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STRATEGY

QUALITY

ACCESS

NOVEMBER 2001

Shaping the Funding Tertiary Education Advisory CommissioTe Ako Pae Tawhiti

FOURTH REPORT OF THE TERTIARY EDUCATION ADVISORY COMMISSIONFOURTH REPORT OF THE TERTIARY EDUCATION ADVISORY COMMISSION


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The cover ofShaping the Funding Frameworkfeatures a pohutukawa.

According to Maori tradition, the pohutukawa (Metrosideros excelsa) has

spiritual, medicinal and cultural significance. Spiritually, it is held as a sign

post to the pathway of spirits. Medicinally, the whole tree is a source of

natural remedies, many tribal traditions share oratorical and symbolic

references to the sacred pohutukawa.


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Ministers Foreword

November 2001

This report, Shaping the Funding Framework, is the fourth and final report of the Tertiary Education Advisory

Commission. It represents the culmination of the work that began with the establishment of the Commission

in April 2000.

The broad aim in establishing the Commission was to identify how New Zealand can develop a more co-

operative and collaborative tertiary education sector that will better assist us in becoming a world-leading

knowledge economy and society. Lifelong learning is the lifeblood of a knowledge economy and society, and

the Commission is committed to the development of a tertiary education system that is capable of fulfilling

that vision. I endorse that commitment.

The Commissions view of tertiary education as a single, interconnected system is ground-breaking. They have

recognised that the tertiary education system is facing a great deal of change and that it needs to adapt to

ensure it remains vibrant. They have also recognised that changing one part of the system will impact on other

parts, and that these interconnections need to be recognised and managed. The development of a partnership

approach to this management is a paradigm shift that will change the way the tertiary education system

(spanning foundation education, industry training, adult and community education and institutional learning

and research) operates in the future. Viewing the tertiary education system as an interconnected whole also

ensures that it is positioned to assist all New Zealanders in accessing learning opportunities that enable them

to fulfil their potential.

A number of recommendations in the Commissions previous reports, such as the decision to establish a

Tertiary Education Commission, and to set up Centres of Research Excellence, have already been adopted as

policy by the Government. Shaping the Funding Frameworkuses the structures and strategic approaches

developed in the Commissions reports, and proposes specific recommendations on the development of a new

funding framework to support achievement of that vision.

The proposals put forward in this report need to be considered by all interested parties. The Government has

not made any decisions on the Commission proposals. I am releasing this report as a basis for consultation and

debate to ensure that the final funding framework that is implemented is the best possible solution. The

consultation period will end on 31 January 2002. Submissions should be made to:

Tertiary Education Funding Framework

Ministry of Education

PO Box 1666, Thorndon

Wellington, New Zealand

Email: [email protected]

Finally, I want to thank individually each of the members of the Tertiary Education Advisory Commission for

an outstanding contribution, and in particular wish to pay tribute to Russell Marshall for undertaking the

challenging role of chairman since December 2000. My thanks also go to members of the Secretariat for their

unstinting commitment to excellence, and for their support at all times for the Commissions vision.

Hon Steve Maharey

Associate Minister of Education (Tertiary Education)

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3.5.2 Financial Position of TEIs 14

3.5.3 Quality of Provision 15

3.5.4 Trends in Funding 15

3.6 Summary 18

Chapter 4: Emerging Trends 194.1 Demographic Changes 19

4.2 Changes in the Knowledge Society 20

4.3 Technological Changes 21

4.4 Internationalisation 22

Chapter 5: Integration of the Tertiary Funding System 245.1 Issues with the Existing Funding Systems 24

5.2 Developing a Coherent Funding System 27

5.3 The Role of ITOs 28

5.4 A Single Funding Formula 29

5.4.1 Implications of a Single Funding Formula 30

5.4.2 Measures for Allocating Funding 30

5.4.3 Removal of Existing Caps 31

5.4.4 Supporting Those with No or Low Qualifications 32

5.4.5 Targeting Assistance 33

5.5 Adult and Community Education 35

5.6 Supporting the Required Structural Change for an Integrated System 35

5.7 Strategic Development Fund 36

Chapter 6: Funding Categories and a Single Funding Formula 396.1 Development of the Current EFTS System 39

6.1.1 Rationale for EFTS Bulk Funding 396.1.2 The Relationship Between Cost and Funding Categories 40

6.1.3 Changes to Funding Categories 40

6.1.4 The Emergence of Distortionary Behaviour 41

6.1.5 Lack of Transparency 41

6.2 A Single Funding Formula 42

6.2.1 Factors in the Single Funding Formula 43

6.3 The Need for a Review of the Cost and Funding Categories 46

6.3.1 The Number of Cost and Funding Categories 46

6.3.2 Related Issues for the Cost and Funding Category Review 47

6.3.3 Possible Approaches to the Cost and Funding Category Review 48

6.3.4 Australian Experience 49

6.3.5 Indexation of Cost and Funding Categories 49

6.4 Some Related Issues for the Operation of the Single Funding Formula 49

6.4.1 Distinguishing Capital from Operational Funding 50

6.4.2 The Funding of Statutory Roles 51

6.4.3 Distinguishing Public from Private Provision on the Basis of Ownership 53

Chapter 7: Merit-Based Entry to Degrees 567.1 Rationale for Rationing 56

7.1.1 Improving the Quality of Learning and Research 57

7.1.2 Ensuring a Better Match of Learners to Courses 57

7.1.3 Producing Savings 57

7.2 Outline of Rationing Options 58

7.3 Evaluation of Rationing Options 58

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7.4 Implications for Efficiency/Innovation, Allocative Processes, and Fee Setting 62

7.4.1 Efficiency and Innovation 62

7.4.2 Allocative Processes 63

7.4.3 Fee Setting 63

7.5 The Commissions Preferred Rationing Option 647.6 Related Issues: Capping Expensive Disciplines, Introducing Shorter Programmes 66

7.6.1 Capping Expensive Disciplines 66

7.6.2 Introducing Shorter Programmes 67

Chapter 8: Predictability and Fees 688.1 Predictability 68

8.1.1 The Arguments For and Against Greater Funding Predictability 69

8.1.2 Analysis 70

8.2 Fee Setting and Fee Stabilisation 72

8.2.1 Fee Setting 72

8.2.2 Fee Stabilisation 738.2.3 Analysis 74

Chapter 9: Student Financial Support 769.1 Student Loan Scheme 76

9.2 Student Allowances 79

9.3 Targeting Specific Students 81

Chapter 10: The Funding of Research 8310.1 The Strengths and Weaknesses of the Current Research Funding Arrangements 84

