doc. dr. milena bevc* funding, equity and efficiency of higher … · 2008. 5. 27. · ib revija...

IB revija 1/2008 UMAR 5

doc. dr. Milena Bevc*

Funding, equity and efficiency of higher education -Interrelationships between these phenomena and an

international conference on them

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Povzetek

Financiranje, pravičnost in eko-nomska učinkovitost visokegaizobraževanja so tri medsebojnopovezane razsežnosti tega izobra-ževanja, ki so v zadnjih dvehdesetletjih v Evropi in drugje posvetu deležne naraščajoče po-zornosti znanstvenikov in obliko-valcev politike. Analiza teh pojavov

ter povezav med njimi je jedro tegaprispevka in je bila tudi jedromednarodne konference o financi-ranju, pravičnosti in učinkovitostivisokega izobraževanja, ki je od21. do 24. novembra 2007 po-tekala v Portorožu. Prispevek sezačenja s predstavitvijo namena inciljev te konference, nadaljuje s

predstavitvijo vsakega od trehpojavov z uporabo enotnega pri-stopa (opredelitev pojava, njegovomerjenje, prikaz globalnih tren-dov). Na koncu pa poskušapokazati, kakšne so možnosti zamerjenje povezav med njimi.Konča se z glavnimi sklepnimiugotovitvami.

Summary

Funding, equity and economic ef-ficiency of HE are three mutuallyconnected phenomena that havebeen of increasing interest toscholars and policy makers dur-ing the last two decades in Eu-rope and elsewhere. Analysingthese phenomena and the rela-tions between them is the main

topic of this paper, and was alsothe main topic of the internationalconference "Funding, Equity andEfficiency of Higher Education",which took place in Portorož,Slovenia, 21-24 November 2007.The paper begins by presentingthe purpose and goals of this con-ference, and continues with a

presentation of each of the threephenomena using a joint approach(definition of the phenomenon, itsmeasurement, prevailing globaltrends). Finally, it tries to explorethe possibilities of measuring therelationships between them. Itends with some key conclusions.

Key words: higher education, funding, equity, efficiency.

Ključne besede: visoko izobraževanje, financiranje, pravičnost, učinkovitost.

JEL: I210, I220, I280


Bruce Johnstone*

Financing higher education:some special features of formerly socialist Europe

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Summary

Universities and higher educa-tional systems throughout theworld including in formerly Social-ist Europe are experiencing a fi-nancial dilemma as costs both tothe individual institution and tothe national system rise fasterthan the available public revenues.

The source of the dilemma is three-fold: (1) inexorably rising per-stu-dent costs; (2) increased demandfor university places; and (3) ris-ing competition for scarce publicrevenue from politically and so-cially compelling competing needs.Solutions involve some mix of low-

ering per-student costs (if possible)and supplementing public revenuewith tuition fees and other privatesources. The challenge is how tomaintain accessibility in the faceof almost inevitable rising ex-penses to both parents and stu-dents.

* State University of New York at Buffalo, USA1 Deficit financing, once at least a “fall back” method of raising public revenue, is highly constrained by the rules of the Euro

community.

1. Introduction

Underlying many of the financial issues in highereducation in all countries is the surging demandof the past three or four decades, driven by a beliefin higher education as a principal engine of socialand economic advancement, both for the individualand for the larger society and economy. Mostcountries in Europe (with some differences amongcountries in Western, Central, Eastern andSoutheastern Europe) and their higher educationsystems have grown, or massified, dramatically sincethe mid and late 60s, nearing in some countries apossible effective saturation, at least of the classicaluniversity form of tertiary education. Most countriesare still attempting to accommodate this increasingparticipation, possibly with some form of moreeffective sector diversification. Several countries, withlow or even declining birth rates and at or nearthis apparent saturation, are actually facing thepossibility of significant declines in enrollments,at least of traditional-age first degree students. Atthe same time, some of these same countries arestill struggling to accommodate the massificationthat has already happened (that is, to restore someof the former per-student revenues for theiruniversities and to “catch up,” as it were, on theenrollment surge that has already occurred).

This demand, whether still surging or “flattening,”is accompanied by the second element of highereducation’s financial dilemma, which is the rapidlyincreasing per-student cost pressures, fueled throughoutEurope and worldwide by a resistance of the highereducational enterprise to the kinds of ongoingproductivity enhancements typically associatedwith the goods-producing sectors of theindustrialized economies (mainly substitutingcapital for labor). At the same time, governmentsin nearly all countries seem increasingly unableto keep pace with these cost pressures throughpublic (that is, tax and/or deficit generated)revenues. This inability goes considerably beyonda mere unwillingness to tax. Taxation and evendeficit financing are nearly as difficult technicallyas they are unpopular politically.1 Globalizationand the virtually unlimited mobility of capital andproductive facilities leads multinational goodsproducers to seek a combination of politicalstability, low wages, and low taxes, which limitsthe ability of the advanced industrial countries tomaintain high taxes and thus limits the size of theirpublic sectors (including their publicly-financeduniversities). The so-called transitional countriesof Central, Eastern, and Southeastern Europe, longdependent on relatively easy value added taxes onstate-owned producers, have had to devise new

Key words: Higher education (or university) costs, cost sharing, tuition fees, access (or accessibility).

JEL: I210, I220, I280

20 UMAR IB revija 1/2008

means of taxation, none of which have beenparticularly successful. And to the extent that anyof these countries were able to increase their taxessignificantly (and to do so year after year), therewould remain all of the other compelling publicneeds (e.g. elementary and secondary education,ageing populations, unemployment and the needfor an economic safety net, public health, publicinfrastructure, and the restoration of theenvironment) that compete with higher educationfor these limited additional revenues.

What emerges from this confluence of (1) highand rapidly increasing demand; (2) commensu-rately high and rapidly increasing costs; and (3)increasingly limited public revenues are two large,complex, and interrelated issues pressing uponhigher educational institutions and governmentsworldwide. First, how can the demand for greater (but stillhigh quality) higher educational capacity be met at a lower per-student cost (especially at a lower per-student cost to the tax-payer)? The policy responses to this dilemma in-clude: (1) those that attempt to lower costs (e.g. merg-ing institutions for economies of scale, increasingstudent/faculty ratios, etc.); and (2) those that at-tempt to supplement limited public revenue with privaterevenue (e.g. with tuition, fees, philanthropic dona-tions, and institutional and faculty entrepreneur-ship). The higher educational reform agendas ofmost countries, including the mature economiesas well as the countries of the transitional and thedeveloping worlds, contain elements of both.

Second, how can higher education resist (and possibly reverse)its natural inclination to reproduce, and even to exacerbate,existing social disparities and inequalities, whether by parents’social class, ethnicity or kinship affiliation, language, region,or religion? Access to higher education everywhereis limited by the level and quality of the secondaryeducation, including whatever combination offamily cultural capital and private tutors canfurther enhance the academic preparedness of theaspiring student. Parental income is virtuallycertain to be a predictor of higher educationalparticipation, especially where means-testedfinancial assistance and generally available studentloans are limited or non-existent. And becauseparental income is generally correlated with whitecollar or professional occupation, membership ina dominant ethnic and linguistic group, and accessto the best secondary schools (that is, other predictorsof academic preparedness and ambition) higher educationcan reinforce and even accentuate existing socialstratification, even while some of the very brightestand luckiest of the poor or the rural or thelinguistic or ethnic minorities are able to use highereducation to escape from their social andeconomic marginalization.

2. Internal and external efficiency

Both parts of system of funding higher education– state funding of educational institutions and statefinancial support to students – have importantimpacts on both the internal and the externaleconomic efficiency of higher education. A verylow price of instruction (i.e. low or no tuition fees)does not stimulate students to efficient study. Incombination with fellowships as the only directstate financial support to students, such a systemresults in very high private returns to highereducation compared to social returns. Thus, theinternal economic efficiency, which includes theefficiency of study, or learning, is as a rule, low ininstitutions and countries without tuition fees. Inmany European former socialist countries, privaterates of return are high (and have been increasingsince the 90s) compared to social returns and alsocompared to the rates of return in the highlyindustrialized countries of the OECD.

3. Cost-sharing

Worldwide, the most common approach to theneed for increasing revenue is some form or formsof cost sharing, or the shift of some of the highereducational per-student costs from governmentsand taxpayers to parents and students. This trendin the mature economies can be seen in the highand rapidly increasing tuition fees in the US,Canada, Japan, Australia, and New Zealand; morerecently in the early beginnings of tuition fees inthe West European countries of UK, Portugal, TheNetherlands, most recently (2001) Austria and(2006) Germany (some Landers); and finally inthe so-called dual track tuition fees of post-CommunistRussia, Czech Republic, and other East and CentralEuropean countries.

The economic rationale behind the case for studentsbearing a portion of the costs of their highereducation is that there are substantial privatebenefits, both monetary and non-monetary, thataccrue to the student from higher levels of educationand that these benefits justify a tuition, especiallyone that can be deferred and repaid through someform of loan or a surtax upon income or currentearnings. The case for parents bearing a portion ofthe costs of their children’s higher education (viaan up front tuition, but almost always with the caveatof means-testing, or the presumption that theparents actually have the financial ability to pay)is driven partly by the same assumption of privatebenefits extending to the parents, reinforced bythe fact that parents all over the world do pay, and


partly by the aforementioned fact that public needsseem almost everywhere to be outrunning theavailable public revenues. Thus, there seem to befew alternatives to some tuition fees (short ofdenying the universities the revenue that they seemto need and losing either higher educational qualityor higher educational capacity or both) to theprincipal detriment of the poorest or mostmarginal students, who have such limited options.In fact, at least in the abstract, most economistsmaintain that some tuition fees—assuming somemeans-tested grants and/or sufficient availablestudent loans—is actually more equitable than freehigher education in that students everywhere aredisproportionately from the middle and upperclasses and the taxing systems in most countriestend to be proportional or even regressive.

Europe remains the last bastion of genuinely freehigher education, although three decades ofmassification, overcrowding, persistent under-funding, and the generally slow economic growthof the 1990s have been placing great pressures onthe universities for alternative revenue sources. TheUK throughout most of the 90s dramaticallyreduced its once very generous student grants, andin 1997 for the first time imposed a tuition fee(interestingly, under a Labor Government),although this “up front” tuition fee has since beenconverted to a deferred tuition, not unlike theAustralian Higher Education ContributionScheme, which is repaid through a surtax on theincomes of graduates after their incomes exceed athreshold level.2 France in the early years of the21st century continues to provide nearly freeuniversity education to every graduate of theiracademic secondary schools, but Austriaabandoned free higher education in 2001 andGermany offered possibility to introduce tuitionfee in 2005; many observers believe that the restof the continent will one day follow.

The US presumes both a parental contribution basedupon the income and some of the assets of theparents (which necessitates some way to testparental means, or financial need) and a studentcontribution, either from loans or term-time orsummer earnings. Scandinavia officially rejects theproposition that parents should be financiallyresponsible for the higher education of theirchildren, but it accepts the notion of a studentresponsibility for living expenses, born by extensivestudent loans. Russia, along with most of the rest

of the countries of the former Soviet Union, andmost of Eastern and Central Europe (all of whichhave political/ideological legacies of highereducation as another entitlement) albeit one thatthe governments can no longer afford to honor—attempt to have it both ways, with regular, orgovernmentally-sponsored, students entitled to atraditionally free higher education (presumablyselected by competitive examinations), but allothers charged tuition.

4. Sector diversification

A related issue, still largely financial, in highereducation is the form and extent of sectordiversification, or the creation and effective use ofshorter cycle, more accessible, and morevocationally-oriented alternatives to long (3 or 4to 6 or 7 year) first degree associated with theclassical, research-oriented university. Thesealternatives—such as the German and AustrianFachhochschulen, the Dutch HBOs, the FrenchIUTs (Institutes Universitaires Technologies), theJapanese public and private junior colleges, andthe American community colleges (to which mostUS higher educational observers would add thepublic and private four year and comprehensivecolleges and universities)—attempt to providetertiary level education that is shorter in term, morepractical, less academically rigorous, and lesscostly.

Some countries, such as Spain and Italy, haveresisted the non-university movement altogether.Britain actually erased what was once a clear binaryline dividing the classical research universities, bothold and new, from the non-university polytechnicsand now exhibits the research drift so prevalent inthe US, where colleges and universities that oncefeatured bachelors and master degrees and ateaching emphasis now strive toward research andadvanced degrees. Sector diversification willcontinue to meet resistance from universitystudents and faculty, who frequently see alternativesto the classical university as lower in status anddesigned mainly to track less well-prepared students(therefore more likely to be from poor or otherwisemarginalized families) into forms of tertiaryeducation that will limit their opportunities.Nevertheless, sector diversification will likelyremain prominent on the agenda of internationalhigher education reform.

2 Interestingly, what appears to be an unintended consequence of the UK’s shift from an up front to a deferred tuition fee is nota shift back to governmental funding, but a transfer of cost burden from the middle and upper middle class parents (lowincome parents did not have to pay the means-tested up-front tuition fee) to all students.


5. Private higher education andprivatization of public highereducation

Private higher education has always been importantin the US, as it has been in much of East Asia andLatin America and is rapidly emerging (albeit invery fragile forms) in Russia and the other newlyindependent countries of the former Soviet Union.This importance can be quantitative, or demandabsorbing, as in the relatively low cost, less selectiveinstitutions of Philippines, Japan, Korea, Thailand,Brazil, and elsewhere in Latin America that permitthe maintenance of a smaller, costlier, moreselective, and generally more elite public universitysector. Such private institutions are typically highlyresponsive to the market—that is to the interests ofboth students and their potential employers (e.g.featuring business, computer science and Englishlanguage instruction). Or as in the United States,but less often in the rest of the world, they can beelite and leading edge. (The US also has asignificant number of the low-cost, non-selective,private non-profit colleges, as well as a large, non-selective, proprietary or for-profit, sector).

Considerably more significant in Europe than therise of privately owned institutions of highereducation is the privatization of the public institutions:e.g. charging tuition fees and encouragingentrepreneurship on the part of institutions andfaculty alike, granting increased autonomy toinstitutional management (and diminishing theinf luence of the faculty), and taking on privatesector norms such as marketing and the emphasison accountability. The issues emerging fromprivatization include all of the controversiesassociated with cost-sharing plus the issuesassociated with the clash of traditional academicvalues and faculty authority and the newermanagerialism.

6. Globalization and the conformanceof academic standards

Globalization refers to an internationalization ofproduction, of capital (and therefore the ownershipand control of this production), of informationand knowledge, and of culture itself. Globalizationis often associated with the worldwide ascendancyof market capitalism and a perceived increasinghegemony of the OECD nations, and in particularof the United States and the other English language-speaking countries. Higher education is animportant engine of globalization, and is in turnprofoundly affected by it. The modern university

is among the most international of all institutions,and research and scholarly creativity, especially inscience and technology, are among the mostinternational of human endeavors. At the sametime, critics decry the extent to which globalizationweakens local culture, literature, and language, andthe intentional or unintentional complicity ofhigher educational institutions in this process.Finally, even as globalization generates wealth, italso diminishes the ability of states and othergovernmental units to tax that wealth, thusdiminishing the sectors—including public highereducation—that depend financially upon publicrevenue.


Lorenz Lassnigg*, Martin Unger**

Funding higher education - where is Austria going?

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Summary

The paper describes the new sys-tem of funding Austrian universi-ties, which is mainly based on per-formance agreements. Secondly,the consequences of the old fund-ing system with restricted publicbudgets in times of a "massifi-cation" of university educationand an open access policy aredescribed. Equity in access is dis-

cussed under these conditions,resulting in a very unequal sys-tem mainly due to the strong so-cial selectivity of the school system.Moreover, reforming the open ac-cess policy will be at the top of thepolitical agenda in the near future.We conclude that the new systemof funding follows in its core theold culture of negotiation, because

objective criteria are rarely takeninto account. Most of all this is truefor the research performance ofthe universities. Overall, the effi-ciency of the system is hard tojudge because relevant data islacking. This won't change muchin the near future.

