of N credits where N is less than 120
would attract annual funding of: (Funding category x LI + LA + SRA) x N/120.

323

The cost of the statutory obligations of TEIs and ITOs would be reflected in
their funding through the SRA.

324

Fee levels are highly correlated with the level of subsidy per learner.

325

Medicine, dentistry, veterinary science, specialist large animal science,
foreign-going nautical training.

326

The current general provisions for a capital injection on the basis of a
business plan submitted to the government would remain. TEIs would also be able
to receive assistance for capital development through the proposed Strategic
Development Fund, as described below.

327

$119 million in the 2003 academic year.

328

Education Act 1989, s254(3)(a).