10.1.1 Strengths 84

10.1.2 Weaknesses 85

10.1.3 The Commissions View 8710.2 A Performance-Based Research Fund 88

10.2.1 The Performance Indicator Model 88

10.2.2 The Peer Review Model 92

10.2.3 A Performance-Based Research Fund for New Zealand: The Mixed Model 96

10.3 Centres/Networks of Research Excellence 103

10.4 The Funding of Research Infrastructure 105

10.5 Conclusion 106

Chapter 11: The Relationship between Teaching and Research,and the Provision of Post-Graduate Education 107

11.1 The Relationship between Teaching and Research 10711.1.1 The Commissions View 110

11.2 The Provision of Post-Graduate Education 111

11.3 The Funding of Post-Graduate Education 113

11.4 Policy Options for the Funding of Research Training 114

Chapter 12: Accountability for Quality and Performance 11512.1 Using the Funding Framework to Promote Quality 115

12.1.1 Improving the Quality of Academic Staff 115

12.1.2 The Quality Test 116

12.2 Defining Quality 117

12.2.1 Quality as Excellence 11712.2.2 Quality as Value for Money 118

12.2.3 Quality as Fitness for Purpose 119

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12.2.4 The Commissions View 119

12.3 Measuring Performance 119

12.4 Creating Performance Incentives 122

12.4.1 Linking Funding and Performance 122

12.5 Cultivating Linkages between Industry and the Tertiary Education System 123

Chapter 13: Responsiveness to Maori 12513.1 Strengths and Weaknesses of the Current System for Maori 125

13.1.1 Progression and Participation 125

13.1.2 Support for Maori Providers 126

13.1.3 Support for Maori Learners 126

13.2 Implications of the Commissions Proposals for Maori 127

13.2.1 Development of Effective Learning Pathways for Maori 127

13.2.2 Development of Improved Accountability Processes 128

13.2.3 Strengthening Maori Providers, Preserving Te Reo Maori and Tikanga Maori 129

13.2.4 Improved Information 130

Chapter 14: Responsiveness to Pacific Peoples 13114.1 Strengths and Weaknesses of the Current System for Pacific Peoples 132

14.1.1 Progression, Retention, Participation 132

14.1.2 Support for Pacific Providers 133

14.1.3 Support for Pacific Learners 134

14.2 Implications of the Commissions Recommendations for Pacific Peoples 135

14.2.1 Development of Effective Learning Pathways for Pacific Learners 135

14.2.2 Development of Improved Accountability Processes 135

14.2.3 Strengthening Pacific Providers, Preserving Pacific Cultures and Languages 136

14.2.4 Improved Information 137

Chapter 15: Further Issues 13815.1 Governance 138

15.2 Diversification of Funding Sources 140

15.2.1 Support from Business and Industry 141

15.2.2 Marketing Tertiary Education Services to International Students 141

15.2.3 Revenue from Consultancy Fees and Entrepreneurial Activity 142

15.2.4 Research and Other Contracts 142

15.2.5 Productive Investment and Production of Goods 142

15.2.6 Support from Other Sources 143

15.3 Encouraging the Diversification of Funding Sources 143

15.4 General (Liberal) Education 143

15.5 System-Level Information 144

15.5.1 The Single Data Return 144

15.5.2 The National Student Index 144

15.5.3 The Prospectus Database 144

15.6 Recognition and Portability of Learning 145

15.7 Information for Learners 146

Chapter 16: The New Funding Framework Summary and Implications 14816.1 The Single Funding Formula (SFF) 148

16.1.1 Cost Categories and Funding Categories 148

16.1.2 Learner and Provider Characteristics 149

16.1.3 Allocative Mechanism 149

16.2 Dedicated Funds 150

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16.3 Major Benefits of the Funding Framework 150

16.3.1 Steering the System 150

16.3.2 Boosting the Quality of Teaching and Research 151

16.3.3 Equity and Participation 151

16.4 Need for a Review of the New Funding Framework 15116.5 The Affordability of the Commissions Proposals 152

16.6 Implications of the New Funding Framework 153

16.6.1 Transitional Arrangements for Implementation 153

16.6.2 Universities 154

16.6.3 Polytechnics 155

16.6.4 Colleges of Education 155

16.6.5 Wananga 155

16.6.6 Pacific Providers 156

16.6.7 Private Training Establishments (PTEs) 156

16.6.8 Industry Training Organisations (ITOs) 156

16.6.9 Learners 15616.6.10 The Government and Taxpayers 157

Diagrammatic Summary 158The Commissions Recommendations: Solutions to System Weaknesses 158

The Funding Framework for Tertiary Education 161

Glossary 162

Appendix 1: Principles of the Treaty of Waitangi 171

Appendix 2: The Current Funding Framework 172

Appendix 3: Current Quality Assurance Mechanisms 188

Appendix 4: Background and Companion Papers 190

Bibliography 191

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Executive Summary

Overview

Shaping the Funding Frameworkis the fourth and final of the Commissions reports. As such, it builds on many ofthe key themes previously put forward. In its first report, Shaping a Shared Vision, the Commission concluded

that, in order for the tertiary education system to contribute fully to the achievement of a knowledge society,

all its components must work together as an integrated whole.

In its third report, Shaping the Strategy, the Commission identified five national strategic goals: innovation,

economic development, social development, environmental sustainability, and fulfilment of Treaty of Waitangi

obligations. That report also identified tertiary education priorities: building the quality of learning, building

stronger bridges into tertiary education, enhancing research quality and linkages, and developing the skills

and environment for a distinctive knowledge society. The Commission recognises that any changes to the

existing funding system needs to be directed towards achieving these goals and priorities.

This report provides a new funding framework for the tertiary education system. In developing its proposals,

the Commission has been aware of the need for the framework to be flexible enough to allow the tertiary

education system to adapt over time. The tertiary education system consists of a complex web of inter-related

components. Viewing it as an integrated whole and increasing the accountability of providers will improve

pathways for learning and will greatly assist New Zealands development as a knowledge society. Implementing

the new funding framework must therefore be done in a holistic way, with consideration given to the dynamic

flow-on effect of changes in one area on all other parts of the system.

A robust, coherent and effective funding framework, while desirable, is not enough. Building a vibrant,

dynamic, high-quality tertiary education system also requires a sufficient, well-targeted and predictable level of

public investment.

In Chapters 1 to 4 ofShaping the Funding Framework, the Commission outlines a number of critical background

issues - including guiding principles and desired incentives for a funding framework, the strengths and

weaknesses of current funding arrangements, and the likely influence of emerging trends on the tertiary

education system. Chapters 5 to 9 focus on the funding of tuition (including student financial support);

Chapters 10 and 11 focus on the funding of research and research training; and Chapter 12 deals with issues

of performance and accountability. Issues relating to Maori and Pacific peoples in tertiary education are dealt

with in Chapters 13 and 14 respectively. Other issues, such as governance and information, are picked up in

Chapter 15. The final chapter, Chapter 16, outlines the nature and design of the proposed new funding

framework and draws out some implications and implementation issues.