* Institute for Advanced Studies, Vienna** Institute for Advanced Studies, Vienna

1. Introduction

The Austrian system of higher education providesa unique case in some respects: a recent reformhas changed a very highly regulated, traditionallystate-financed, input-oriented system to a systemrelying on autonomous institutions. The fundingof higher education is comparatively low, despitecomparatively high overall education and trainingexpenditure. Efficiency is not controlledsystematically, and existing indicators point torather low efficiency. The dropout rate has beenone of the highest, and study duration is very high.The admission system is still based on the right toa study place acquired by a matriculationexamination at upper secondary school. Theuniversities are in general not allowed to restrictstudy places, and thus are in different proportionsovercrowded. In terms of equity, there areindications that the system is quite unequal interms of social background, and except for thegender proportion, strong inequality persists.Austria agreed to join the Bologna process earlyon; thus the study structure is in the process ofchange as well, which opens many questions aboutthe consequences of these changes. Recently thefirst graduates of bachelor’s studies have reachedthe labour market, and their pathways into furtherstudies are not clear so far.

The paper is based on some in-depth analyses aboutthe comparative financing of higher education(evaluation of OECD indicators), a comparativecase study about costs and results of individualuniversities, a comparative study of admissionmechanisms to higher education, and a set ofrepresentative student surveys focusing on thesocial study conditions (see Lassnigg, Steiner 2003,Unger et al. 2005, 2006, Lassnigg et al. 2007, HIS2005, Unger, Wroblewski 2007).

2. System of funding

In the past the system of funding was based on acameralistic system, with predefined budgets forthe universities. Recently the universities have beengiven a high level of autonomy, and they arefinanced mainly on the basis of a performanceagreement (Leistungsvereinbarungen), with 20% basedon a set of indicators (Formelbudget). Teaching andresearch funds are not separated in the universitysector, and the teaching load is not identifiable.

Performance agreements (80% of total university budget)For the first time, performance agreements betweenthe Ministry and the individual universities weresigned at the end of 2006. They cover the period2007–2009. The agreements describe the status

Key words: Austria, funding, equity, efficiency.

JEL: I280


quo in teaching and research and the intendedprojects for the next three years in several areaswith reference to the university development plans(see Table 1). The universities receive a lump sumfor the achievement of the whole performanceagreement. There is no money allocated toparticular aspects of the contracts. Only the futureprojects are quantified with indicators (like thenumber of additional professors) and given a fixeddeadline for their achievement. The next periodof performance agreements will take into accountwhether or not the universities fulfilled all pointsin the foregoing agreement. However, it is not clearhow this will be assessed and how over- andunderachievements in certain points will be tradedoff. Moreover, most of the deadlines in theagreements are set for 2009, but as negotiationsfor the next period of performance agreementsshould be finished by 2009, their achievementcannot be taken into account.

In the agreements there is no connection to thenumber of students; only the subjects and the type

Topics of performance agreements Example of the University of Vienna

1. Human resource development Increase in number of professors and doctoral students

2. Research Implementation of research foci, interdisciplinary research platforms,increase in third-party funded research

3. Teaching Improved supervision of theses, implementation of the Bologna structure,expanded e-learning offers, expansion of courses for further education

4. Social objectives Increase in number of female professors, measures for supporting scientificcareers of females

5. Internationality and mobility Increased participation in EU funded projects, increase in number of jointdegree programmes, rising mobility of students, cooperation in teaching

6. Special units University sport: rising number of participants

Source: University of Vienna (Mitteilungsblatt No. 99, 22.3.2007).

Table 1: Coverage of performance agreements and intended projects of the University of Viennaas an example

of degrees offered in each subject are fixed. How-ever, the University of Business Administration,for example, signed the contract with the reserva-tion that it can only fulfil it if the number of in-coming students does not rise. Moreover, its agree-ment contains an estimation of future students inthe newly established master’s programmes. Ifmore students decide to continue with a postgradu-ate programme (access is not limited by law), theuniversity will not be able to fulfil the agreementcompletely. Even more, the estimates of the uni-versity (which are part of the contract) assume adropout rate of 65% – like the current one.

Indicator-based allocation of funds (20% of total universitybudget)Twenty percent of the total university budget isallocated according to an indicator-based system.All parties, the ministry and the universities, agreedon a set of 11 indicators and a very complicatedformula of budget allocation based on theseindicators (see Table 2). In general, the systemtakes the status quo of the universities’ funding

Table 2: Indicators used for the allocation of 20% of the total university funds

Indicator Weight

1. Number of active students in BA, MA and diploma studies within the official study duration according to the curricula (plus a grace period) 15%

2. Number of graduates in BA, MA and diploma studies 10%

3. Proportion of graduates within the official study duration according to the curricula (plus a grace period) 10%

4. Success rate of students in BA, MA and diploma studies 10%

5. Number of graduates in doctorate and PhD studies 15%

6. Income from research projects funded by the Austrian Science Fund or the EU 15%

7. Income from research projects funded by other sources 15%

8. Proportion of female professors 6%

9. Number of female graduates in doctorate and PhD studies 1%

10. Number of students participating in exchange programmes (outgoing) 2.5%

11. Number of first-time enrolled students in MA, doctorate and PhD studies without a prior degree from Austria 0.5%

Source: BMWF (Verordnung über das formelgebundene Budget der Universitäten, BGBl. II No. 120/2006).


into account, as well as the size of the universitiesand the improvement of the indicators versus aprior reference period and versus all otheruniversities.

Indicators are weighted for the field of study andtype of degree, and are standardised according tothe size of the university. Scores are calculatedwith a sigmoid function for each indicator, mostlytaking reference values from prior periods intoaccount. The points per indicator are then weightedaccording to the share listed in the table aboveand summed for each university. Finally, the totalscores are standardised according to the size ofthe university, and the overall budget is divided bythese standardised total score points among theuniversities.

This complicated formula was developed toestablish a fair system, which takes into accountthe different situations of, for example, universitiesof medicine or the arts. However, the formula isso complicated that the result is again a non-transparent system of budget allocation. Severaluniversities were surprised when they saw theresults. They expected an increase in their budget,but the result was a decrease (which is capped).Therefore, the ministry has already announced anevaluation of the formula.

Moreover, the complicated formula does not allowfor calculating the value of each indicator inmonetary terms. For example, if a universityincreases the proportion of female professors(indicator 8), one does not know how much moneyis allocated for this. This makes internal processesin the universities more difficult, and theadministration can hardly award additional moneyfor certain achievements of sub-units, likeadditional funding for an institute that appoints afemale professor.

Another criticised point is the benchmarking ofthe current situation with the prior period.Improvements should be rewarded and standstillsor declines should result in budget cuts. However,the University of Business Administration, forexample, claims to have been operating at the limitsof its capacity for several years already. Therefore,improvements are not possible anymore in theiropinion. Of course, single indicators are criticisedas well: to take only students within the definedstudy duration into account, for example, leads todifferent results according to the amount of de factopart-time students (officially there are only full-time students). Several subjects are more easilycombined with student jobs or are more attractivefor continuing education of the work force thanothers. Therefore, the average amount of time spent

by students for their studies per week variesbetween the universities, as does the proportionof students finishing in the intended period of time.

Apart from the lump sum of the university budget,there is a separate system of funding for additionalresearch, which is very complex, due to differentkinds of research (academic, applied, development)situated in different institutions and ministries.Thus, the financing of the services of universitiesis hardly transparent either.

A second and very much smaller sector of highereducation, the universities of applied sciences(Fachhochschule), is organised on a very differentbasis: an accrediting council selects andperiodically re-evaluates programmes, and fundingis provided by the federal government on a perstudent ratio which is carefully monitored. Thefederal government admits a certain number ofstudy places per programme and funds 90% of eachplace. The amount differs by subject, but it doesnot include the cost of the infrastructure. Theproviders of the programmes have to make do withthis amount of money or raise additional funds(at least for the infrastructure). They are alsoallowed to accept more students than the federalministry admits, but without federal funding.Mostly the necessary additional money is paid bythe provincial governments, which are in mostcases the providers of the programmes. Tuitionfees are allowed up to the amount charged by theuniversities (less than € 400 per term), but in threeof the nine provinces, the institutions do not chargefees. Originally, it was hoped that this new fundingsystem might raise more private money, especiallyfrom the business sector. In fact, it brought up theprovinces as new players in the higher educationsector and therefore resulted in “different” publicmoney instead of notable private funds (Lassnigg,Unger 2006).

3. Consequences of restricted publicbudgets for higher education

Because of the missing regulation of study places,the increase of student numbers since the 1970shas not been matched with additional funds; thus,as in most other countries, the per capita fundingwent down (in real terms).

In Austria, this was to some extent hidden by threefacts: first, little or no study activity of a highproportion of the counted student population. Aretrospective analysis estimated that around 25%of university students included in the statistics forthe year 2000, the year before the introduction of


fees, were inactive (Pechar, Wroblewski 2002).Therefore, “real” conditions in many areas differedvery much from the “official” indicators.

Second, no formal part-time status exists, but forexample, more than 60% of students work duringthe term (Unger, Wroblewski 2007). Therefore,the per capita number of enrolled students differsgreatly from the number of full-time equivalents,which is not precisely calculable. However, morethan 40% of students spent less than 30 hours perweek on their study in 2006 (ibid.), a number thatprovides an indication of the potential part-timers.

Third, following from the high proportion ofhidden part-timers, the average duration of studyis very high in Austria. According to OECD data,the average duration of tertiary type A programmeswas 5.6 years in Austria. Only in Germany (6.6)and the UK (5.9) is the average duration of studylonger; the OECD average was 4.4 years (OECD2006). Based on these figures, it may make senseto compare the cumulative expenditures perstudent over the average duration of studies insteadof the annual expenditure. According to thisindicator (OECD 2006), Austria spends morethan most of the OECD countries for which dataare available. Only Switzerland and Sweden havehigher expenditures on tertiary education.

Nevertheless, a high proportion of a university’sbudget is spent for staff. However, the number ofscientific personnel could keep up even less withthe growth of student numbers. Currently, thereare 4.5 times more students enrolled in Austrianhigher education institutions than in the year 1970,and the (nominal) budget increased by around fourtimes, but the number of academics has onlydoubled in the same period (Pechar 2007).Moreover, the allocation of academics was asobscure as was the allocation of funds within theold system. Therefore, the ratio of students peracademic shows the results of a system with openaccess and non-transparent and inadequate fundingof the growing number of students.

While in some, mainly technical, subjects the ratioof students per academic is average in internationalcomparisons, there are also the so-called “masssubjects” with ratios of more than 400 studentsper professor. In fact these constitute only a handfulof subjects, but the majority of students areenrolled in these subjects. Pechar (2007) calculatesthat 30% of all university students are enrolled insubjects with an “extremely unfavourable” ratioof 50 or more students per academic, and a further25% of all students are enrolled in subjects withan “unfavourable” ratio of 37 or more studentsper academic. Even if one took the proportion of

part-time students into account and estimated full-time equivalents, the picture would still beunfavourable in several subjects.

A very intense comparison of institutional budgetssupports this argument (Unger et al. 2005): TheTechnical University of Vienna (which is notovercrowded in most areas) has a similar budgetper student available and a similar ratio of studentsper academic as the Technical University ofDarmstadt in Germany. However, both universitieslag far behind the financial situation of the ETHin Zurich. The situation of “full universities”(excluding medicine) is quite different: on average,the budget of the University of Vienna is far belowthe budget per student of the universities in Munichand Zurich, as is the ratio of students per academic.However, a look at sub-units shows that the financialsituation of the University of Vienna differs nottoo much from the situation of the University ofMunich, apart from humanities, social sciences andeconomics – areas with vast numbers of students.Here again, the gap between the Austrian and theGerman universities versus the University ofZurich remains large in all subjects. Theexpenditures per graduate, however, differ muchless among the analysed universities. A comparisonof business schools showed similar effects (Ungeret al. 2006): the expenditure per student at theUniversity of Business Administration in Vienna(WU) is similar to the one at VSE in Prague andthe Faculty of Economics at the University ofHamburg, but far less than at the CopenhagenBusiness School (CBS) or the Faculty ofEconomics at the University of Zurich. On theother hand, only Zurich spends more per graduatethan Vienna.

In a word, the funding of universities has beenvery opaque, and the available data have notallowed for a sound monitoring of it. Differentindicators show very different results. Some reasonsfor this are the many de facto part-time students, alonger study duration and a high dropout rate. Thefunding situation differs very much among thesubjects. Only a few subjects face severe financialproblems; however, these are the subjects whichenrol a majority of the students. The situation mayimprove with the new budget allocationinstruments, but they involve mechanisms toprevent financial shocks for single institutions dueto a cap of maximal budget cuts; therefore, thereallocation of funds will take time.

Concerning research funds separate from highereducation funding, there has been a long-standingassessment of very low research expenditure inAustria. However, more recently, research hasdiscovered a quite substantial amount of research


funding, which had been hidden before. Asupplemental funding offensive for research hasimproved the proportion substantially since theyear 2000. These funds are raised mainly by theentrepreneurial sector.

4. Cost-sharing

Due to the OECD figures, the funding of theAustrian system is almost totally public. Privateexpenditure covered 7.3% of the total expenditureon educational institutions in 2003 – this figurenearly doubled compared with the preceding years.The OECD average was 24%; in Japan and Koreaprivate expenditures covered 60% to 77%, and inthe United States 57% (OECD 2006).

Private money is particularly collected in two areas:first, since 2001 relatively small tuition fees arecollected (below € 400 per semester), and second,the private sector contributes mainly to appliedresearch. However, these funds are not formallyincluded into the university budget, and much ofthe funds goes to non-university researchinstitutions. Thus in many areas there is a more orless deep cleavage between academic research onthe one hand, and applied research anddevelopment on the other. The Austrian privatesector is particularly reluctant to finance researchin higher education.

However, an evaluation of OECD indicators showsthat the figures about private funds are hardlycomparable, and Austria is lagging behind theshares of private funds in most countries (Lassnigg,Steiner 2003). Totally missing are opportunitycosts, which, however, matter very much when itcomes to equity questions.

Attempts to increase private fundsIntroducing tuition fees has been one attempt toincrease private funds. This issue has been contestedvery strongly in the political arena; however, thecurrent government has also retained them.

Other attempts have been initiatives to raise moreprivate money for research and to increaseinteraction between academic research and appliedresearch. Different kinds of programmes have beenset up for joint research and development centresbetween university institutes, non-universityresearch centres and enterprises. Some of theseprogrammes have formed rather large and high-quality research and development centres basedon academic quality assessment procedures.

5. Equity in access

Equity in access has been a more or less neglectedissue in Austrian higher education. The system isnominally “open”, as there have been norestrictions to access, which is conditional onlyon holding the Austrian matriculationexamination. Selection is performed mainly by theschool system, which is tracked after grade four(age 10 of pupils) in upper-level and lower-levelprogrammes. There is also a strong social bias inthe selection of school careers: as the recent censushas shown, only 12% of pupils from a lowereducational background compared to 77% ofchildren from parents with a university degreeattend a college-preparatory secondary school atthe age of 12 (Bauer 2005). In other words, yourlikelihood of attending an upper-level programmeis six times higher if your parents finisheduniversity, compared to children from parents withonly a compulsory school certificate. Even more,according to PISA studies, the performance ofpupils in Austria depends very strongly on theeducational background of the parents. In reading,for example, the influence of the social backgroundis the strongest among all EU countries (Breit,Schreiner 2006).