Guiding Principles

The Commission has used eight principles that have guided its thinking in the development of the funding

framework. Although it recognises that trade-offs between these principles may be necessary, the Commission

believes that the new funding framework should:

promote the desired steering of the tertiary education system;

be transparent;

have low transaction costs;

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.

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The funding framework for the tertiary education system should also include incentives to encourage desired

behaviour by particular stakeholders. These include incentives on:

the system as a whole to encourage diversity, sensible risk-taking, and a sense of ownership and responsibility;

the government to act as a good steward for the system as a whole;

providers to be cost-aware, to pursue excellence, and to be innovative and responsive;

learners to participate and achieve; and

employers to develop strong links with Tertiary Education Providers.

The Current Framework Strengths and Weaknesses

The current systems have been highly effective in dealing with the massive increase that has occurred in

demand for tertiary education. New Zealand is one of only three countries in the Organisation for Economic

Co-operation and Development (OECD), along with Finland and the United Kingdom, where both

participation and completion rates for degree-level education are above the OECD average. Significantly, this

achievement has been attained with no substantial evidence of widespread decline in the quality of tertiaryeducation. In addition, the current funding systems have encouraged providers to become more responsive to

the needs and interests of learners and other stakeholders. But these results have come at a cost: New

Zealands level of public investment in tertiary education as a proportion of GDP is amongst the highest in the

OECD when student financial support is included.

The Commission has, however, identified a number of problems, and believes that the existing framework

suffers from a lack of steering and is fragmented and incoherent. There is widespread concern that the level of

public investment in tertiary education is inadequate and has resulted in high levels of student debt,

deteriorating infrastructure, financial difficulties for providers, and difficulties in attracting and retaining high-

quality academic staff and post-graduate students.

The current EFTS system for tertiary education institutions (TEIs) and private training providers (PTEs) operated

by the Ministry of Education has relatively weak accountability measures. Its lack of predictability is an obstacle to

providers and learners making informed investment and educational decisions. Incentives for providers to improve

the quality of both teaching and research are weak, and the linking of most research funding to the EFTS system

has made valuable research centres vulnerable to changes in the pattern and level of student enrolments.

The purchasing system for Industry Training and foundation education operated by Skill NZ on the other

hand promotes stronger accountability than the EFTS system does, but has substantially higher transactional

costs, and the process can be intrusive and undermine provider autonomy. Moreover, the system used by Skill

NZ to allocate funding lacks transparency. The Commission has a particular concern that the numbers of

places in Industry Training and foundation education are tightly capped.

Operating two funding systems in parallel under different rules has resulted in inequitable treatment of

learners, different levels of accountability (and funding) for similar programmes, and a widespread exit of

TEIs from programmes funded by Skill NZ. The tertiary education system has increasingly developed into

stand-alone sectors that do not support seamless learning or equity for learners.

Key Proposals

In shaping a new funding framework for the tertiary education system, the key proposals of the Commission are:

1. To develop a unified and coherent funding framework for the tertiary education system, involving the

following measures:

the use of charters and profiles in conjunction with quality and desirability tests to steer the system;

the development of a new Single Funding Formula;

a comprehensive cost and funding category review; and

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If public funding of tertiary tuition is to be as effective as possible, it must broadly reflect the cost of delivering

programmes. Consequently, the Commission recommends that a cost and funding category review be carried

out to identify and reduce the distortions in the current subsidy rates. As part of this review, it is proposed that

a Tertiary Education Price Index (a system-specific cost index) be developed. The annual adjustment of the

cost and funding categories would be based on this index. The Tertiary Education Price Index would be afurther mechanism for ensuring that tuition subsidies appropriately reflect changes in the cost of offering

programmes.

Given that the Commission is proposing the development of a Single Funding Formula across most of the

tertiary education system, it is important that the cost and funding category review considers all relevant

components of the system. The Commission therefore recommends that the review cover Industry Training,

Training Opportunities and Youth Training, as well as the EFTS-funded component of the current funding

framework. Furthermore, the review should include an examination of tertiary education staff salaries and

conditions, and existing clinical add-ons.

More predictability in funding would be provided by the proposed Tertiary Education Price Index. If this

index is not introduced, then tuition-subsidy rates for the funding categories should be published at least two

years in advance. This period of advance warning would give timely signals to both learners and providers, and

would enable them to prepare for any adjustments that may be necessary.

The Commission envisages that many learners will continue to contribute to the cost of education through

fees. There are difficult trade-offs implicit in fee-setting and fee-stabilisation issues, and the Commission wishes

to see fees kept at reasonable levels of affordability for learners. In the Commissions view, fee-setting should

rest with individual providers, as they are best placed to determine any appropriate trade-offs between quality

and cost. The learner choice implicit in the Single Funding Formula would provide a check on fee levels and

would help to limit the costs of tertiary education for learners. This position would have implications for the

fee-stabilisation policy currently in place. The level of fees charged by providers is, however, closely related to

the level of government funding, so a fee-stabilisation policy is not necessarily inconsistent with fee-setting

autonomy resting with providers.

A key element in the development of the Single Funding Formula is the progressive lifting, and eventual

removal, of the current funding caps on the numbers of enrolments in foundation education (National

Qualifications Framework levels 1 to 3) and Industry Training programmes. These forms of education are

important pathways into the workforce and ongoing tertiary education. They provide the skills necessary for

living and working in the modern world. Removing the caps would increase the accessibility of such

programmes and would meet the governments social and economic objectives.

An exception to the integrated Single Funding Formula is Adult and Community Education. This component

of the system represents an important form of contact between the tertiary education system and thecommunity, as well as being qualitatively different in function from other components of the system. In

recognition of these special characteristics, the Commission believes that it is appropriate to keep funding for

this component separate and to deliver it through a dedicated ring-fenced fund.

Dedicated Funds

The proposed Single Funding Formula and Adult and Community Education fund would form major components

of the funding framework for tuition. The Commission also recommends the establishment of a series of

dedicated funds for specific purposes these are: a Performance-Based Research Fund and two Funds to support

Centres/Networks of Research Excellence and a Strategic Development Fund to facilitate system development.

The Performance-Based Research Fund would promote the pursuit of research quality and the retention of

talented staff, as well as enhancing the ability of researchers to conduct world-class research. Tertiary

Education Providers that consistently produce research of a high quality would be appropriately rewarded.

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The Commission is concerned that current arrangements make financial support for research projects and

research infrastructure highly susceptible to fluctuations in the level and pattern of enrolments. Establishing

the Performance-Based Research Fund would weaken this relationship between research funding and student

numbers, and so would provide a more predictable foundation for conducting research.

By providing increased incentives and rewards for research quality and enhancing the ability of researchers to

undertake high-quality research, the Performance-Based Research Fund would also benefit post-graduate

students by promoting a higher-quality research training environment. Access to this fund would be available

to all eligible Tertiary Education Providers and collaborative entities that they may form. The Commission

recommends that there be two sources of funding for this fund: the re-allocation of the current research top-

ups and new funding.

In its second report, Shaping the System, the Commission proposed the establishment of Model A

Centres/Networks of Research Excellence. These Centres/Networks would receive public funding in recognition

of the high quality of their research outputs. The government has undertaken to support such Centres/Networks

from a dedicated fund. Over time, this fund may be incorporated into the Performance-Based Research Fund.

In addition, the Commission recommends that new funding be available for a separate form of

Centre/Network of Research Excellence, referred to in Shaping the Strategyas Model B, to be matched by

investment from industry and other groups. These Centres/Networks would be focused on achieving the

national strategic goals noted at the beginning of this Executive Summary.

Both models are key instruments for supporting and improving the quality of research undertaken within the

tertiary education system. They would also provide a high-quality environment for the teaching and

supervision of students (especially post-graduate students). Model B Centres/Networks would be founded on

co-operation between industry/community groups and researchers. Consequently, such Centres/Networks

would promote links between the tertiary education system and research users such as the business sector,

community groups, and iwi.

The Commission recommends the creation of a Strategic Development Fund, administered by the Tertiary

Education Commission, to facilitate change in the tertiary education system in a pro-active manner. The fund

would support innovation, co-operation, differentiation, the quality of teaching and assessment, and the

strategic development of the tertiary education system. The Commission recognises that significant changes

have occurred in the tertiary education system since 1990, and that ongoing change is both desirable and

inevitable. Further, it believes that the future evolution of the system will be towards a more co-operative and

collaborative model of tertiary education provision. The Strategic Development Fund is designed to support

moves in this direction. It can also be used to provide support for specific groups of learners, such as Maori

and Pacific peoples. The Strategic Development Fund would be partly funded by the discontinuation of the

base grants for Tertiary Education Institutions.

Proposals to Improve the Quality and Efficiency of the System

A fundamental goal of the Commission has been to maintain and improve the quality of tertiary education and

research. The Commission has recommended a number of initiatives to achieve this goal including:

the quality test;

the Performance-Based Research Fund;

higher merit-based entry into under-graduate degrees;

tighter restrictions on the provision of post-graduate education; and

more consistent use of performance measurement across the system.

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Proposals to Support the Learning of Maori and Pacific Peoples

Reducing disparities and building capability and capacity in tertiary education for Maori and Pacific learners is

a crucial element in any attempt to improve equity in the system. This is particularly important given that the

populations of both Maori and Pacific peoples are expected to continue to grow at a faster rate than other

ethnic groups for the foreseeable future. While the participation of Maori and Pacific peoples at all levels of

tertiary education needs to improve in line with their population growth, it will also be important that

measures are put in place to eliminate disparities in educational achievement between these groups and the

rest of the New Zealand population.

To ensure that the needs of Maori and Pacific learners are addressed in the tertiary education system,

providers should be required to specify in their charters and profiles the initiatives and performance indicators

that they will use to develop their capability and capacity and to support their Maori and Pacific learners. In

assessing the desirability of a programme or an activity, the Tertiary Education Commission should consider

what contribution that programme or activity makes to enhancing participation and achievement for Maori

and Pacific learners. To ensure accountability, the Commission recommends that a proportion of tuition

funding be withheld from those providers that are unable to demonstrate that they are meeting the needs of

the Maori and Pacific learners within their enrolment catchment area.

The Commission believes that it is important to provide support for Matauranga Maori, for the study of Te Reo

Maori, and for awareness of Tikanga Maori and Kaupapa Maori. Consequently, it recommends that if no

provider demonstrates a high quality of research performance in relation to Maori studies and Treaty issues,

then priority should be given to the development of a Model A Maori Centre/Network of Research Excellence.

In addition, the Tertiary Education Commission should give priority to nurturing the research capacity of

Pacific peoples, at least until one or more providers can demonstrate the production of high-quality results in

this area.

The Commission recommends that, in the short-term, funding should be re-allocated from the current Maoriand Pacific Special Supplementary Grants and be ring-fenced for equity purposes within the Strategic

Development Fund. This would reduce transaction costs and improve accountability.

The Commission is aware of the existence of low levels of adult literacy in Maori and Pacific communities. In

recognition of this, and in accordance with the intention to uncap foundation education and Industry

Training programmes, priority should be given to developing capacity within the tertiary education system to

support the literacy and education needs of Maori and Pacific peoples.

Furthermore, the Commission recommends that the government give priority to developing a new institutional

form specific to Pacific peoples in the tertiary education system. The Ministry of Pacific Island Affairs and the

Ministry of Education should work collaboratively on this matter.

Reviewing Policies Surrounding Student Financial Support

The Commission is concerned that current arrangements for student financial support do not ensure the most

effective use of public funds. It makes several recommendations about existing systems of student financial

support, and re-affirms the need for the government to provide adequate levels of support for learners in an

appropriate manner.

The Commission believes that the current policy of writing off interest on loans for full-time and low-income

students while they are studying is not an effective use of the governments resources. While this policy has

decreased the length of time taken to repay loans after graduation, it has also led to an increase in the number

of students taking out loans and in the overall level of student debt. To compound matters, the policy hasmade it possible for learners to borrow money and invest it for private gain (arbitrage). Consequently, the

Commission believes that this policy should be amended so that, as a minimum, the incentives for arbitrage

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should be removed. Any savings accruing to the government as a result of modifying the current loan scheme

should be re-invested in the tertiary education system and be used for the benefit of students.

The Commission is concerned that the current Student Allowances Scheme may not be the most effective

method of improving equity for learners in the tertiary education system. Hence, it recommends that the

government re-examine the Student Allowances Scheme to ensure that it represents the best possible use of

resources while still achieving equity objectives. This may involve greater reliance upon mentoring schemes

and bridging programmes than currently occurs.

Where a learner enrols in a course or programme that does not pass the proposed desirability test, or where a

learner is offered a non-subsidised place in a capped course, student loans and allowances should not be

available.

While the issues regarding scholarships are complex, scholarships can provide significant assistance to learners

and can also be used for steering the system in desired directions. The Commission recommends that the

government explores methods of promoting private funding of scholarships, and that consideration be given

to the extension of current scholarship schemes to achieve excellence and equity objectives.