The social selectivity of the education systemcontinues in the tertiary sector. A recent studentsurvey confirmed earlier studies on this issue:Unger and Wroblewski (2007) calculated a so-called “recruiting quota” that shows the numberof incoming students according to their fathers’educational level per 1,000 men in the populationwith the same educational level. If the student’sfather finished an apprenticeship, the recruitingquota is 7.9. If the student’s father is a universitygraduate, the quota is 42.9 – more than five timeshigher. For a simpler description, the populationis divided into two groups, fathers with and fatherswithout a matriculation certificate (Matura, Abitur).The quotas are then 33.2 and 10.7 in favour of themore highly educated fathers (pictures for students’mothers are similar). According to this simplifiedindicator, children from higher social classes areover-represented threefold at the universities.

This ratio was even higher several decades ago,but has ceased to change over the last decade. Theintroduction of tuition fees in 2001 led to an overallreduction in the number of incoming students fortwo years (in accordance with economic predictionsabout this), which was, contrary to all fears, notsocially selective according to the recruiting quota.Meanwhile, the same number of new studentsstarted courses of university study as before the


introduction of fees, and enrolment at theuniversities of applied sciences even increased.

The situation at the universities of applied sciencesis a bit less socially selective. Here, fathers with aMatura are “only” over-represented twofold amongincoming students, although the sector does notfollow an open access policy and each institutionselects its students according to its own criteria.Because this sector has been in existence only 13years and is still expanding, the social selectivityof the total higher education sector is reducingslightly. Currently, more than a quarter of allbeginners start at a university of applied sciences,and there are plans to further increase thisproportion.

However, comparative assessments have shown thatthe Austrian system is relatively inequitable,despite its so-called “open admission”. The lastedition of the Eurostudent report (HIS 2005), forexample, presents the ratio of students’ fathers toall men of corresponding age groups with highereducation. This ratio is 2.6 in Austria, 2.2 inGermany, 2.0 in France, 1.7 in Italy and Finland,1.6 in the Netherlands, 1.5 in Spain and 1.1 inIreland (an indicator of 1.0 would show a sociallyequal distribution). Only in Portugal is the ratiomuch higher (5.4), but partly this is affected byvarious data problems. Usher and Cervenan(2005) published an Educational Equity Index(EEI) for universities based on a similar indicator.Austria, with an EEI score of 38, ranks in 12th

place out of 13 countries. The Netherlands is themost equitable country, with an EEI score of 67.

As the European Court decided in 2005 that“open admission” must also be applied to non-Austrian EU citizens, big debates about theadmission system have come up, and universitiesclaim the right to select students. Some pilotprogrammes have been installed in certain studyfields, for example, medicine. Here, the universitiesare now allowed to limit the study places and selecttheir students themselves.

The Austrian Rectors’ Conference (UniversitiesAustria) has launched a big research project toassess the admission system and to come up withalternative solutions (Badelt et al. 2007). Withinthis project, Lassnigg et al. (2007) looked at thesocial selectivity of different admission systems inseveral countries. Apart from the fact that there ishardly any international comparative literatureabout this issue, the first finding was that the effectsof admission systems have to be analysed in thecontext of the whole system (including e.g. fees,

grants or other supportive measures like taxreductions or child benefits). However, the prior“education pipeline” (and its selectivity) is themost important factor. International studies (e.g.Usher, Cervenan 2005) have shown that systemswhere the admission to higher education dependson an entitlement of the school system (e.g.Germany, Austria) show the worst results withregard to social equity. In this sense, the open accessto Austrian universities is far away from beingopen to anybody. Instead, it could be called asystem with open access for the privileged.

However, the consequences of the subliminaldiscussion about reforms of the admission systemare not easy to foresee at the moment. In general,equity issues have gained importance in publicdebate with the PISA results and swap from timeto time with the universities. However, mainlytuition fees are discussed and contested under theequity topic.

6. Economic efficiency

Internal economic efficiencyWe can rate internal economic efficiency as notvery good because of the lack of transparency forboth input and output. The issue is furthercomplicated by the bulk of recent changes. Thereis particularly a lack of information about theextent to which the infrastructure is really used bystudents and by the lack of information about theresearch activity and output of the staff.

Because of the high drop-out rate and the longstudy duration in the past, even the relatively lowbudget does not indicate a high degree of internalefficiency. Particularly if we calculate costs pergraduate, based on the average per studentexpenditure, this indicator is very high.

On the other hand, some more in-depth studiesabout research efficiency have obtained a relativelyhigh efficiency.

External economic efficiencyBecause of a lack of income information, there isnot much evidence about the external efficiencyof Austrian higher education. The individual ratesof return of Austrian education and training areaverage, whereas there are indications that thesocial rates of return are comparatively low. Somesimulations indicate that the public costs are toohigh; however, this might result rather fromschooling than from higher education.


7. Planned and required changes

The first change is full implementation of thereform of the university sector. In terms offinancing, the first round of performanceagreements has just started, and information aboutthe achievement indicators will soon be available.This will bring to light whether or not the reformmight really improve efficiency.

A second change which can be foreseen is reformof the admission system. There are no clear plansat the moment; however, much points to thedirection that the universities will get somediscretion in selecting their students – maybe inPhD or master’s programmes firstly. A study aboutthe equity implications of admission systemsmainly pointed out that massive and clearly targetedsupport programmes for applicants with adisadvantaged background are a main ingredientfor improving equity (Lassnigg et al. 2007).

A third issue is how the system of grants is working,and might work under new conditions of admission.Available studies point out that the existing systemof grants might be too broadly dispersed to morewealthy parts of the population, and not generousenough for the part of the population really inneed of support. However, results of research alsoshow that financial compensation is a necessarybut not sufficient means for improving equity(ibid.). Much broader measures are needed, whichalso include the responsibility of the highereducation institutions for improving equity.

A final issue, which is most difficult to point outnow, is the impact of the new Bologna structureon financing and equity. It will be interesting tosee how the recent priorities about the socialdimension of the Bologna process, as signed bythe ministers at their London meeting in May 2007,will be implemented in Austria: “Nationalstrategies and policies for the social dimension,including action plans and measures to evaluatetheir effectiveness” (London Communiqué 2007).

8. Conclusions

Major reforms have taken place in the Austrianhigher education system during the past years,starting with the universities of applied sciencesas a new sector in 1994 and continuing with a newuniversity act in 2002 which gave the universitiesfull autonomy and a new system of funding,implemented for the first time in 2007. The oldcameralistic system of funding has been criticisedof being non-transparent and based on having the

right contacts in policy and administration. Thisculture of negotiation was replaced by a twofoldsystem consisting of performance agreements anda smaller part based on indicators. However, theuniversity budget is allocated as a lump sum andno single performance indicator is valuated inmonetary terms. Even the main services of auniversity, teaching and research, are not separatelyfinanced. Neither does the system take thecapacities of the universities, e.g. in the form ofstudy places, into account. Apart from a fewexceptions, a policy of open access to all universityprogrammes is still the case. In a generalisedmanner, one can say the old culture of negotiationhas mainly been replaced by a different culture ofnegotiation. Transparency of results is better thanbefore, but still only in a much-aggregated way.

In addition to this, performance in research ishardly taken into account. Only the income ofthird-party funded research projects has a weightof 30% in the indicator-based part of the universitybudget, which allocates 20% of the total budget.Academics spend up to half of their working timefor generally funded research – according to theirown answers in the surveys of Statistics Austria.This is not yet considered adequately within thefunding system, nor are the outcomes of thisresearch evaluated by other measures – apart frominternal evaluations of the universities.

The open access of the university system is aeuphemism. Due to the strong social selectivity ofthe school system, one might better talk about openaccess for the privileged. Research shows that onlymassive direct interventions and support strategiespromise to have positive effects on the reductionof social selectivity. However, the institutionsthemselves have a responsibility for the socialcomposition of their student body – even more, ifthey are to be granted the right of regulating accessto their studies themselves.

It is hard to say anything about the efficiency ofthe system in the given situation, be it internal orexternal efficiency. Because efficiency played nosignificant role in the debates of the last decades,a great deal of important data and information ismissing for a well-founded judgement.

References

Badelt C., Wegscheider W. & Wulz H. (eds.),Hochschulzugang in Österreich. Graz: Leykam.

Bauer A. (2005). Volkszählung 2001:Soziodemographische Determinanten derBildungsbeteiligung. In: Statistische Nachrichten 2/2005 (pp. 108–120). Statistik Austria, Vienna.


Breit S. & Schreiner C. (2006). SozioökonomischeHerkunft und Schulleistung. In: Haider G. &Schreiner C. (2006). Die PISA-Studie. ÖsterreichsSchulsystem im internationalen Wettbewerb. Wien:Böhlau.

HIS (2005). Eurostudent Report 2005. Social andEconomic Conditions of Student Life in Europe 2005.Synopsis of Indicators. HIS. Hanover.

Lassnigg L. & Steiner P.M. (2003). Die tertiärenBildungsausgaben Österreichs im internationalenVergleich. IHS research report. Vienna.

Lassnigg L. & Unger M. (Eds.) (2006),Fachhochschulen – Made in Austria. Review desneuen Hochschulsektors. Münster, Wien: Lit-Verlag.

Lassnigg L., Unger M., Vogtenhuber S. & ErkingerM. (2007). Soziale Aspekte des Hochschulzugangsund Durchlässigkeit des Bildungssystems. In BadeltC., Wegscheider W. & Wulz H. (eds.),Hochschulzugang in Österreich (pp. 361–477). Graz:Leykam.

London Communiqué (2007). Towards theEuropean Higher Education Area: responding tochallenges in a globalised world. Communiqué ofMinisters competent for Higher Education in thecountries participating in the Bologna Process.Accessible at: http://www.dfes.gov.uk/londonbologna/uploads/documents/LondonCommuniquefinalwithLondonlogo.pdf.

OECD (2006). Education at a Glance. Paris.

Pechar H. & Wroblewski A. (2002). RetrospektiveSchätzung studienaktiver Studierender anUniversitäten der Wissenschaften für den Zeitraum1996/97-2000/01. Research report for the BMBWK.Vienna.

Pechar H. (2007). Der offene Hochschulzugang inÖsterreich. In Badelt C., Wegscheider W. & WulzH. (eds.), Hochschulzugang in Österreich(pp. 21–81). Graz: Leykam.

Unger, M. & Wroblewski A. (2007). Studierenden-Sozialerhebung 2006. IHS research report. Vienna.

Unger, M., Schmutzer-Hollensteiner E., Bönisch M.,Vogtenhuber S. & Lassnigg L. (2005).Finanzvergleich von Universitäten in Zürich,München, Darmstadt und Wien. IHS researchreport. Vienna.

Unger, M., Vogtenhuber S., Bönisch M, Pichna M &Erkinger M. (2006). Finanzvergleich vonWirtschaftsuniversitäten in Zürich, Hamburg,Kopenhagen, Prag und Wien. IHS research report.Vienna.

Usher, A. & Cervenan, A. (2005). Global HigherEducation Rankings 2005. Toronto, ON: EducationalPolicy Institute.


Astrid Schwarzenberger*

Funding higher education in Germany:raising the issue of efficiency and equity

........................................................................................................................................................................................................................................................................................

Summary

The allocation of public funds tohigher education institutions inGermany has been reformed soas to increase the institutions'efficiency. More recently, a sourceof private funding for highereducation institutions has beenadded in the form of tuition fees.This development will have its ownimpact concerning discussions on

the efficient use of the fees. Theintroduction of tuition fees hasalso given rise to much publicdebate about the extent to whichstudents should take on a shareof the costs of higher education,and how far this could mean adamper on equity in participationin higher education. Even beforethe introduction of tuition fees,

participation rates were far frombeing equal regarding studentswith different socio-economicbackgrounds. Tuition fees andcurrent reforms (bachelor's/master's structure), as well as newfunding criteria are not likely toimprove this situation.

* Higher Education Information System (HIS), Hanover, Germany

1. Introduction

Efficiency has so far been discussed mainly in thecontext of the efficiency of the system throughwhich the state allocates funding to highereducation institutions. By now, all 16 Germanfederal states (Länder) have reformed theirrespective funding systems to promote greaterefficiency, as will be explained in the first part ofthis paper. Besides, the very recent introductionof tuition fees as a new source of funding in someof the Länder will also be presented; thisdevelopment has greatly fanned the discussion onhow much (if anything) a student should contributeto funding his/her studies, and how socialexclusion could be prevented. The existing formsof state support – many of which are intended tomake up for financial disadvantages experiencedby some students – are laid out in the secondsection, and the third chapter explains thedifferences in cost-sharing that can be observedbetween students from different social back-grounds, and their implications for equity. Thefourth part takes a look at the impacts that currentreforms – including those in higher educationfunding – might have on equity in participation inhigher education, and the paper closes with a

reference to research aimed at finding out moreabout differences in cost-sharing.

2. Funding of higher educationinstitutions

2.1. State funding

Each of the 16 German federal states (Länder) hasjurisdiction over higher education matters withinits realm – and can therefore determine how itsrespective higher education institutions are to befunded. Although the Länder are essentiallyimplementing the same reform programmes, theirrespective funding models ref lect the regionalcontext and their specific political agenda.Therefore, there is a great variety of differentsolutions: “the” German higher education system,in fact, offers 16 variations of play, which makesGermany a particularly interesting case study.

Concerning the state funding of higher educationinstitutions, this contribution will focus on anupdated comparative survey by HIS of the fundingand steering systems being applied in the GermanLänder (Leszczensky/Orr 2004; currently being

Key words: Funding higher education institutions (including tuition fees); state support to students; cost-sharing and its consequences for participation and equity.

JEL: I220, I280, I290


4% Operating income 3% Operating income

76% State

funding 91% State

funding

20% Third-

party

funding

6% Third-party

funding

updated and extended). The survey is descriptive-analytic and carried out in cooperation with the16 ministries of higher education in Germany. Afurther HIS survey carried out in 2005 collateddata on instruments of funding allocation withinuniversities (Jaeger et al. 2005); this reportprovides background information on theinterlinkage between state and institutional levels.

One of the main reforms in the German higher edu-cation sector starting in the early 1990s was the in-troduction of new allocation models for institutionalfunding. By now, practically all of Germany’s fed-eral states have introduced performance-based allo-cation mechanisms in their respective systems offunding higher education institutions. Likewise,higher education institutions have started to useperformance-based procedures for their internalfunding allocation. This way, the focus is put oncompetition between higher education institutions(and faculties at the internal level), and the new al-location systems aim at increasing the institutions’efficiency (e.g. in terms of graduate numbers).

These reforms in the allocation of state supportare all the more relevant because the share thatstate funding represents of a higher education in-stitution’s budget accounts for almost 80% foruniversities and over 90% for Fachhochschulen (uni-versities of applied sciences). (Kunst- undMusikhochschulen, i.e. universities for the arts andmusic, are excluded in this paper.)

Traditionally, funding was allocated in a discre-tionary-incrementalist way: an institution’s budgetwould essentially be determined simply by rollingover its previous year’s budget, possibly adjustedfor inf lation. This was based on the assumptionthat a higher education institution’s cost structurewas quite fixed. There were no explicit hard crite-ria on which this budgeting was founded, efficientuse of the funds made available was not the fore-most issue, and whenever changes occurred inhigher education policy or the strategy of a highereducation institution (e.g. the introduction of anew course of study), negotiations between theministry and the higher education institution con-cerning an appropriate adaptation of the budgetwere required. As the results of such negotiationswere never certain beforehand and because theprocess somewhat lacked transparency, leavingroom for discretion in a ministry’s budgetary de-cisions, funding procedures based on more objec-tive criteria that would also promote an increaseof efficiency and would give some degree of trans-parency and predictability were called for – hencethe introduction of indicator-based (also: formula-based) funding.

Generally, indicator-based funding models aredeemed to:

• reduce the burden of funding negotiations;

• enable the state to enact policy within aframework of university autonomy;

Figure 1: Income sources of higher education institutions (without tuition fees) in 2004

Universities (except medicine) Fachhochschulen

Source: Own calculations based on Statistisches Bundesamt 2006.


• provide transparent and predictable fundingallocations and therefore contribute to theaccountability of the higher education sector;

• reward performance;

• encourage competitive behaviour betweeninstitutions; and

• improve efficient use of resources.

Though this is essentially true, the functioning ofsuch indicator-based models is also largelydependent on the concrete construction of theallocation procedure and on how indicator-basedfunding is embedded within the whole fundingframework. As far as this is concerned, a greatvariety of procedures can be found in the field.

The indicator-based procedures used across theLänder and within institutions show basicsimilarities with regard to the range and definitionof performance indicators. They concentrate onindicators for teaching and learning and forresearch, though most also use indicators (or atleast special weightings) for gender equity andsometimes also for internationalisation. As far asindicators ref lecting teaching performance areconcerned, there is a clear focus on studentnumbers and numbers of graduates. Third-partyfunding, as well as numbers of doctorates andHabilitationen (a Habilitation is a post-doctoralqualification giving the holder the right to beadmitted to a university as a professor), are themain indicators for research-related efforts.Furthermore, it is worth noting that – on the statelevel as well as the internal level – teaching-relatedindicators are usually weighted higher thanresearch-related parameters.

On the level of precise design and modelarchitecture of the funding procedures, by contrast,there are remarkable differences. These concernvery central questions such as how much of abudget is to be allocated by formula (between 1%and 95%), how many indicators are necessary(between very few indicators for a clear steeringeffect and many indicators to ref lect differentinstitutional profiles), and what the scope ofcompetition between institutions should be (e.g.unified allocation or sector-specific allocationsystems). An overview of characteristics of therespective Länder systems is given in table 1.

It is striking that three Länder – Brandenburg,Hamburg and Rhineland-Palatinate – are usingindicator-based funding shares that account foralmost the entire state budget. However, theindicators used there can be differentiated into twotypes: those that form some kind of basic grant

(like the number of students or the number ofprofessors and other academic personnel) andthose that make up a more performance-orientedgrant (with indicators quite comparable to thoseused in the other systems). By establishing thebasic grant through indicators rather than bydiscretionary-incremental decision-making, trans-parency in funding allocation is achieved, whilstthe use of quite stable and predictable indicatorsdoes not put the higher education institutions atrisk of having to deal with high fluctuations fromone year to the next.

In the other Länder, the “remaining” 80% or more ofthe state grant is still allocated mainly on the basisof discretionary-incremental procedures. One of thereasons for this is that such procedures allow forsome flexibility that a formula does not offer (as aformula that is to work well should not be changedtoo often, and therefore cannot too readily be adaptedif changes in higher education policy should occur).

But even in the Länder appropriating “only” in theorder of up to 20% by formula, the impact on thebudget thus experienced is not negligible. It mustbe stressed that owing to the high dependence onstate support and because of the higher educationinstitutions’ limited possibilities to influence theirspending situation – professors are civil servantsin Germany, and the personnel costs that accountfor some three quarters of a university’s budgetcan hardly be touched – even a budget change ofe.g. 1% of the state grant can be serious for thehigher education institution in question. Indeed,to prevent drastic budget changes, some Länder areusing (or have initially used and then phased out)cut-off limits beyond which losses in the totalbudget that should in theory occur, based on theindicator calculations, are capped.

2.2. Introduction of tuition fees

The funding situation in Germany’s Länder is notexpected to change completely, even where tuitionfees are introduced; these are estimated to makeup in the order of 10% of a university’s budget(Leszczensky 2004) – so the state grant woulddefinitely still remain by far the most importantfinancial source (and whilst tuition fees areintended to be additional funds for highereducation institutions, there is still wide-spreadscepticism that their introduction will not, in time,lead to a decrease in the state grant).

Regarding tuition fees, this paper is based on asurvey on the different models of tuition fees thatwere installed as the first such models in sevenGerman Länder (Ebcinoglu, 2006).


Table 1: Main characteristics of Länder indicator-based allocation procedures (2006)

Share of state grantallocated by formula(approx. % values for

universities)

Number of indicatorsused (all HEIs oruniversities only)

Scope of competition

Baden-Wurttemberg 20 13Separate competitions between

universities and betweenFachhochschulen

Bavaria 1.5 9Separate competitions between


Berlin 20 11 Separate competitions by type ofHEI and within subject areas

Brandenburg 95 7 Competition between all institutionsof higher education

Bremen 10 5 Benchmarking against pastperformance

Hamburg 85 4-5 Benchmarking against pastperformance

Hesse - (model put on hold) (14) Competition between all institutionsof higher education

Mecklenburg-WestPomerania 4 8 Competition between all institutions

of higher education

Lower Saxony 3 11Separate competitions between


North Rhine-Westphalia 20 5Separate competitions between


Rhineland-Palatinate 95 17Separate competitions between


Saxony 1 11Separate competitions between


Schleswig-Holstein 5 4 Benchmarking against nationalaverages

Thuringia 15 6 Benchmarking against pastperformance

Source: Updates on Leszczensky/Orr 2004.

Until recently, a federal law prohibited the use ofgeneral tuition fees (although there were exceptionsbefore for students who had exceeded the normalperiod of study by many years, and for thosestudying at private institutions); so when speakingof the funding of higher education institutions (andensuing efficiency debates), this would usually referto the ca. 80% share of a higher educationinstitution’s funding that was provided by the state.Since a ruling from the Federal ConstitutionalCourt (Bundesverfassungsgericht) in 2005, however,the Länder are free to decide whether or not tointroduce such general tuition fees, thus makingthe students take on a bigger share of the costs ofhigher education (until then, students only had topay a small administrative fee).

As a result, the Länder have come up with quitedifferent solutions concerning not only the general

decision on whether or not to introduce such afee, but also concerning the time of introduction,the precise circumstances under which anexemption from the fee can be granted, theconditions for a loan specially intended to covertuition fees, and the measures to deal with the riskof default for such loans. Within certain limits,the Länder can also decide on the amount of thefee: in its ruling, the court referred to the amountmost often discussed at the time: € 500 per semester.This was deemed appropriate as compared tostudents’ overall cost of living. Therefore, this is –so far – the maximum and indeed the most usualamount of general tuition fee charged in any ofthe Länder.

In 2006, the first seven Länder (namely Baden-Wurttemberg, Bavaria, Hamburg, Hesse, LowerSaxony, North Rhine-Westphalia and Saarland)


started charging such fees, whilst the others decidedagainst fees – be it for political or pragmaticreasons. In most of the Länder that have introducedfees, the amount of the fee is the same for allinstitutions (€ 500 per semester), but in Bavariaand North Rhine-Westphalia, it is up to the highereducation institutions to decide upon the amountto be charged (in Bavaria, a certain minimumamount per type of higher education institution isrequired, so the fees range from € 100 to € 500 atFachhochschulen, and € 300 to € 500 at universities;in North Rhine-Westphalia, by contrast, all highereducation institutions are free to choose anyamount between € 0 and € 500/semester – almostall higher education institutions have decided tomake use of the possibility to charge fees). Thisleads to an even greater variety of funding modelsfor higher education institutions.

When tuition fees were introduced, there wasmuch concern about how to prevent excludingfinancially disadvantaged students from studyingaltogether. Therefore, certain conditions underwhich a student could be exempt from payingtuition fees were formulated in each of the Länder;but in no two Länder are all these conditionsidentical. Essentially, such conditions could be thestudent looking after at least one child of his/herown, the student providing care for seriously illfamily members, the student’s number of siblingsin higher education, any disabilities the studentmight have and whether the student couldotherwise be deemed to be in need of financialassistance (“hardship cases”).

Tuition fees are intended as extra funds for theimprovement of teaching; ever since theirintroduction, there has been – and still is – muchdebate about how these extra funds could be usedin the most efficient and appropriate way. Forinstance, no one would argue that longer libraryopening hours or the employment of further tutorswould indeed comply with this rule. But when thedrastic increase in energy costs during the winterof 2006–07 led some universities to use part oftheir tuition fee income to make up for theunexpected extra costs that the state would notcover, voices were raised against this interpretationof improving teaching by heating lecture rooms.A great number of higher education institutionsthat levy tuition fees have installed a forumthrough which students are participating indeciding on how to best spend the extra funds.

At the time of writing, there is no clear evidenceto judge whether or to what extent the introductionof tuition fees has led or could still lead to a lastingdrop in new enrolment numbers, but there is muchconcern that this could be a consequence. The

number of first-year students has gone down inrecent years, but that trend had started alreadybefore the actual introduction of tuition fees –though some think that even the debate about theimminent introduction of tuition fees might havekept potential students from enrolling. Indeed, ina survey of those who obtained their highereducation entrance qualification in 2005, 25% ofthe pupils who declared no intent to study statedthat if tuition fees were introduced, studying wouldbe beyond their financial limits. And 19% (multipleanswers were possible) said that they did not meetthe financial prerequisites that studying required.Of these students, 11% declared they were notprepared to put themselves into debt through theBAföG’s loan programme (Heine/Willich 2006).However, fees would hardly be the only criterionfor not taking up a course of study; this decision ismost often a mixture of several reasons. In thismixture, the increase of study courses that are openonly to students with very good grades (the so-called Numerus clausus system) most likely plays avery important role, as well: in 2006, highereducation institutions used their own selectioncriteria for almost two thirds of all bachelor’scourses, though in some Länder, this ratio was muchhigher, e.g. 92% in Berlin (HRK 2006).Furthermore, 66% of those students who haddecided against taking up a course of studyexplained that they wanted to earn moneythemselves as soon as possible (Heine/Willich2006). A survey of those who left school with ahigher education entrance qualification in 2006(when tuition fees were already a given fact) hasbeen carried out, but has not been published atthe time of writing, though publication is expectedin spring 2008. It should go without saying, though,that even if tuition fees turn out not to be a majordeterrent to entering higher education, theycertainly do nothing to make enrolling any morelikely.

3. State support to students

Whilst the ways of funding higher educationinstitutions thus differ considerably between theLänder, the basic system of state support to studentsis the same nation-wide. There are variouscomponents of state support to students inGermany.

Usually, only the “classic” grant and loan supportis taken into consideration: the combined BAföG(Bundes-Ausbildungsförderungs-Gesetz) grant/loan, state-funded merit-based grants, and other loans.Depending on their parents’ income, students mayapply for support as laid down in the BAföG; halfof this support is a grant and the other half a loan.


There is a maximum debt limit (currently € 10,000),beyond which debts are waived. A reduction ofloan debt can be granted upon application for anumber of reasons, e.g. if the student achieves verygood study results, if he/she graduates within acomparatively short period and/or if an earlyrepayment of the debt is made. There are also state-funded non-repayable merit-based grant schemesfor students showing outstanding performance intheir studies. Loan schemes outside BAföGtargeted at students are relatively new in Germanyand have only existed for some years. Theintroduction of tuition fees has given rise to thecreation of new public and private loan schemesspecifically to cover tuition fees; some of theseare specific to the respective Land or even the highereducation institution. Since the state would coverfor possible default, this is also a means of statesupport even in cases where the loans are offeredby private banks.

Besides these obvious modes of student support,there is a great variety of other direct and indirectforms of support to students and their parents thatare all linked to student status. Orphans’ pensionsare just one of these forms. Students are usuallycovered by their parents’ health insurance; wherethis is not the case (due to age limits), they benefitfrom reduced rates. Besides this, students enjoycheap food at refectories, since their meals arepublicly subsidised. Some student housing offersare also relatively cheap due to public subsidies.

On the parents’ side, a number of benefits anddifferent types of tax relief can apply provided thechild still has student status. First of all, a childallowance is paid out to the parents of students upto an age limit of 27 years (as of 2007 reduced to25 years) and a certain limit of the student’s ownincome. This allowance is supposed to be passedon to the student, but this does not, in fact, alwayshappen – or at least not the entire sum is handedon. Civil servants benefit from further student child-related supplements, and there can be childsupplements for house owners, housing benefits,retirement provisions, widow(er)s’ pensions,unemployment benefits, etc., all linked to thechild’s student status. Furthermore, tax deductionsfor a student child and his/her education arepossible.

All these transfers (even though not all of themcan be assessed) add up to a substantial amount ofstate support to students – though this is hardlyperceived as such in the general public discussion.However, calculations for 2004 show that whilstthe “visible” BAföG grants (excluding loans andsubsidies on loans) amounted to € 760 million andchild allowances to well over € 2 billion, all other,

less obvious exemptions and benefits make up forwell above € 3 billion. Altogether, there are some€ 7 billion spent as public support to students andtheir parents – compared to the nearly € 10 billionreported by the OECD as having been paid thatyear in teaching allocations for ISCED 5A/6institutions, this is a rather substantial figure(Schwarzenberger /Gwosć 2008).

4. Cost-sharing and its consequencesfor participation and equity

By law, everyone who has attained the formalqualification for admission to higher education(Hochschulzugangsberechtigung, e.g. the Abitur) has theright to access higher education; higher educationstill is free in some of the Länder (and was untilvery recently in the others), and a state supportsystem for financially disadvantaged students(BAföG) and loan schemes to cover tuition feesare in place. Therefore it would seem that no onewho qualifies to enter higher education would bekept from actually doing so – thus, in theory, socialequity in admission should be achieved inGermany. In fact, access to higher education andequity has not really been considered a big issueso far, at least not in the general public.

However, this formal right and the existing supportsystems do not necessarily mean that social equityis really achieved, since obtaining this qualificationmeans that a number of obstacles must have beensurmounted already, and even those who haveobtained the qualification do not necessarily allactually enrol in higher education.

The social survey on students in Germany(Sozialerhebung; the latest available survey –Isserstedt et al. 2007 – is used as a basis for thistext) shows that participation in higher educationis to a large extent dependent on whether or notthe respective parents have a degree in highereducation: out of 100 children whose fathers havean academic degree, 83 enter higher education,whilst only 23 of the 100 children whose fathershave no academic qualification do enrol; so theodds of entering higher education are 3.6 timeshigher for children of academics than of non-academics (there are other determinants, as well,but parents’ academic status has the greatest singleimpact on participation in education). One has tobear in mind that a student who does enrol inhigher education must have passed other thresholdsbefore that: e.g. the question of which school achild is sent to after primary school and if he/shethen moves on to classes that would allow him/her to obtain a higher education access qualification


23 21 18 15 14 14 13 12 13

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high

elevated

medium

low

also play a very important role here. In fact,children of academics already have considerablyhigher transition rates at these stages than childrenwhose parents are not academics.

The differentiation by social background of thestudents raises further concerns about equity. Plainas it may sound, “social background” is a constructthat combines information on the parents’ jobstatus (worker, employee, civil servant or self-employed; all differentiated a bit further) and theirlevel of education (holder of an academic degreeor not). Thus, four groups are formed: low, medium,elevated and high social background (for moreinformation on this particular concept, cf. Isserstedtet al. 2007, p. 492 f.).

The developments in the composition of the studentbody by social background show that the share ofstudents from a high social background hasincreased over the past years (thus raising furtherconcerns about equity), as is depicted in Figure 2.Within a quarter of a century, the share of studentsfrom a high social background has more thandoubled at the expense of all other groups. Thehighest decrease can be registered in the group ofstudents from a low social background: their sharein the student body has shrunk to 58% of its valuefrom 1982.

It is not surprising that the amount of money whichstudents can dispose of each month is not the same

Figure 2: Development in the composition of the student body by social background group in %(rounding discrepancies may occur)

Source: Isserstedt et al. 2007, p. 136.* As of 1991, values for both old and new Länder.** For 2006, data include the so-called Bildungsinländer (students with citizenship other than German, but with a Germanhigher education entrance qualification).

for students from different social backgrounds;these differences, however, are not particularly high:the median revenue a student from a low socialbackground had was € 700 a month, compared to€ 711 for students from a medium, € 720 for thosefrom an elevated and € 749 for students from ahigh social background (arithmetic mean: € 742,€ 753, € 767 and € 790 respectively).

By contrast, the composition of a student’s income(contributions from parents, BAföG, own earningsand other sources) varies considerably accordingto his or her respective social background, cf.Figure 3.