Future Directions

Providers

The Commission understands that many providers are currently facing financial difficulties and that these

problems must be addressed in a forward-looking fashion. But rather than designing a new funding framework

to bolster the status quo or protect existing provider structures, the aim has been to facilitate pro-active change

in the interests of building a sustainable and robust network of provision over the longer term. The key is for

providers to demonstrate the particular contribution they can make and how they can do that in an ongoing

way. To achieve this objective, some funding redistribution and structural adjustment are inevitable. The

proposed Strategic Development Fund is designed to assist the change-management process, while minimising

the costs of adjustment.

Specific proposals are likely to affect different stakeholders in different ways. Universities will need to find

more effective ways of achieving their mission as institutions of advanced learning that develop intellectual

independence. Under the Commissions proposals, the quality of learning in universities would be

strengthened by the introduction of higher merit-based entry requirements to under-graduate degrees and by

tighter restrictions on the provision of post-graduate education. The quality of research in universities will be

enhanced by the separation of much of the funding of tuition and research, by greater predictability of

research funding, by the establishment of Centres/Networks of Research Excellence of several kinds, and by

the provision of additional resources.

With the greater concentration of research effort and post-graduate teaching in the universities, there is an

argument that sub-degree programmes should be offered mainly by other providers, particularly polytechnics.

The Tertiary Education Commission may use profiles to encourage greater collaboration between universities

and polytechnics at the sub-degree level.

Polytechnics currently face significant challenges. The changing geographic distribution of regional

populations throughout New Zealand requires many polytechnics to plan for static or declining rolls. Ensuring

the continuing regional delivery of vocational education by polytechnics requires substantial reconfiguration

of the polytechnic sector.

The Commission envisages a polytechnic sector characterised by a small number of strong hubs that supportoutlying capacity along smaller regional spokes. This arrangement would result in enhanced quality at lower

cost. Larger polytechnics are more likely to benefit from stronger senior management capability, not only at

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CEO level but also at senior management level, while spoke campuses would not be required to bear the

financial burden of a large central administration.

This transformation offers the promise of polytechnics that perform strongly and deliver on their distinctive

mission. Although the number of separate entities would decrease, a strengthened vocational education system

would evolve. The Strategic Development Fund is intended to support this reconfiguration.

New opportunities for polytechnics would be provided by the removal of caps currently in place for foundation

education and Industry Training, and the introduction of the Single Funding Formula for courses at this level.

Colleges of education would be able to develop appropriate strategic relationships with universities. Although

the proliferation of teacher education providers has led to some recent innovation, the Commission believes

that the consolidation of teacher education is preferable to the dissipation of scarce resources. It would also

improve the quality of teaching.

The three wananga are still at an early stage of development, although their rapid growth indicates they are

increasingly meeting the needs of Maori. The challenges facing these providers are in building researchcapability and in strengthening the quality of their degree programmes. The Commissions commitment to

supporting a Maori Centre/Network of Research Excellence (Model A) would benefit wananga that are

prepared to collaborate with strong research partners.

The Commission believes that Private Training Establishments have a role in meeting niche demand for

specific types of education. A strong Tertiary Education Commission would use charters, profiles, and the

desirability test to ensure that government-funded private provision of tertiary education would complement

rather than compete with the offerings of Tertiary Education Institutions, while at the same time offering

students a viable alternative.

Industry Training Organisations will continue to have an important role in supporting and developing their

industries. The Commission recommends that they retain their role of brokering training for trainees and

supporting on-job training and assessment.

Learners

Learners as a group would benefit from all of the Commissions proposals, particularly the increased

coherence of the tertiary education system, improved portability of credits, and strengthened performance

measures. The proposed cost and funding category review is intended to ensure that providers receive funding

at levels where student fees are affordable.

The Commission recommends that the caps on Industry Training, and foundation education be progressively

removed. The uncapping of foundation education courses would increase access to tertiary education for those

learners who have had little success in compulsory education. This would build pathways into employment and

higher levels of the tertiary education system, and would also assist in skill development. The Commissions

proposals to increase the merit standard for entry to under-graduate degrees would make it necessary for many

learners to undertake foundation-level study before undertaking degree courses.

The future tertiary education system would also involve initiatives to support top students. In particular, the

introduction of the Performance-Based Research Fund would enhance the capacity of providers to maintain

and develop the quality of the research training environment.

The Government

The various components of the new funding framework give the government significant flexibility in how it

targets its expenditure. The government, for instance, may wish to use the Priority Index to provide a higher

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Recommendations

Chapter 1: Introduction

Recommendation 1. page 3

The Commission recommends that a new funding framework for tertiary education be developed to support

the governments strategic vision for the tertiary education system.

Chapter 2: The Funding Framework Principles, Incentives and Assumptions


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.


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.

Chapter 5: Integration of the Tertiary Funding System


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.


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.

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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.


The Commission recommends that the existing performance indicators used in the foundation education

sectors be modified to place greater emphasis on completion of qualifications.


The Commission recommends that the new funding formula for the tertiary education system be founded

upon enrolments using a measure based on New Zealand Register of Quality Assured Qualifications credits.


The Commission recommends that, as part of their integration into the new funding system, the caps on those

programmes currently funded through Skill NZ (Youth Training, Industry Training and Training

Opportunities) be progressively removed.


The Commission recommends that certain categories of learners should receive 100 percent government

subsidy, including those who have not previously achieved in school or foundation education. Eligibility for

this total subsidy level would be based upon the following criteria:

the learners previous consumption of foundation education, as expressed in terms of credits; and

the learners tertiary programme being creditable towards the National Certificate of EducationalAchievement.


The Commission recommends that Adult and Community Education be funded by the TEC through a

separate ring-fenced Fund.


The Commission recommends that in addition to the bulk-funded, learner demand-driven component of the

overall funding Framework, separate Funds be set aside to achieve desired goals and behaviours within the

tertiary education system. The separate Funds are for:

research through a performance-based system;

Centres/Networks of Research Excellence (Model A);

Centres/Networks of Research Excellence (Model B);

strategic development; and

Adult and Community Education.


The Commission recommends the establishment of a Strategic Development Fund to support differentiation,

the quality of teaching and research, equity, co-operation, innovation and strategic development of the tertiary

education system as a whole.

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Chapter 6: Funding Categories and a Single Funding Formula


The Commission recommends that the new funding framework enable, through the Single Funding Formula:

differences in learner needs and characteristics, programme/activity type, and the relative priority of the

activity to be recognised and differentially funded; and

co-funding of Industry Training by industry.


The Commission recommends that after application of the desirability test the TEC should decide either:

to not fund the programme/activity; or

to fund the programme/activity by applying the standard rate which the government is prepared to support.