First of all, the share that the parents contributeto a student’s budget differs greatly between thesocial background groups: whilst this constitutesonly 29% of the budget of a student from a lowsocial background, a high social backgroundstudent’s budget is made up 65% by the parents’contribution. It should also be noted that whilst95% of students in the high social backgroundgroup received some financial support from theirparents, the same was true for only 77% of studentsfrom a low social background. Whatever theparents do not or cannot contribute is made upfor by BAföG payments and by own earnings. Asis to be expected, the higher the social group, thefewer the students who receive any BAföGpayments. In this, it should be noted that since2003, the share of students from a low social


2939

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low medium elevated high

other sources

own earnings

BAföG

parents

Figure 3: Composition of students’ income sources by social background in 2006 (in %; referringto “normal students”* including Bildungsinländer)

Source: Isserstedt et al. 2007, p. 197.* “Normal students” constitute nearly two thirds of the student body: they are unmarried, do not live with their parentsany more and are enrolled in their first course of study.

background who receive BAföG has gone up from54% to 58% (whilst the amounts that could bereceived remained the same), and smaller increasescan also be observed for the other groups. Studentsfrom a low social background have the highestown earnings (arithmetic mean of € 351 per monthcompared to € 279 for students from a high socialbackground), but the percentage of students thatmake any own earnings is nearly the same in allgroups, and has slightly decreased in all groupssince 2003.

It may be concluded that without any BAföGsupport, the number of students from the two lowersocial background groups would be smaller thanit is now. Besides, it was found that the lower astudent’s social background, the less he or sheconsidered it likely that the funding of his/her costsof living would be ensured during studies (39% of“normal students” from a low background, asopposed to 72% of those from a high socialbackground agreed that their subsistence costswould be ensured during their study period).

5. Possible developments

Whilst the results of the Sozialerhebung show thatthe situation can be deemed critical enough interms of participation and equity – especially sinceparticipation in higher education in Germany isalready below average by international comparison

– the introduction of tuition fees is likely only toaggravate this situation and to highlight thedifferences between students from both ends ofthe social spectrum.

Other changes in the higher education landscapemay also cause problems of their own: theintroduction of the bachelor’s/master’s structure– which is somewhat more rigid than that oftraditional degree courses – leaves students lesstime than in traditional degree courses for takingon a job during term-time. As the Sozialerhebung2007 has shown, bachelor’s students spend morehours per week on their studies than the averagestudent (which is caused by a higher amount oftime for independent study rather than going tolectures) – there are no data on students in master’scourses yet. This would make it somewhat moredifficult for bachelor’s students to work during term-time for as many hours and with the same earningsas students in traditional degree courses.

Funding procedures including indicators such as thenumber of graduates set an incentive for highereducation institutions to get their students throughthe system more quickly, so this may well emphasizethe pressure put on students in terms of the timerequired for studying, leaving less time to workalongside studies. This does not bode well for thesocial inclusion of students who have to work justto be able to fund their place in higher education –i.e. mainly students from a lower social background.


On the other hand, where the number of studentsfeatures as an indicator in the state funding system(and the number of graduates, too), it is in theinterest of higher education institutions to keepattracting students.

Apart from taking out loans – which is traditionallyhighly uncommon for students in Germany andmuch resented, since they are hesitant to start offtheir working life with considerable debt – apossible way out of this dilemma could be theofficial introduction of part-time courses: in theory,all courses are full-time courses in Germany todate, but de facto some students are studying part-time judging by the number of hours they put intotheir studies, though the reasons for this may bequite varied. By allowing for part-time enrolments– which should translate into a lesser amount oftuition fees – students who simply have to work to(co-)fund their studies might not be deterred fromenrolling due to the hours required for studies/work per semester. However, this would mean thatin terms of years until graduation, part-timestudents would require more time, so they wouldtake longer to join the “real” work force – whichwould still put them at a disadvantage regardingtheir total career income and thus also theirpension, and quite possibly concerning their careerchances as well.

Currently, there is a political debate about raisingthe BAföG payment by 10% as of 2008 to makeup for the increase in the cost of living since thelast raise from 2002. If the BAföG is increased,that may help students who would otherwise onlyjust have refrained from studying for financialreasons – but the fundamental differences in thecomposition of a student’s income depending onhis/her social background and the socio-economically inf luenced participation in highereducation are unlikely to be changed.

6. Further research

In the cost-sharing analysis made possible throughthe Sozialerhebung, the more obvious supportelements such as BAföG are taken intoconsideration. However, as was shown above,students and their parents can benefit from aconsiderable number of public support items thatcannot all be included in the calculations made inthe Sozialerhebung, since they may, for instance,apply to the parents’ taxation. But these, too, reducethe students’ and parents’ share in the cost of highereducation, whilst increasing the state’s share. Avery recent study (Schwarzenberger 2008) hasshown that the different transfers and other typesof support to students and their parents – and thus

also cost-sharing between the state and privatehouseholds – tend to differ according to a student’ssocio-economic background. What remains to beexplored, however, is the impact of such differenceson equity and whether there is a causal relationshipbetween cost-sharing scenarios and enrolment fromdifferent social strata.

References

Ebcinoglu, F. (2006). Die Einführung allgemeinerStudiengebühren in Deutschland. Entwicklungsstand,Ähnlichkeiten und Unterschiede der Gebühren-modelle der Länder [The introduction of tuition feesin Germany – Stage of development, similarities anddifferences between Länder tuition fee models]. HISKurzinformation A4/2006. Hanover: HIS.

Heine, C./Willich, J. (2006). Studienberechtigte2005. Übergang in Studium, Ausbildung und Beruf.[Those who obtained their entrance qualification tohigher education in 2005: Transition to studies,apprenticeships and jobs]. HIS Hochschulforum No.F6/2006. Hanover: HIS.

HRK Hochschulrektorenkonferenz (2006).Pressemitteilung 59/06 [Press release 59/06]. 6November 2006. Bonn: HRK.

Isserstedt, W./Middendorff, E./Fabian, G./Wolter, A.(2007). Die wirtschaftliche und soziale Lage derStudierenden in der Bundesrepublik Deutschland2006. 18. Sozialerhebung des DeutschenStudentenwerks durchgeführt durch HIS Hochschul-Informations-System GmbH [Economic and SocialConditions of Student Life in the Federal Republicof Germany 2006. 18th Social Sur vey of theDeutsches Studentenwerk, carried out by HigherEducation Information System GmbH]. Bonn/Berlin:Bundesministerium für Bildung und Forschung.

Jaeger, M./Leszczensky, M./Orr, D./Schwarzenberger, A. (2005). FormelgebundeneMittelvergabe und Zielvereinbarungen alsInstrumente der Budgetierung an deutschenUniversitäten: Ergebnisse einer bundesweitenBefragung [Formula-based funding and targetagreements as instruments of budgeting in Germanuniversities: Results of a national survey]. HISKurzinformation A13/2005. Hanover: HIS.

Leszczensky, M. (2004). Paradigmenwechsel in derHochschulfinanzierung [Paradigm change in highereducation funding]. In: Aus Bildung undZeitgeschichte, Beilage zur Wochenzeitung DasParlament, bpb Bundeszentrale für politische Bildung,Bd. 25/2004, pp. 18–25.

Leszczensky, M./Orr, D. (2004): StaatlicheHochschulfinanzierung durch indikatorgestützteMittelverteilung. Dokumentation und Analyse derVerfahren in 11 Bundesländern [State funding ofhigher education through indicator-based allocations:


Documentation and analysis of procedures in 11German states]. HIS Kurzinformation A2/2004.Hanover: HIS.

Schwarzenberger, A. (Ed.) (2008): Public/privatefunding of higher education: a social balance.Hanover: HIS.

Schwarzenberger, A./Gwosć, C. (2008): Countryreport of Germany. In: A. Schwarzenberger (Ed.):Public/private funding of higher education: a socialbalance. Hanover: HIS 2008, pp. 66–81.

Statistisches Bundesamt (2006): Monetärehochschulstatistische Kennzahlen [Monetaryindicators in higher education]. Fachserie 11, Reihe4.3.2. Wiesbaden: Statistisches Bundesamt.


Hans Vossensteyn*

Student financing in the Netherlands:from generosity to cost-sharing - facts,

perceptions and effects

........................................................................................................................................................................................................................................................................................

Summary

In 1986 a generous new systemof student financing was intro-duced in the Netherlands. Overtime, many changes were imple-mented, including higher tuition

fees, an increased role for studentloans, performance requirementsand flexibility for students to workalongside study. This paper ex-plores how these developments

* Center for Higher Education Policy Studies (CHEPS), University of Twente, Enschede, Netherlands

1. Tuition fees

In the Netherlands, students in publicly fundedhigher education have had to pay a uniform tuitionfee, regardless of the costs related to different studyprogrammes, since 1945. The government annuallysets the tuition rate. During the 1980s universitystudents paid slightly higher fees than students inthe HBO sector, but in the early 1990s this wasequalised again. Students make their tuitionpayments directly to the higher educationinstitutions, which have full autonomy over thisrevenue stream. In 2003, tuition fees made upabout 17% of institutional revenues in the HBOsector and about 5.5% in the university sector –about 15% of the overall university teaching budget(Tweede Kamer der Staten-Generaal, 2003). Thisdemonstrates that public subsidies to highereducation are considerable and privatecontributions moderate. Figure 1 shows thedevelopment of the level of tuition fees in theNetherlands since 1945.

The real value of the fees declined in the 1945–1971period. In that period students had to pay NLG200 (€ 91) per academic year in nominal terms.After an initial increase to NLG 1,000 (€ 454) in1972–1973, the level was set at NLG 500 (€ 227)between 1974 and 1980. Since then, tuition levelshave gradually increased up to almost € 1,445 in2003–04. Figure 1 shows that particularly in theperiod since 1986 the increases in the level of fees

Key words: Netherlands, cost-sharing, tuition fees, student support, price-responsiveness.

JEL: I280

impacted the financial situation ofstudents, access and equity inhigher education, and how stu-dents perceive the influence of cost-sharing.

often exceeded the rate of inflation. As a result, alarger share of the costs of higher education hasbeen gradually shifted to students and theirfamilies, which indicates that the Dutchgovernment did not use the instrument of tuitionreduction to expand access to higher education.As such, tuition fees have become an issue ofcontinuous discussion. Proponents argue thattuition fees constitute a “fair” private contributionto the costs of higher education, which brings theindividual students considerable future rewards(monetary as well as non-monetary). But theopponents of fees argue that these harm access,particularly for those from lower socio-economicbackgrounds. This has led to many heated politicaldebates about who has to pay the costs of a steadilygrowing higher education system. As a good Dutchtradition, such debates generally end incompromises that include moderate annual tuitionincreases accompanied by the full compensationof lower-income students through a system ofstudent financial support.

The major discussions on tuition fees in2002–2003 related to the issue of differentialtuition fees. The Ministry of Education, Cultureand Science took up the discussion for a numberof reasons: to allow institutions to charge highercontributions in return for enhanced qualityprogrammes, and to make particular subjects likescience, engineering and teacher training moreattractive. However, in the first case opponents fearthat this would harm access for poor students, and


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Figure 1: Development of tuition fees (€ , in current prices and in real 2000 prices)

Source: Ministerie van OCW, time series.

in the second case it is questioned whetherabandoning the equity principle, not to mentionthe public costs involved, can be justified by theexpected number of extra students attracted to thedesired programmes.

An interesting recent development has been toexperiment with allowing institutions to developprogrammes that offer additional quality, for whichthey are allowed to ask higher tuition fees. Up tonow, a few such programmes have been acceptedby the Ministry of Education.

2. Student support

Since 1945, successive Dutch governmentsgradually developed a system of student support,though with a change of focus over the followingsix decades (De Regt, 1993). In the early days themajor drive was to open up opportunities for smallnumbers of talented low-income students. Between1956 and 1972, economic growth and the generaltendency of democratisation changed the focus toopening opportunities for all. This period laid thegroundwork for the massification of highereducation, though student support remainedlimited to small bursary and loan programmes.Financial support consisted mainly of tax benefitsand family allowances for students’ parents. Dueto the oil crises of the early 1970s, the actualimplementation of a far-reaching student supportsystem was postponed. As a result, we can concludethat before 1986 there was a willingness to expandstudents’ opportunities, but due to limitedgovernment resources, student support was not avery active instrument in encouraging access to

higher education. Nevertheless, participation ratesconsiderably increased during this period and thegender imbalance to a large extent disappeared.Most recently the number of female students isslightly higher than the number of male students.

A new relatively generous system of student aidwas implemented by the Student Finance Act(WSF) in 1986. This system transformed allindirect support like tax benefits and familyallowances into direct financial support to studentsthemselves. The system established a compromisebetween students’ access and financial inde-pendence, transparency and simplicity of thesystem, and affordability for the government (Hupeand Van Solm, 1998). The major characteristicsof the system, which is still largely in place, arereflected in the following elements:

♦ A basic grant (basisbeurs) for all full-timestudents, varying between students who live withtheir parents and those who do not;

♦ A means-tested supplementary grant for alimited number (about 30%) of students;

♦ Loans that can be taken up on a voluntary basis,carrying a below-market interest rate;

♦ Parental contributions or students’ own income.The parental contributions are strongly inter-related with the (parental) means-testedsupplementary grants and loans;

♦ Finally, students can earn up to € 10,527.57 perannum (in 2006) before they start losing anyof their grant entitlements.

All components together add up to a given amountthat students are expected to need for study andliving costs according to annual estimates by the


Ministry of Education, Culture and Science. Fromthis perspective, no (full-time) student should faceany financial barriers for entrance into highereducation.

2.1. Changes within the currentstudent financing mechanism

After 1986, on the basis of demographic develop-ments the government expected a decline in thenumber of students and thus believed that arelatively generous system for students would befeasible from the viewpoint of public finances. Butthe opposite happened, and partly as a result, alarge number of additional changes have takenplace since then (Vossenteyn, 2002):

♦ Tuition fees were increased in real terms.

♦ Basic grants were reduced several times due togrowing numbers of students and limited publicbudgets.

♦ Supplementary grants were increased tocompensate for tuition increases, inflation andreductions in the basic grants. This is to guaranteeaccess for students from disadvantagedbackgrounds (about 30%, based on a means test).

♦ The duration of grants was reduced in twosuccessive steps (1991 and 1996) to thenominal duration of courses (4–6 years).

♦ Student loans gained in importance. As withsupplementary grants, student loans alsocovered reductions in the basic grant, increasesin tuition fees and inf lation. In addition,students have been permitted to replace(assumed) parental contributions with studentloans since 1995.

♦ Performance requirements were imposed. Since1993 students have had to meet performancerequirements in order to remain eligible forgrants. Under the so-called “progress-relatedgrant” (Tempobeurs) students had to pass 25% ofthe annual study credits, or otherwise theirgrants would be converted into interest-bearingloans (Hupe and Van Solm, 1998). In 1996,the progress requirements were intensifiedthrough the “performance-related grant”(Prestatiebeurs). Since then, all grants have beenawarded initially as loans, and only if studentspass 50% of their exams in the first year andcomplete their degree within the nominalduration of the programme plus two years (sixor seven years in total) are their initial loansconverted into a grant. In 2000, the time limitto complete a degree was relaxed to 10 yearsfor all programmes, particularly to allowstudents to be involved in extra-curricularactivities like student activism and part-timework (Ministerie van OCenW, 1999).

♦ Due to the developments addressed above, theemphasis on parental contributions andstudents’ own resources has gradually increased.In addition, students’ expenditure patterns havegone up, exceeding the standard budget availablethrough student support. Finally, students seemto be debt averse. Consequently there is morepressure on parents and students, who are morelikely to have part-time jobs (Vossensteyn,1997).

Most of the changes implicitly meant budgetaryreductions and were aimed at encouraging studentsto pursue more efficient study patterns. Fur-thermore, the focus of the support policies haveshifted: from opening up opportunities for lowerincome groups until the mid-1980s, followed bycreating a basic income provision for all studentsin 1986, after which the system reverted once againto supporting underprivileged students. The impactof all changes in the student financing system onstudent choice and students’ enrolment behaviourwill be discussed in the next section.

3. Impact of tuition and supportpolicies on student enrolmentbehaviour

Until the mid 1980s, student financial support wasrelatively moderate or poor in the Netherlandsand thus could not be expected to generatemassification in higher education. Nevertheless,rapid expansion of higher education happenedduring the 1960s and 1970s, also reducing thegender imbalance to a large extent. Thesedevelopments seem to be the result of generalsocietal tendencies rather than active accesspolicies.

However, the introduction of a relatively generoussystem of student support in 1986 could beexpected to boost access and participation, althoughits purpose was to guarantee equal access for allstudents regardless of their backgrounds. Therehave been a number of studies on student choicebehaviour that also looked at the potentialrelationships between financial support andparticipation. However, most of these studiesindicated no clear relationships between changesin student finance and the composition of thestudent body (De Jong et al., 1991; De Jonge etal., 1991).

Also the deterioration of student support,particularly during the 1990s, has been studied forits impact on access to higher education(Vossensteyn, 2002). The gradual shift towards cost-


sharing in the Netherlands might be expected tohave led to changes in student enrolmentbehaviour, for example in terms of lowerparticipation, the choice of cheaper (shorter) oreasier study programmes, or better study progress.However, hardly any such changes in student choiceseem to have occurred. Only a few tendencies canbe indicated.

First, the introduction of study progressrequirements, which meant a serious “culturalchange”, had only a temporary effect onparticipation in higher education. Initially, thenumber of new entrants to university studiesdecreased slightly, some (potential) studentspostponing actual enrolment and some university-qualified candidates entering HBO programmes(De Jong et al., 1996). However, within a few yearsthe traditional enrolment patterns appeared again.

A second interesting development is that,regardless of the growing emphasis on loans, thenumber of students actually taking up loansdecreased substantially, from 40% in 1991 to about15% in 1997 (De Vos and Fontein, 1998). Onereason is that since 1992 interest has been charged.However, take-up rates have gone up slightly since2000 to about 24% in 2005. Instead of acquiringstudent loans, students prefer to take part-time jobs,which enable them to avoid accumulating debtsand even to upgrade their standard of living.Moreover, students are also willing to borrowoutside the student loan system, either from familyor by having a bank overdraft. Many even take upflexible and temporary loans from private banksto cover extraordinary expenses, such as computerequipment or holidays (Kerstens and De Jonge,1999). In 2005, Vossensteyn found that lower SESstudents indeed prefer not taking up loans, showingdebt-averse perceptions, but that they take as muchin student loans as higher SES students anyway.

With respect to the impact of tuition fees, moststudies show that the real increases in tuition feesdid not seem to impact access in terms ofenrolment patterns. Student choice behaviour ingeneral seems to be price inelastic! Such price-unresponsiveness dates back to the 1980s andcontinues into the 1990s (Oosterbeek and Webbink,1995). A simulation model showed that evensubstantial tuition fee increases will hardly affectenrolment rates, except for students from lowersocio-economic families (Sterken, 1995).Furthermore, a recent survey by Felsö et al. (2000)indicated that students would not change theirpreferences in cases where tuition fees were eitherincreased or reduced by € 450.

Some simulation studies devoted attention to theproblem of a declining interest in science andengineering studies. They found that guaranteeingstudents a job after graduation and increasingengineers’ salaries would have a stronger influencein attracting extra students to these studies thanincreasing scholarships or reducing tuition (DeJong et al., 2001; Felsö et al., 2000). In fact someuniversities of technology have experimented withgiving students additional scholarships, but thisdid not attract extra students.

All in all, various studies, covering different timeperiods, have all come to the conclusion thatstudent choice is not so much affected by financialincentives, except for students from disadvantagedgroups. This more or less confirms the findings ofinternational studies on student choice (Heller,1997; Hossler et al., 1999).

References

CBS (2007). Statline, www.cbs.nl.

Felsö, F., M. van Leeuwen and M. van Zijl (2000).Verkenning van stimulansen voor het keuzegedragvan leerlingen en studenten, Amsterdam: Stichtingvoor Economisch Onderzoek der Universiteit vanAmsterdam (SEO).

Heller, D.E. (1997). “Student Price Response inHigher Education: An Update to Leslie andBrinkman”, Journal of Higher Education, 68, 6, pp.624–659.

Hofman, A., M. van den Berg, J. de Boom, U. deJong, J. Roeleveld, M. van Leeuwen and D. de Graaf(2001). Studentenmonitor 2000, Beleidsgerichtestudies Hoger onderwijs en Wetenschappelijkonderzoek 75, Den Haag: Sdu Grafisch Bedrijf.

Hofman, A., U. de Jong, M. van Leeuwen, J. deBoom, I. van der Veen, J.A. Korteweg and E. Heyl(2003). Studentenmonitor 2003, studeren in hethoger onderwijs, Beleidsgerichte studies Hogeronderwijs en Wetenschappelijk onderzoek 94, DenHaag: Sdu Grafisch Bedrijf.

Hossler, D., J. Schmit and N. Vesper (1999). Goingto College: How Social, Economic and EducationalFactors Inf luence the Decisions Students Make,Baltimore: The Johns Hopkins University Press.

Hupe, P.L. and A.I.T. van Solm (1998). HetZoetermeerse labyrint, Beleidsgerichte studies Hogeronderwijs en Wetenschappelijk onderzoek 55, DenHaag: Sdu Grafisch Bedrijf.

Informatie Beheer Groep (1987–2007).Studiefinanciering hoger onderwijs, maandbedragen,Groningen: IBG.


Jong, U. de, H. Oosterbeek, J. Roeleveld, C.N.Teunings and H.D. Webbink (1991). Wel of nietverder studeren? Ministerie van Onderwijs enWetenschappen, Beleidsgerichte studies Hogeronderwijs en Wetenschappelijk onderzoek, nr. 26,Den Haag: DOP.

Jong, U. de, D. Webbink, H. Meulenbeek, M.Voorthuis, F. Haanstra and F. Verbeek (1996).Uitstel of afstel? Een onderzoek naar deachtergronden en motieven om niet direct verder testuderen, Amsterdam: Stichting voor EconomischOnderzoek (SEO)/SCO-Kohnstamm Instituut,Universiteit van Amsterdam.

Jong, U. de, M. van Leeuwen, J. Roeleveld and M.Zijl (2001). Deelname aan hoger onderwijs,Toegankelijkheid in beweging, Kiezen voor hogeronderwijs 1995–2000, Ministerie van Onderwijs,Cultuur en Wetenschappen, Beleidsgerichte studieshoger onderwijs en wetenschappelijk onderzoek 81,Den Haag: Sdu.

Jonge, J.F.M. de, L. Huvers, D.M. Ligtermoet andA. Ziegelaar (1991). Effectiviteit en efficiëntie vande Wet op de studiefinanciering, Leiden: Researchvoor Beleid.

Ministerie van Onderwijs, Cultuur en Wetenschappen(1999). Flexibele studiefinanciering, Een stelsel datpast, Den Haag: Sdu Grafisch Bedrijf.

Oosterbeek, H. and D. Webbink (1995). “Enrolmentin Higher Education in the Netherlands”, DeEconomist, 143, 3, pp. 367–380.

Sterken, E. (1995). “De collegegeld-gevoeligheid vandeelname aan het WO”, Economisch StatistischeBerichten, 10.5.1995, pp. 454–456.

Vos, K. de, and P. Fontein (1998). Actualiseringleengedrag en schuldopbouw in de WSF, Tilburg:Economisch Instituut Tilburg (EIT).

Vossensteyn, H. (1997). Student Financial Assistancein the Netherlands: A Contextual Report. Enschede:CHEPS.

Vossensteyn, J.J. (1999). “Where in Europe WouldPeople like to Study? The Affordability of HigherEducation in Nine Western European Countries”,Higher Education, 37, pp. 159–176.

Vossensteyn, J.J. (2002). “Shared Interests, SharedCosts: Student Contributions in Dutch HigherEducation”, Journal of Higher Education Policy andManagement, 24, 2, pp. 145–154.

Vossensteyn, J.J. (2004). “Fiscal stress: worldwidetrends in higher education finance”, Journal ofStudent Financial Aid, Vol. 34, No. 1, pp. 39–55.

Vossensteyn, J.J. (2005). Perceptions of student price-responsiveness: A behavioural economics explorationof the relationships between socio-economic status,perceptions of financial incentives and student choice(dissertation), Enschede: CHEPS, University ofTwente.


Borut Kodrič*, Nada Trunk Širca**, Rok Strašek***

Funding higher education in Slovenia:the introduction of a lump-sum instrument

........................................................................................................................................................................................................................................................................................

Summary

The paper presents an analysis ofthe existing higher educationfunding system in Slovenia. Thefindings of this analysis, whichfocused on full-time undergradu-ate studies, show significant dif-ferences in the operating costs ofstudy activities among differentinstitutions within individual studygroups, as well as different studyfields. At the same time, consider-

able discrepancies were noted inconnection with funding receivedfor particular study activities andthe average operating cost of studyactivities among individual studygroups. In compliance with thementioned findings, the study car-ried out an analysis of the effectsof changing the ratio betweenbasic and standard annual fundswithin the total annual funds. By

increasing the percentage of stand-ard funds within the total annualbudget, average funds per studentgradually approximate the aver-age expenditure within individualstudy groups, based on which itcan be claimed that the processof decreasing the percentage ofbasic funds has been too slow.

1. Introduction

The question of higher education funding is veryhigh on the agenda in most EU countries (EC,2004; Jacobs, van der Ploeg, 2006). On 23–24March 2006 the European Council called on themember states “to facilitate, in line with nationalpractices, universities’ access to complementarysources of funding, including private ones, and toremove barriers to public-private partnerships withbusinesses”, and concluded that reforms must be“stepped up to ensure high-quality educationsystems which are both efficient and equitable”.Slovenia is no exception, as there has been a lot ofdebate about the level of funding and the rightpublic-private mix of higher education funding inthe last few years.

At the EU level, the new investment paradigm ineducation and training was first set out in January2003 in the Communication Investing efficiently ineducation and training: an imperative for Europe. The needfor a substantial increase in investment in humanresources was highlighted in view of achieving the

Lisbon goals. Public funds should be granted tohigher education institutions in such a way thateffectiveness, efficiency and quality are promoted.Funding mechanisms should provide incentives forchange and innovation. However, due to limitedpublic budgets there is also clear pressure to ensurethe more efficient use of existing funds and astronger appeal to increase private contributions.

The share of total public expenditure for tertiaryeducation in GDP in Slovenia is around 1.34%.However, the Slovenian government has made itan objective to raise this to 1.4% in the MasterPlan for Higher Education. Tertiary education inSlovenia is mainly publicly funded. However, onethird of all students in tertiary education (part-time students) pay tuition fees, which are notnegligible.

In this paper we do not focus on what the optimalpublic-private mix should be, but insteadconcentrate on the allocation mechanism of publicfunds that are regulated by the Decree on thePublic Financing of Higher Education and Other

Key words: Funding of education institutions, higher education institutions, Decree on the Public Financingof Higher Education and Other University Member Institutions 2004-2008, basic funds, standard funds.

JEL: I220

* Faculty of Management Koper, University of Primorska, Koper, Slovenia** Faculty of Management Koper, University of Primorska, Koper, Slovenia***Faculty of Management Koper, University of Primorska, Koper, Slovenia


University Member Institutions 2004–2008(hereinafter: decree), which replaced the Standardsfor Financing Higher Education adopted by thegovernment in 1992. The decree was adopted inDecember 2003 for a fixed period of time. Themost important change in the funding system wasthe introduction of a lump-sum instrument thatdefines the allocation of public funds among highereducation institutions (hereinafter: HEIs) inrelation to their outcome.

Even though the lump-sum instrument was chosento replace direct payments for individual HEactivities and costs, a “link” remained with theformer funding system. The new allocationmechanism defines basic funds and standard funds,which form the total annual funding for each HEI.The share of basic funds in 2004 amounted to 80%of the funds received in 2003 and was set todecrease by 2.5 percentage points each year.However, the funds received in 2003 representeddirect payments according to the former standards.So, even though the allocation was supposed to berelated to the outcome of HEIs, the majority offunds was still allocated according to the formerstandards.

Not all HEIs faced the same situation with theintroduction of the lump-sum instrument. HEIswith large staff numbers (and possibly facingdecreasing enrolments in the last few years) thathad received quite substantial funding accordingto the former standards were in a more favourableposition than the newly emerging HEIs, usuallywith small staff numbers but facing an expansionof their activities. That is why the introduction ofthe proposed allocation mechanism brought abouta lot of discussion about the right basic-standardmix of annual funding.

In this paper we analyse the effects of changingthe ratio between basic and standard annual fundswithin the total annual funds.

The paper is organised as follows: Section 2 brieflydescribes the funding system of tertiary education,with a focus on the lump-sum funding of studyactivities at HEIs. Section 3 describes themethodology and data used in the analysis. Section4 presents the results of the analysis and, finally,Section 5 concludes the paper.

2. Tertiary education funding inSlovenia

The share of total public expenditure on tertiaryeducation in GDP amounted to 1.34% in 2003(see Table 1). In the Master Plan for HigherEducation, the Slovenian government made it anobjective to raise this to 1.4%.

When comparing annual expenditure on educationinstitutions per student in Slovenia and in EUcountries, we can see that Slovenia is laggingbehind. However, the difference shrinks when wemake a relative comparison based on annualexpenditure on education institutions per studentcompared to GDP per capita.

A quarter of total public expenditure on educationat the tertiary level is spent on financial aid tostudents, which is outstanding in comparison withEU countries.

Slovenian tertiary education is offered by higher(post-secondary) vocational colleges and highereducation institutions, which consist of professionalcolleges, faculties and art academies. Higher

Table 1: Key indicators of tertiary education funding, Slovenia and the EU, 2003

Indicator SI EU-25 EU-15*Country withthe lowest

value

Country withthe highest

valueTotal public expenditure on education as % ofGDP, at tertiary education level (ISCED 5-6) 1.34 1.15 1.16 0.74

(Latvia)2.48

(Denmark)Annual expenditure on public and privateeducation institutions per student in EUR PPS,at tertiary education level (ISCED 5-6)

5,743 8,060 8,868 3,245(Lithuania)

13,717(Sweden)

Annual expenditure on public and privateeducation institutions per student compared toGDP per capita, at tertiary education level(ISCED 5-6)

34.8 36.7 37.4 27.4(Ireland)

54.5(Sweden)

Financial aid to students as a % of total publicexpenditure on education, at tertiary educationlevel (ISCED 5-6)

25.2 16.1 16.9 0.4(Poland)

56(Cyprus)

Source: Eurostat, 2007.Note: * The EU-15 group comprises Luxembourg, Denmark, Belgium, Austria, Germany, France, Netherlands, Italy, Sweden, UnitedKingdom, Finland, Ireland, Spain, Portugal and Greece.


vocational education is organised parallel to highereducation and not as an integrated part of it. Thefirst vocational colleges were established in 1996–97.Programmes are markedly practice-oriented andclosely connected with the world of work.

According to the Higher Education Act, an HEImay be established by the state or by private(national and foreign) natural persons and legalentities. Public HEIs are established in order toprovide public services. In certain conditions, aprivate HEI may be granted a concession for apublic service (and consequently for public co-financing) by a government decree on the basis ofa public tender. In such cases, private HEIs areco-financed on the same conditions as the stateones. In the 2005–06 academic year, three out offive free-standing HEIs delivered undergraduateprogrammes with such a concession.

The financing of vocational colleges is regulatedby the Standards for Financing Vocational Collegesadopted by the government in 1996. Study activitiesare publicly financed for all full-time students,whereas part-time students pay tuition fees. Sincetwo-thirds of higher vocational students (part-timestudents) pay tuition fees, we can say thatgovernment funding plays a minor role. However,the funding of vocational colleges is not the focusof this paper.