The Commission recommends that an Education Subsidy Index (ESI) be developed which would reflect

differential proportions of funding for each component in the Single Funding Formula.


The Commission recommends that a programme or discipline-specific Priority Index (PI), informed by the

national strategic goals, be included in the Single Funding Formula to allow differential subsidy rates for

selected programmes or disciplines.


The Commission recommends the development of a Learner Index (LI) which would be a multiplier withinthe Single Funding Formula to reflect the needs of specific learners.


The Commission recommends the development of a Learner Add-on (LA) which would be an additive to the

Single Funding Formula and reflect the needs of specific learners.


The Commission recommends the development of a Statutory Role Add-on (SRA) to be included in the Single

Funding Formula, which reflects the cost of fulfilling the statutory roles and responsibilities of Tertiary

Education Institutions and Industry Training Organisations.


The Commission recommends that the government initiate, as a matter of priority, a systematic review of the

cost and funding categories used to allocate funds within the tertiary education system, including foundation

education (Training Opportunities and Youth Training) and Industry Training programmes.


The Commission recommends that the cost and funding category review be completed in order that the

implementation of the new funding categories can commence in the 2004 academic year.


The Commission recommends that, as a significant part of the review of cost and funding categories, a review

of staff salaries and conditions in the tertiary education system be conducted.

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The Commission recommends that once a new set of cost categories have been determined, the government

establish what proportion of costs in each category it is willing to fund through a set of funding categories

using the Education Subsidy Index.


The Commission recommends that the currentadd-ons for clinical costs associated with particular courses be

reviewed as part of the review of cost and funding categories.

The Commission further recommends that the review of the cost and funding categories considers the costs

associated with the teaching of Te Reo Maori.


The Commission recommends that the government continue to make an undifferentiated contribution

towards capital costs via tuition subsidies (through the bulk grants allocated to Tertiary Education Providers),for both public and private providers.


The Commission recommends that the current base grants for Tertiary Education Institutions be discontinued.


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.

Chapter 7: Merit-Based Entry to Degrees


The Commission recommends that, to the extent that scarce resources necessitate the use of various kinds of

rationing, preference be given (in relation to under-graduate degree programmes) to rationing funded places

on the basis of merit ahead of rationing on the basis of price.


The Commission recommends that further rationing within the tertiary education system be introduced as away of:

improving the quality of tertiary education; and

freeing up resources for re-allocation to other priority areas in the tertiary education system.


The Commission recommends that in implementing a system of rationing, the government introduce a

portfolio of initiatives, including:

stringent application by the TEC of the profiling regime including quality and desirability tests on

programmes and activities; and

relatively extensive rationing by merit of all under-graduate degree places achieved by the introduction for

all learners of a new, higher entrance standard.

The Commission further recommends that a careful and systematic study is undertaken of the issues relating

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to the introduction of new, higher entrance standards for all under-graduate degrees, and that there be

comprehensive stakeholder consultation before implementation.


The Commission recommends that a review be undertaken of the current caps that are applied to variousexpensive programmes (such as, medicine, dentistry, veterinary science, specialist large animal science and

foreign-going nautical).

The Commission further recommends that any caps that may be set for these expensive programmes should be

set at levels that ensure the most efficient use of existing capital and human resources.


The Commission recommends that the TEC and NZQA investigate the introduction of a shorter qualification,

along the lines of associate or foundation degrees in other jurisdictions, that is a desirable qualification in its

own right and designed to articulate to under-graduate degrees.

Chapter 8: Predictability and Fees


The Commission recommends that an appropriate Tertiary Education Price Index be developed as part of the

review of cost and funding categories. Once the Index has been agreed, it should be applied to the cost and

funding categories and the separate Funds on an annual basis.


The Commission recommends that if the government decides not to introduce indexation of funding rates

using the Tertiary Education Price Index, then the tuition subsidy rates should be signalled to providers two

years in advance.


The Commission recommends the retention of the current legislation that gives councils of Tertiary Education

Institutions the power to prescribe fees payable by students of the institution.

Chapter 9: Student Financial Support


The Commission recommends that the current loan interest write-off policy while students are studying for

full-time and low-income students, be amended, and that the interest rate for these students be set at a rate

sufficient to remove incentives for arbitrage.


The Commission recommends that savings from amending the current student loan interest write-off policy

for full-time and low-income students remain within the tertiary education system.


The Commission recommends that the government, in determining its response to the Education and Science

Select Committee review on Student Loans and Allowances, re-examine the current system of student

allowances to ensure that the system represents the most effective use of resources. This may involve redirecting

money to provide additional support for other means of achieving equity objectives, such as mentoring schemes.

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The Commission recommends that where a student enrols in a course or programme which does not pass the

desirability test or where a student enrols in a capped course but does not pass the entry test for government

funding for that course, student loans and allowances should not be available.


The Commission notes the complexity of issues regarding scholarships and recommends that the government

explore methods of promoting private investment in scholarships and related issues.

The Commission further recommends an investigation of the extension of the use of scholarship schemes to

achieve both excellence and equity objectives.


The Commission recommends that any bonding arrangements be left to the discretion of individual firms and

organisations.

Chapter 10: The Funding of Research


The Commission recommends that a Performance-Based Research Fund be introduced commencing for the

2004 academic year.


The Commission recommends that the Performance-Based Research Fund be based on the mixed-model,

measuring provider performance according to three criteria: a quality rating of academic staff, externalresearch income and research degree completions.


The Commission recommends that the Performance-Based Research Fund be funded from two sources: all the

funds currently allocated to under-graduate and post-graduate research top-ups, and new funding of a

minimum of $20 million per annum.


The Commission recommends that access to the Performance-Based Research Fund be open to all Tertiary

Education Providers (TEPs) or collaborative entities amongst TEPs, subject to their provision of acceptableResearch and Research Training Management Plans and their having a minimum of 50 research active staff.


The Commission recommends that Model A Centres/Networks of Research Excellence be supported by

separate funding. Over time these funds may be incorporated into, and allocated through, the Performance-

Based Research Fund.


The Commission recommends the establishment of a separate Fund of substantial magnitude (reflecting the

importance of research-enterprise linkages in a knowledge society) for the development of Model BCentres/Networks of Research Excellence aimed at supporting national priorities. Access to this Fund would

require leveraged funds from other sources.

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Chapter 11: The Relationship between Teaching and Research, and the Provision

of Post-Graduate Education


The Commission recommends that the current legislative requirement that degrees be taught mainly by

people engaged in research be relaxed to allow under-graduate degrees to be taught by people with a

comprehensive and current knowledge of their discipline and the skills to communicate this knowledge.