2.1. Funding higher educationinstitutions

The funding of HEIs is more complex andcomprises funding for study activities, funding forresearch and funding for investment. Only thefunding of study activities, especially the relatedallocation mechanism, is of interest in this paper.

Funding of study activitiesStudy activities of HEIs comprise:

- educational and related research, artistic andprofessional activities of higher educationteachers and staff and scientific staff;

- library, information and other professionalactivities; and

- organisational, administrative and infrastruc-tural activities.

The financing of higher education differentiatesbetween undergraduate and postgraduate studies.Undergraduate study activities are publicly financedfor all full-time students, while part-time studentspay tuition fees. The state allocates funds to HEIsbased on the methodology set by the Decree onthe Public Financing of Higher Education andOther University Member Institutions 2004–2008

(hereinafter: decree), which replaced the Standardsfor Financing Higher Education adopted by thegovernment in 1992.

The decree regulates the public financing of studyand extracurricular activities, investment, andinvestment maintenance and development tasks atuniversities and free-standing higher educationinstitutions established by the Republic of Slovenia,and the financing of certain tasks of nationalimportance. The provisions on the financing ofstudy and extracurricular activities and develop-ment tasks also apply to private higher educationinstitutions with a concession, while the provisionson the financing of development tasks also applyto private higher education institutions providingcertified study programmes if they receive publicfunding. The public financing of study activitiesfor a university or free-standing higher educationinstitution is defined as total funds (a lump sum).There is no division between academic andprofessional study programmes.

Postgraduate students pay tuition fees. However,the state provides public funding for the co-financing of these tuition fees through:

- a public tender for the co-financing of post-graduate studies that finances 60–80% of tuitionfees for students whose faculties fulfilled theconditions of the tender (among others, thetuition fee must not exceed the one set by thestate). The tender was issued for the first timein 1998, when 27% of students received co-financing. In the 2004–05 academic year thispercentage was 53%;

- an additional 9% of postgraduate studentsreceive co-f inancing through the “YoungResearchers” financing scheme, which coversthe full tuition fee, some of the material costsfor the research in which the student is in-volved, and the salary for the young researcher.

2.2. Lump-sum funding

The introduction of lump-sum funding, which isused to fund the study activities of undergraduateprogrammes at HEIs, was driven by the followingdrawbacks of the former standards:

- the distribution of funds for study activitiesamong HEIs was mainly in the domain of theministry. The lack of autonomy at the universitylevel did not promote efficiency in the use ofthe funds;

- financial monitoring mainly focused on thecash flow rather than on the realisation of theset long-term goals and performance and qualityindicators of HEIs; and


- the slow responsiveness of HEIs to changes insociety and the economy.

The instrument of lump-sum funding was chosento replace direct payments for individual HEIactivities and costs so the HEIs would gain greaterfinancial autonomy. Increased institutionalautonomy, which is also advocated by thecommunications of the European Commission andendorsed by the European Council (EC, 2007),should allow greater f lexibility in resourcemanagement and promote the more efficient useof public funds. The long-term objectives of thereform were:

- to increase the f lexibility of HEIs, whichshould result in a higher rate of responsivenessto labour market and society needs;

- to maintain a diverse higher education systemand to guarantee equality of opportunity (wideaccess to higher education, particularly forpeople from disadvantaged backgrounds); and

- to promote the more efficient use of funds anda higher degree of transparency.

The new system was introduced for a limited periodof time (from 2004 to 2008). Since the lump-sumfunding instrument relates funds to outcomes, theHEIs needed to completely change their financialmanagement and administration. The increasedfinancial autonomy of HEIs must be accompaniedby a higher level of responsibility for the efficientuse of public money, and the way money is spentshould be made transparent.

However, the formula currently proposed by theministry, which includes only the number ofstudents and graduates as outcome indicators, doesnot give strong incentives to improve educationalquality. There is a need to establish a qualityevaluation system based on performance indicatorsand clearly set targets; otherwise there is a risk ofgrade inf lation.

The methodology for the allocation of funds isdivided into two parts:

- planning the budget; and

- allocating funds to higher educationinstitutions.

Planning the budget at the state levelThe budget is planned so that the annual budgetfunds for study activities from the previous fiscalyear are increased each year in real terms by atleast the growth of gross domestic product, but bynot less than 2.5% with regard to the realisationfor the previous year for study activities. From allthe funds planned for higher education at therelevant ministry, at most 4% is reserved by the

minister for specific policy and development goals.These funds are delivered through public tendersfor specific developmental activities.

Allocating funds to higher educationinstitutionsThe annual funds for the study activities of a highereducation institution (LS) comprise basic annualfunds (OLS) and standard annual funds (NLS).

Basic annual funds for a higher educationinstitution (OLS) are defined in the decree. For2004 they were set at 80% of the annual funds forthe study activities of an HEI in 2003. The shareof basic annual funds was set to decrease each yearby 2.5 percentage points, reaching 70% of theannual funds for the previous year’s study activitiesof the HEI in 2008.

The standard annual funds for an HEI (NLS) aredetermined by taking account of the annual initialvalue (LIV), the total number of students (Š), andthe number of graduates (D) multiplied by theweighting (Ud) and a factor for the study groupf(s) to which the higher education institutionbelongs (NLS = LIV * Σ [{ Š + D * Ud} * f(s)]).

The annual initial value (LIV) means the standardannual funds per student in the first study group.Students (Š) are full-time students in undergraduatestudy programmes excluding graduands at the HEIin the current academic year. Graduates (D) arethe graduates of full-time undergraduate studyprogrammes at the HEI in the previous calendaryear. The graduate weighting (Ud) is currently setat a value of 4.

Study groups (s) combine higher educationinstitutions by their dominant study fields orsubfields according to the ISCED classification ofstudy fields (UNESCO, November 1997).

The factor of the study group f(s) expresses theratio between the funds allocated for the provisionof education in the study group compared to thefirst study group. There are six study groups, whosevalues vary from 1.00 to 4.50.The funds are allocated annually by contract.

3. Data and Methodology

The analysis was based on data provided in annualreports for 2004 and 2005 by the HEIs and ondata provided by the ministry. In this context, itshould be emphasised that the methodology usedfor the cost calculation of study activities is notclearly defined, and therefore probably notcompletely uniform, among individual HEIs.


Study group

654321

Co

st

per

stu

den

t, 2

00

4

12000

10000

8000

6000

4000

2000

0

Table 2: Average expenditure on study activities per full-time undergraduate student by studygroup, EUR, 2004 and 2005*

Study group2004 2005

Min Max Average Min Max Average

Group 1 480(UM PF)

3,768(VSŠP) 2,195 409

(UL FU)3,768

(VSŠP) 2,387

Group 2 1,1141

(UM VZŠ)4,3481

(UL FŠ) 3,1461 1,340(UM VZŠ)

4,486(UL FŠ) 3,109

Group 3 2,387(POLITEH)

4,949(UL FS) 3,764 2,441

(POLITEH)5,212

(UM FS) 3,910

Group 4 2,804(UL FFA)

4,640(UL BF) 4,198 3,288

(UL FFA)4,974

(UL FFA) 4,565

Group 5 5,008(UM FKKT)

5,955(UL FMF) 5,633 4,528

(UM FKKT)7,349

(UL FMF) 6,113

Group 6 6,6772

(UL ALUO)28,2512

(UL AGRFT) 10,0402 6,084(UM MF)

26,552(UL AGRFT) 10,286

Source: MHEST (2004), MHEST(2005), own calculations Trunk Širca et al.Notes: * See the list of HEIs in the Appendix. 1 UP VŠZI is not included. 2 UM MF is not included.

However, the annual reports were the only sourceof expenditures on study activities available at thetime of the analysis.

We calculated the average expenditure per studentwithin study groups and took the group averagesas benchmarks when analysing the effects ofchanging the ratio between basic and standardfunds within the total annual funds.

We started the analysis with a comparison of theaverage funds received per student and averageexpenditure of study activities per student withinstudy groups to find out the relative position of an

HEI in different educational groups. Then wecontinued with the same comparison; however, itwas undertaken at different ratios between basicand standard funds to see how the position of anHEI in each of the study groups would change.

3.1. Expenditure on study activities

Table 2 contains the lowest, highest and averageexpenditure per student in each of the six studygroups in 2004 and 2005. Some HEIs were notincluded in the analysis for 2004 since they didnot exist yet or their data were unavailable.However, we do not consider the bias to be

Figure 1: Distribution of average expenditure on study activities per full-time undergraduate studentby study group, EUR, 2004*

Source: MHEST (2004), MHEST (2005).Note: * See the list of HEIs in the Appendix. UL AGRFT is not included in Group 6.


Study group

654321

Co

st

per

stu

de

nt,

200

5

12000

10000

8000

6000

4000

2000

0

FŠ

FVV

VZŠ

VSŠP

significant, since the number of students in theseHEIs in 2005 was small and so were the weightswhen calculating the group averages (weighted).

First, we can see large differences in expenditureper student among HEIs in the first and secondstudy groups (see Table 2 and figures 1 and 2).

Second, it is almost impossible to draw a linebetween HEIs from study groups 1 to 4, since thedistributions in these groups overlap (figures 1 and2).

These findings hardly justify the distribution ofHEIs by the six study groups defined by the decree;however, this is beyond the scope of this paper.

3.2. Efficiency of the allocation offunds

Table 3 contains the average funds received perstudent and the average expenditure on studyactivities per student in each of the six study groupsin 2004 and 2005. Again, some HEIs were notincluded in the analysis since they did not existyet or their data were unavailable.

We can see that HEIs from the first study groupwere underfunded by 23% in 2004 and by 24% in2005. HEIs from the sixth study group were alsounderfunded in 2004 and 2005 (by 7% and 5%).

Figure 2: Distribution of average expenditure on study activities per full-time undergraduate studentby study group, EUR, 2005*

Source: MHEST (2004), MHEST (2005).Note: * See the list of HEIs in the Appendix. UL AGRFT is not included in Group 6.

As was evident from the documentation, the deficitwas financed from other sources.

On the other hand, HEIs in the second group wereoverfunded in 2004 and 2005, while HEIs in thefourth and fifth group were only overfunded in2004.

With some exceptions, the situation was verysimilar among all HEIs within each study group.

As we can see, the funds were not efficientlyallocated in 2004 and 2005. We see the reason forthis in the excessive share of basic funds withinthe total annual funds of each HEI. For 2004, thebasic funds of each HEI were set at 80% of theannual funds for the study activities of an HEI inthe previous year (2003). For 2005 the share ofbasic funds dropped to 77.5% of the total annualfunds for the study activities of the HEI in theprevious year (2004).

Since the funds of each HEI in 2003 representeddirect payments according to the former standards,we can conclude that the majority of funds in 2004and 2005 were still allocated according to theformer standards, even though the lump-suminstrument had been introduced. HEIs with largestaff numbers (and possibly facing decreasingenrolments in the last few years) that received quitesubstantial funds according to the former standards


Table 3: Funds received per student and expenditure on study activities per student by study group,EUR, 2004 and 2005*

Study group

2004 2005

Funds perstudent

Expenditure perstudent

Funds/expenditure

ratio

Funds perstudent

Expenditure perstudent

Funds/expenditure

ratioGroup 1 1,690 2,195 0.77 1,8031 2,3871 0.76

Group 2 31762 3,1462 1.01 3,196 3,109 1.03

Group 3 3,668 3,764 0.98 3,872 3,910 0.99

Group 4 4,306 4,198 1.03 4,553 4,565 1.00

Group 5 5,859 5,633 1.04 5,984 6,113 0.98

Group 6 9,3813 10,0403 0.93 9,769 10,286 0.95Source: MHEST (2004), MHEST(2005), own calculations Trunk Širca et al.Notes: * See the list of HEIs in the Appendix. 1 UL FU is not included. 2 UP VŠZI is not included. 3 UP MF not is included.

were in a more favourable position than the newlyemerging HEIs that usually have small staffnumbers but face an expansion of their activities.

3.3. The simulation

Since we found the proposed ratio between basicand standard funds within the total annual fundsof each HEI caused the inefficient allocation offunds, we did some simulations of the effects ofchanging the ratio between basic and standardfunds. The simulations were based on the followingassumptions:

- we simulated the allocation of public fundsamong the HEIs for the 2004–2010 period;

- the total budget in 2004–2006 equals therealisation in these years; for the 2007–2010period the total budget was estimated accordingto the decree;

- the number of students in 2003–2007 equalsthe number of full-time students inundergraduate study programmes excludinggraduands at the HEIs in the current academicyear; in the 2007–2010 period the number ofstudents equals the number of full-time studentsin the 2006–07 academic year;

- the number of graduates in the 2003–2005period equals the number of graduates fromfull-time undergraduate study programmes atthe HEIs in the previous calendar year; in the2006–2010 period the number of graduatesequals the number of graduates in 2005;

- from all the funds planned for higher educationin the 2007–2010 period, 4% is reserved by theminister for specific policy and developmentgoals. These funds are being delivered throughpublic tenders for specific developmentalactivities;

- since the variation in expenditures on studyactivities within study groups was found to bevery high, we took group averages as bench-marks. We assumed the averages should be lessbiased than individual data on expenditure andthis should, at least partly, eliminate the alreadymentioned problem of a lack of uniformity inthe cost calculation methodology among HEIs.

When analysing several scenarios, three aspectsmust be considered:

- a comparison of funds received and averageexpenditure on study activities within individualstudy groups in 2004 and 2005 to find outwhich basic-standard mix of funds helps toapproximate the funds received to the averageexpenditure within individual study groups;

- a comparison of the funds/expenditure ratioin 2004 and 2005 between study groups to findout which redistribution effects appear whenchanging the share of basic funds; and

- a comparison of funds received per student ineach year of the 2004–2010 period by averagefunds per student in the whole period to analysethe stability of the funding system from thepoint of view of each HEI.

The relative deviation was the criterion chosen toevaluate the discrepancies between the fundsreceived and average expenditure or average fundsin the case of the analysis of time stability. Therelative deviation was estimated in the followingway:

- First, we compared funds for study activitiesreceived per student with average expenditurein the study group:

_ _ *100exp _ _

iti tj jt

funds per studentIenditure per student

=


- We calculated the absolute deviation (expressedin index points):

100it i tj

D I= −

- Finally, we calculated the weighted averagedeviation from the average expenditure for eachstudy group:

( * )it iti

tit

i

D studentsAD

students=∑∑

The relative deviation defined as described aboveis expressed in index points.

4. Results

The following scenarios were evaluated:

- The allocation of funds according to the decree.The actual realisation in 2004–2006 was takenas a benchmark, whereas the allocation in

2007–2010 was estimated according to theassumptions mentioned in the previous section.

- The allocation of funds according to the decree,without exceptions. The total budget in2004–2006, including additional fundsaccording to Article 18 of the decree, wasallocated according to the formula. Theallocation in 2007–2010 was estimatedaccording to the assumptions noted in theprevious section.

- The allocation of funds according to the formuladefined in the decree, but at different ratiosbetween basic and standard funds within thetotal annual funding of each HEI – 70%:30%,60%:40%, 50%:50%, 40%:60% and 100%standard funds.