The Commission recommends that no new post-graduate degree programmes be funded unless the academic

unit delivering the programme reaches a specified threshold on the quality measure (based on the research-

quality rating of academic staff) within the proposed Performance-Based Research Fund.


The Commission recommends that, over time, all academic units providing post-graduate programmes be

reviewed, using the quality measure (based on the research-quality rating of academic staff) within the

proposed Performance-Based Research Fund, to ensure that their research intensity and quality is sufficient to

support post-graduate teaching.

The Commission further recommends that where academic units fail to meet the specified quality threshold,

their funding, for those post-graduate programmes, be removed.


The Commission recommends that research training be funded through a mix of both the Performance-Based

Research Fund and the tertiary education funding categories.

Chapter 12: Accountability for Quality and Performance


The Commission recommends that the quality of teaching in tertiary providers be addressed as a priority issue

with consideration being given to the introduction of a requirement for new academics to undertake some

teaching training, and assistance being made available for those already in the tertiary education system to

move towards attaining competency and basic teaching skills, within a specified period.


The Commission recommends that no funding be extended to private tertiary providers that fail to gain at

least a one-year reassessment on their New Zealand Qualifications Authority Quality Assurance Standard Audit.


The Commission recommends that system-wide performance indicators be developed to measure:

access;

retention;

completion;

progression; and

destinations.

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These indicators should be segmented across a range of varying learner characteristics including ethnicity and

previous educational attainment.


The Commission recommends that the TEC convene a working party of sector representatives to determineconsistent and appropriate definitions for these indicators, and that the indicators be implemented and

monitored with the aim of establishing system-wide and sector-specific performance benchmarks.


The Commission recommends that the quality-assurance bodies work together with the TEC to establish

benchmarks and threshold criteria to be used to set the quality standard used for determining funding

allocations.


The Commission recommends that, over time, the quality benchmark for removal of funding be progressivelyraised.


The Commission recommends that the performance indicators and performance benchmarks be used over

time to inform profile negotiations, with consistently poorly performing providers and Industry Training

Organisations being subjected to greater restrictions and scrutiny, with the ultimate sanction of the removal of

public funding.


The Commission recommends the introduction of performance-based payment for providers as an at-risk

component of the funding formula for tuition purposes (based on assessment against the system-wide, and

sector-specific, tuition-related performance indicators).

The Commission further recommends that in the short term providers and ITOs which fail to meet the

performance targets specified in their profiles be subject to a 1 percent reduction of their bulk funding for

tuition.

Chapter 13: Responsiveness to Maori


The Commission recommends that, in accordance with the intention to uncap foundation education, priority

be given to develop the capacity to support the literacy and education needs of Maori.


The Commission recommends that, in their charters and profiles, providers be required to specify:

the initiatives they will use to support Maori learners and develop Maori capability and capacity; and

the performance indicators to be used for measuring their achievement of this.

The Commission further recommends that, in applying the desirability test to a programme or activity, the

TEC take into account the contribution (specified in the providers charter and profile) that the programme

or activity makes to enhancing participation and achievement by Maori learners.

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The Commission recommends that financial penalties be imposed on providers that cannot demonstrate they

are meeting the needs of their Maori learners as specified in their charters and profiles and that this be done

by withholding a proportion of their tuition funding.


The Commission recommends that, in the short term, funding re-allocated from the existing Maori Special

Supplementary Grants be ring-fenced for equity purposes within the Strategic Development Fund.


The Commission recommends that if no institution achieves a high Performance-Based Research Fund

ranking for research performance in Maori issues, then priority be given by the TEC for development of a

Model A Centre/Network of Research Excellence in this field.

Chapter 14: Responsiveness to Pacific Peoples


The Commission recommends that the government give priority to developing a new institutional form for

Pacific peoples within the tertiary education system and that the Ministry of Pacific Island Affairs and the

Ministry of Education work collaboratively in relation to this issue.


The Commission recommends that, in the short term, funding be re-allocated from the existing Pacific Special

Supplementary Grant and be ring-fenced for equity purposes within the Strategic Development Fund.


The Commission recommends that, in accordance with the intention to uncap foundation education, priority

be given to develop the capacity to support the literacy and education needs of Pacific peoples.


The Commission recommends that, in their charters and profiles, providers be required to specify:

the initiatives they will use to support Pacific learners and develop Pacific capability and capacity; and

the performance indicators to be used for measuring their achievement of this.

The Commission further recommends that, in applying the desirability test to a programme or activity, theTEC take into account the contribution (specified in the providers charter and profile) that the programme

or activity makes to enhancing participation and achievement by Pacific learners.


The Commission recommends that financial penalties be imposed on providers that cannot demonstrate they

are meeting the needs of their Pacific learners as specified in their charters and profiles, and that this be done

by withholding a proportion of their tuition funding.


The Commission recommends that the TEC, as a priority, work to develop research capacity in relation toPacific studies and continues to do so until a provider or providers rank sufficiently highly using the

Performance-Based Research Fund assessment.

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Chapter 15: Further issues


The Commission recommends that the TEC establish a working party to review governance structures taking

into account the important role that governance has in a devolved tertiary education system.


The Commission recommends that the current legal limit on tax deductibility and tax rebates for financial

donations to not-for-profit Tertiary Education Providers be increased.


The Commission recommends that the relevant bodies be encouraged to ensure that under-graduate degrees

include components of general (liberal) education as the basis of lifelong learning and the preservation of a

national culture.


The Commission recommends that high priority be given to improving information to learners and

prospective learners.

The Commission further recommends that a working party to examine improving information to learners, be

established. The working party could consider evaluating interactive careers information provided in a range

of media and languages, including Te Reo Maori, and Pacific languages.

Chapter 16: The New Funding Framework Summary and Implications


The Commission recommends that the new funding framework be reviewed five years after full

implementation, to assess whether the Commissions 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.


The Commission recommends that the new funding framework be phased in to facilitate a timely and smooth

transition process. The Strategic Development Fund could be used as a means of mitigating short-term

adjustment costs and impacts.

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Chapter 1: Introduction

The tertiary education system is a vital part of the knowledge society. It plays a key role in the development of

new knowledge and new applications of knowledge while, at the same time, supporting the development of

skills and the dissemination of information and research findings. In its first report, Shaping a Shared Vision, theCommission concluded that, in order for the tertiary education system to contribute fully to New Zealands

development as a knowledge society, its components must work together coherently.

The Commission believes that viewing the tertiary education system as an integrated whole will improve the

responsiveness of the system and the development of pathways that support lifelong learning.

In its second report, Shaping the Strategy, the Commission identified compelling reasons for the government to

invest in the tertiary education system.2 Improving the ability of New Zealanders to access new skills and

knowledge, as well as supporting the development of new knowledge and novel applications of existing

knowledge, can have important social and economic benefits for New Zealand. As The Treasury has noted:

Better-educated people tend to be healthierHigher levels of education lead to lower uptake ofsocial welfare benefits (even when available), and, of course, through higher wages, to paying

more tax The children of better-educated parents themselves do better at schoolIndividual

education levels are associated with a lower risk of crime, and there is an additional effect from

average levels of education in a community.3

Similarly, there exists significant evidence that investment in the tertiary education system has a positive impact

on the productive capacity of a country.4 Furthermore, it is highly likely that a tertiary education system left to

the dictates of the market would not deliver desirable outcomes. Further discussion of the rationales for

public funding of tertiary education and research is available on the Commissions website.6

The tertiary education system is, however, currently undergoing significant change and the funding frameworkmust be flexible enough to enable the system to adapt over time. Technology is contributing to the growth in

open, non-campus-based and part-time forms of learning and learning environments as well as supporting

networked research entities. This has encouraged the development of new approaches to the

teaching/learning/research relationship, and these, in turn, produce new and co-operative ways of working.

New ways of working increasingly involve greater specialisation, both of providers and the activities they

undertake, and support widespread linkages and co-operative relationships. Many of these relationships are

innovative and operate across traditional provider, organisational, and national boundaries.

Demographic change will also have a significant impact on the tertiary education system. As already identified

by the Commission,7 relevant changes are likely to include:

a continued decrease in the population that makes up the core age group for tertiary education until 2003,when it will begin to increase again;

rapid growth in the number of 10- to 16-year olds over the next five years particularly in Auckland;

continued increases in ethnic diversity and younger age structures, and accelerated growth of non-European

ethnic groups such as Maori, Pacific, and Asian peoples;

a large sustained increase in the proportion of older persons over the next two decades, including an

increase in numbers of older persons in the workforce;

2 Shaping the Strategy, p. 15.

3 The Treasury (2001b), p. 24.4 See, for example, Barro and Sala-I-Martin (1995), Gemmell (1997), Acemoglu (2001).5 For discussions of market failure in the tertiary education system, see Patrinos (1999).6 http://www.teac.govt.nz also available from the Commission on request.7 Shaping the System, pages 16 and 17.


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a continuing shift in employment away from the goods-producing sector; and

an increase in demand for skilled workers.

By 2016, nearly half of all learners and an increasing proportion of New Zealand's working-age population will

identify as being of Maori, Pacific, or Asian descent. New Zealand's economic and social success will be

influenced to a greater degree by their skill level. The tertiary education system is therefore likely to face a

continuing shift in the mix of its student population.

Progressively more learners are likely to re-enter formal learning environments throughout their lives. These

learners will not necessarily be looking for qualifications but for recognition of the learning gained through

work, cultural, and life experiences, and for opportunities to fill gaps in their knowledge and skills. These

trends bring pressure on the system to recognise learning that occurs outside of formal learning institutions,

and to recognise different cultural perspectives of learning and knowledge.

The Commission has recommended a more strategic approach to the organisation and operation of the

tertiary education system in order to address the trends8 affecting it, to provide system steering, and to

contribute to the achievement of national strategic goals and tertiary education priorities.

The national strategic goals identified by the Commission are: economic development, innovation, social

development, environmental sustainability, and fulfilment of obligations under the Treaty of Waitangi.9 The

priorities for the tertiary education system are:10

building the quality of learning while supporting New Zealands high levels of participation in tertiary

education;

focusing on the two ends (top and bottom) of the tertiary education system including:

- enhancing research quality and capacity, and linkages between tertiary researchers and the wider

community, which will promote effective and useful research that can enhance New Zealands social and

economic wellbeing; and- building stronger bridges into tertiary education, which will ensure that the tertiary education systems

potential to raise the quality of life for all people is fully realised; and

developing the skills and environment for a knowledge society to complement the first two priorities and to

ensure that New Zealands tertiary education system can effectively contribute to the development of social

and economic prosperity.

Addressing trends and achieving goals and priorities requires the effective use of a range of levers, of which

the funding framework will be one. It is not, however, the only lever that can be used to bring about change.

Other levers the Commission has already recommended include:

charters and profiles, to be used as a means of identifying and recognising the special character,

programmes, and activities of providers and the linkages with their communities of interest; and

a quality test, which determines whether a programme or activity is of sufficient quality; and a desirability

test, which determines whether the programme or activity is desirable or whether it contributes sufficient net

benefit to the country and to the tertiary education system.

Government funding accounts for the bulk of most providers total income. For this reason, the way that

funding is allocated and the constraints and rules around its allocation are extremely important. An effective

and efficient funding framework is one that enables the steering of the system to achieve the national strategic

goals and tertiary education priorities, encourages specialisation and linkages, and ensures accountability to

stakeholders.

8 Shaping the System, Chapter 3.9 Shaping the Strategy, p. 14.10 Ibid., pages 18 and 29.


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In order to enhance effectiveness, the funding framework must also be supported by appropriate incentives,

rewards, and sanctions. These could include changes to the other instruments to produce more stringent

quality-assurance and audit practices, improved decision making by both learners and providers, improved

governance, and more rigorous accountability regimes.

While the goals and priorities for the tertiary education system may change and develop over time and provide

other areas of focus, the funding framework must consider the varied purposes of tertiary education and the

needs of all stakeholders. The impact of funding (both public and private) on the viability, capacity, and

capability of individual providers, on the tertiary education system as a whole, and on the cost of learning for

students, are all major issues.

The Commission is aware that developing instruments to support a high-quality, strategically focused tertiary

education system may require trade-offs. These will need to be made in relation to the principles, objectives,

goals and priorities proposed by the Commission. Furthermore, with the resource constraints currently

operating on the tertiary education system, any trade-offs need to be transparent and defensible.

Any changes to the funding framework, therefore, must be managed in a way that ensures the achievements ofthe current funding systems are retained but that their weaknesses are addressed. The strengths and

achievements of the current system include diversity of provision, high levels of participation, high levels of

programme completion, and increased diversity of people participating in the tertiary education system.

Implementing a new funding framework must be done in a holistic way, with consideration given to the

dynamic impact of one areas changes on all other parts of the system.

Recommendation 1

The Commission recommends that a new funding framework for tertiar y education be developed to support the governments

strategic vision for the tertiary education system.


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Chapter 2: The Funding Framework Principles, Incentives andAssumptions

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 Commissions 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 Zealands

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 tertiaryeducation system.

New Zealands 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 Commissions 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, isnot 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.

11 Shaping a Shared Vision, pages 12 and 13.


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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 purpose

4. Financiamiento Educaciòn Superior Nueva Zelanda

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