Several remarks may be made concerning theresults:

- When the allocation is performed accordingto the decree, we see the HEIs from the firstand sixth groups were underfunded in 2004

Table 4: Comparison of average funds received per student according to different ways of allocation,with average expenditure per student, by study group, 2004 and 2005 (index)

Year Studygroup Decree1

Decree,without

exceptions270 S:30 N3 60 S:40N4 50 S:50 N5 40 S:60 N6 100S7

2004

Group 1 80 80 80 81 82 82 85

Group 2 104 103 103 103 102 102 101

Group 3 101 102 101 101 101 101 100

Group 4 105 105 107 109 110 112 119

Group 5 104 104 103 103 102 101 98

Group 6 94 93 93 92 92 91 89

Group 6without

academies88 88 89 89 90 90 93

2005

Group 1 76 76 77 77 78 78 79

Group 2 106 103 102 101 101 100 100

Group 3 103 103 103 103 102 102 103

Group 4 105 105 107 109 111 113 117

Group 5 95 96 95 94 94 94 95

Group 6 96 92 92 92 92 92 94

Group 6without

academies92 87 88 90 91 92 96

Source: MHEST (2004), MHEST (2005), own calculations Trunk Širca et al.Notes: 1Actual realisation of Ministry of Higher Education, Science and Technology (exceptions were taken into account). 2 Allocationaccording to the decree, but without making exceptions - additional funds represent that part of the total budget allocated according tothe formula. 3 Simulation when basic funds represent 70% and standard funds 30% of the annual funds of each HEI. 4 Simulation whenbasic funds represent 60% and standard funds 40% of the annual funds of each HEI. 5 Simulation when basic funds represent 50% andstandard funds 50% of the annual funds of each HEI. 6 Simulation when basic funds represent 40% and standard funds 60% of theannual funds of each HEI. 7 Simulation when standard funds represent 100% of the annual funds of each HEI.


and 2005, whereas HEIs from the fifth groupwere only underfunded in 2005 (see Table 4).We ran two separate estimations for the sixthgroup, one with art academies included (asdefined in the decree) and the other with artacademies left out of the system, since weconsider them exceptional cases that shouldbe treated individually. When excluding the artacademies, the deficit per student is even higher(12% in 2004 and 8% in 2005).

- Increasing the share of standard funds meansrelating funds more and more to outcomeindicators. As we can see in Table 5, increasingthe share of standard funds helps to reduce thedeficit in the first group by nearly 5% whentotal annual funds are defined as standard funds.

- Results for the sixth group differ when artacademies are left out. Again, increasing theshare of standard funds within the total annualfunds helps to reduce the deficit by nearly 5%(2004) or 4% (2005) when the total annualfunds are defined as standard funds.

- On the other hand, increasing the share ofstandard funds helps to reduce the surplus inthe second and third groups, which wereoverfunded.

- The only exception is group 4, where the surpluseven grows when increasing the share ofstandard funds. We consider this to be aconsequence of overestimating the factor ofgroup 4 in the decree.

In accordance with the above findings, we canconclude that by increasing the share of standardfunds within the total annual funds, average fundsper student gradually approximate the averageexpenditure within the individual study groups. Itcan be seen (Table 5) that by increasing the shareof standard funds within the total annual funds,

the average relative deviation of funds receivedfrom average expenditure decreases by nearly onethird in 2004 and by about 15% in 2005.

5. Conclusion

The findings of this analysis reveal significantdifferences in the operating costs of study activitiesamong different institutions within the individualstudy groups, as well as the different study fields.At the same time, considerable discrepancies werenoted in connection with funding received forparticular study activities and the average operatingcost of study activities among individual studygroups, especially the groups numbered 1 and 6.We have showed that by raising the percentage ofstandard funds within the total annual budget,average funds per student gradually approximatethe average expenditure within individual studygroups, based on which it can be asserted that theprocess of decreasing the percentage of basic fundsand increasing the share of standard funds (withinthe total annual budget for study activities) hasbeen too slow. Relating funds more to outcomeindicators would help to increase efficiency in theallocation of funds among HEIs.

We also recommend that greater attention be paidin the future to the reporting system of highereducation institutions, since the lack of uniformityin that system poses an important limitation tothe comparability of the data.

References

European Commission (2004). The Financing ofHigher Education in Europe.

Table 5: Average relative deviation of funds per student from group average expenditure accordingto several scenarios, 2004 and 2005 (index points)

Year HEI Decree1Decree,without

exceptions270S:30N3 60S:40N4 50S:50N5 40S:60N6 100S7

2004All 17.7 17.0 15.7 14.5 13.3 12.7 12.2

Withoutacademies 16.6 16.1 14.9 13.8 12.7 12.3 12.2

2005All 14.6 14.6 13.8 13.1 12.7 12.4 12.3

Withoutacademies 14.3 14.5 13.7 13.0 12.6 12.4 12.4

Source: MHEST (2004), MHEST (2005), own calculations Trunk Širca et al.Note: 1Actual realisation of Ministry of Higher Education, Science and Technology (exceptions were taken into account). 2 Allocationaccording to the decree, but without making exceptions - additional funds represent that part of the total budget allocated according tothe formula. 3 Simulation when basic funds represent 70% and standard funds 30% of the annual funds of each HEI. 4 Simulation whenbasic funds represent 60% and standard funds 40% of the annual funds of each HEI. 5 Simulation when basic funds represent 50% andstandard funds 50% of the annual funds of each HEI. 6 Simulation when basic funds represent 40% and standard funds 60% of theannual funds of each HEI. 7 Simulation when standard funds represent 100% of the annual funds of each HEI.


URL: http://ec.europa.eu/education/policies/2010/studies/financing1_en.pdf, 10.9.2007

European Commission (2007). PLA on “Steering onSystem Performance”. The Hague, 7–9 March 2007.

Eurostat (2007). Population and Social Conditions. URL:http://epp.eurostat.ec.europa.eu/portal/page?_pageid=0,1136184,0_45572592&_dad=portal&_schema=PORTAL, 5.9.2007

Jacobs, B., Frederick van der Ploeg (2006). How toReform Higher Education in Europe. Economic Policy,July 2006 (535–592).

MHEST (2004). Annual report on HEIs – 2004.Ljubljana: Ministry of Higher Education, Scienceant Technology.

MHEST (2005). Annual report on HEIs – 2005.Ljubljana: Ministry of Higher Education, Scienceant Technology.

MHEST (2006). Decree on the Public Financing ofHigher Education and Other University MemberInstitutions 2004–2008. Official gazette RS, No. 132/06, Ljubljana: Ministry of Higher Education, Scienceant Technology.

Trunk Širca, N., Kodrič B., Strašek R. & MarjetičD. (2007). Izdelava ekonomskega modela zasimulacijo učinkov sprememb sistema financiranjaterciarnega izobraževanja – zaključno poročilo.Koper : University of Primorska, Faculty ofmanagement Koper.


Appendix

Table A.1: The list of higher education institutions in Slovenia

Code TitleUL - University of LjubljanaUL AG Music AcademyUL AGRFT Academy of Theatre, Radio, Film and TelevisionUL ALUO Academy of Fine Arts and DesignUL BF Biotechnical FacultyUL EF Faculty of EconomicsUL FA Faculty of ArchitectureUL FDV Faculty of Social SciencesUL FE Faculty of Electrical EngineeringUL FFA Faculty of PharmacyUL FGG Faculty of Civil and Geodetic EngineeringUL FKKT Faculty of Chemistry and Chemical TechnologyUL FMF Faculty of Mathematics and PhysicsUL FPP Faculty of Maritime Studies and TransportUL FRI Faculty of Computer and Information ScienceUL FSD Faculty of Social WorkUL FS Faculty of Mechanical EngineeringUL FŠ Faculty of SportsUL FU Faculty of AdministrationUL FF Faculty of ArtsUL MF Medical FacultyUL NTF Faculty of Natural Sciences and EngineeringUL PEF Faculty of EducationUL PF Faculty of LawUL TEOF Faculty of TheologyUL VF Veterinary FacultyUL VŠZ Professional College for Health SciencesUM - University of MariborUM EPF Faculty of Economics and BusinessUM FERI Faculty of Electrical Engineering and Computer ScienceUM FE Faculty of Energy EngineeringUM FG Faculty of Civil EngineeringUM FKKT Faculty of Chemistry and Chemical TechnologyUM FK Faculty of AgricultureUM FL Faculty of LogisticsUM FNM Faculty of Natural Sciences and MathematicsUM FOV Faculty of Organisational SciencesUM FS Faculty of Mechanical EngineeringUM FVV Faculty of Criminal Justice and SecurityUM VZŠ Professional College for Health SciencesUM FF Faculty of ArtsUM MF Faculty of MedicineUM PEF Faculty of EducationUM PF Faculty of LawUP - University of PrimorskaUP FHŠ Faculty of Humanistic Studies KoperUP FM Faculty of Management KoperUP PEF Faculty of Education KoperUP TURISTICA Turistica - College of Tourism PortorožUP VŠZI College of Health Care IzolaIndependent higher education institutionsPOLITEH Nova Gorica PolytechnicVSŠP GEA College of Entrepreneurship, PiranVŠUP School of Business and Management, Novo mesto


Prof. Prakash Naidoo*

A funding framework to address efficiency andequity in public higher education institutions in

South Africa

........................................................................................................................................................................................................................................................................................

Summary

Funding of higher education frompublic sources in South Africaprior to 2004 was based on a for-mula designed in 1982-83 whichcould not assist the governmentin addressing the goals set out inthe Education White Paper 3 of1997. A new funding framework

replaced the old formula fundingin 2004 and directs the allocationtowards achieving the goals stipu-lated in the white paper. In addi-tion, it specifies how funds are tobe distributed in order to achievethe sustainability of institutions,as well as to promote equity and

efficiency. This paper analyzesthese distributive mechanisms andthe extent to which the fundingframework achieves the goals de-scribed in the Higher EducationAct (1997): equity, efficiency andsustainability of the higher edu-cation sector.

* Vaal University of Technology, South Africa

1. Introduction

In 1994, the post-apartheid government set out toachieve a new society that could benefit all itscitizens. For higher education this means fulfillingthe general purposes as set out in the white paper of1997, the Programme for the Transformation of HigherEducation. The National Commission on Higher Educationin 1995 set in motion specific policy goals andinitiatives for the higher education system, resultingin the National Plan for Higher Education in South Africa(NPHE) being released in February 2001. TheNPHE set out five major goals and strategies forhigher education. These goals relate to providingeducational opportunities to youth in order to“produce” skilled graduates for the South Africaneconomy, promoting equity in order to reflect thedemographic profile of the country, ensuring adiversified higher education system, securing andadvancing high-level research capacity, andrestructuring the higher education landscape. Onedirect consequence of the NPHE was a majorrestructuring of the higher education landscape.The minister of education set about rationalizingthe number of higher education institutions froma total of 36 institutions to 23. Up to 2003 the 36institutions comprised traditional universities and“technikons”. Technikons are essentially the

equivalent of polytechnics existing in othercountries. The name “technikon” has now beenreplaced by “university of technology”. Thedevelopment of technikons evolved from the eraof technical colleges in the 1950s, mainly toprovide a career-oriented education. The effect ofrationalization addressed the original raciallyclassified institutions into a more geographicallycoordinated system, and redesignated institutionsas reflected in Table 1.

2. The history of financing highereducation

The financial problems facing higher educationinstitutions in South Africa are the same onesfacing other higher education systems worldwide.According to Johnstone (2004:001), these relateto the cost of higher education per student and theincrease in enrolment due to the legitimateexpectations of the school-leaving youth. In 2000,the Taskforce on Higher Education and Society(2000:54) estimated that total public expenditureon higher education in the entire world isapproximately USD 300 million, or 1% of the grossdomestic product. It is also estimated that aboutone third of this expenditure occurs in developing

Key words: South Africa, funding framework, higher education, efficiency, equity.

JEL: I220


Table 1: Changes in the public higher education landscape in 2004 in South Africa

Higher education institution No. of institutions Headcount enrolment (%)

Before 2004

Historically advantaged universities 11 54

Historically disadvantaged universities 10 14

Historically advantaged technikons 8 24

Historically disadvantaged technikons 7 8

After 2004

Traditional universities 11 36

Comprehensive universities 6 44

Universities of technology 6 20

Source: Council on Higher Education, 2004:40; Council on Higher Education, 2006:184.

countries, where higher education is heavilysubsidized by the government, with a low feecharged to students.

Higher education institutions in South Africaderive their income from three main sources: stategrants and subsidies, tuition fees, and third-streamincome (income from other sources), i.e. incomereceived from research contracts and donations.Prior to the introduction of a new funding frame-work for higher education in South Africa, thefollowing formulae and mechanisms were used tofund higher education institutions:

• The Holloway formula for funding universitiesimplemented in 1951;

• The formula recommended by the Van Wykde Vries Commission for funding universities

implemented in 1977;

• The South African Post-Secondary Education(SAPSE) formula for funding universitiesimplemented in 1984;

• An adaptation of the SAPSE formula forfunding technikons implemented in 1987;

• A revised SAPSE formula for funding bothuniversities and technikons implemented in1993.

The new funding framework, which is the mainsubject of this paper, came into effect in the2004–05 fiscal year. The largest sources of incomefor most higher education institutions in SouthAfrica are state grants and subsidies, whilst in mostinstitutions tuition fees and third-stream incomecontribute approximately 25% each (Figure 1).

Figure 1: Sources of funds of public higher education institutions in South Africa

Government

grants 50%

Student tuition and other fees

25%

Other private income

ANNUAL FUNDS FOR

PUBLIC HIGHER EDUCATION

100%

Source: South Africa, 2004c.

25%


Full-time learners writing grade 12 exams

508,000

Fail exams

161,000

32%

Pass with

exemption

86,000

17%

Pass without

exemption

261,000

51%

Cannot enter

further or higher

education

Exempt from

writing university

entrance examinations

Enter

Public further education

Private further education

Private higher education

Labour market

Other

264,000 (50%)

Enter a university or

technikon after grade 12

76,000

15%

Figure 2: Headcount enrolment in higher education institutions

0 100 200 300 400 500 600 700 800

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Academic Year

Stud

ent he

adcount

(x10

00)

3. Inflow and outflow of highereducation

Most entrants into the South African highereducation system may enrol only if they have

Sources: Council on Higher Education, 2006:24; South Africa, 2005a:30; South Africa, 2006b:29.

Figure 3: Flow of students from grade 12 into higher education institutions – South Africa, 2003

Sources: South Africa, 2004c; South Africa, 2006b.

obtained a grade 12 certificate. Figure 2 representsthe number of students in the public highereducation sector from 1989 to 2005, and Figure 3ref lects the current transfer of students fromsecondary to tertiary education.


4. The financing of higher education

Prior to 2004, South African higher educationinstitutions were subsidized on the basis of theold formula approach. The South African Post-Secondary Education System (SAPSE) identifiesand defines 11 programmes that describe all of auniversity’s potential activities (South Africa,1985:15). These eleven educational and generalprogramme activities comprise the following:instructional programme, research programme,public service programme, academic supportprogramme, student services programme,institutional support programme, operation andmaintenance of plant programme, bursariesprogramme, auxiliary enterprises programme,hospital programme and independent operationsprogramme.

The formula operated on the basis of ten differenttypes of “cost units” to ensure that the cost of highereducation was appropriately subsidized. The tencost units related to state subsidies for threecategories of salaries (one category each), forsupplies, buildings and equipment, two separatecategories for subsidizing books and periodicalsin the humanities, and two separate categories forsubsidizing books and periodicals in the naturalsciences.

In December 2003 a new public higher educationfunding framework was released after aconsultative process (South Africa, 2003:5–6). Itindicates, amongst other issues, that “the newframework is a goal-directed and performance-relateddistributive mechanism which explicitly links the allocationof funds to academic activity and output, and in particular tothe delivery of teaching-related and research-related serviceswhich contribute to the social and economic development ofthe country”.

The new framework is also compatible with themedium-term expenditure framework (MTEF)process used by the government. The MTEFprocess allows the formal motivation and annualnegotiation of funds with three-year cycles. TheNational Treasury reviews budgets by considering

growth, affordability within the fiscal framework,the spending and policy priorities of eachdepartment in terms of its contribution towardsgovernment’s strategic objectives, inf lationadjustments, and sector-specific issues. Issuesspecifically related to higher education areincreases in enrolment and graduation rates, costs,efficiency in the sector, and restructuring the highereducation sector. The MTEF allocation for the2007–10 fiscal period (Table 2) shows an averageincrease of public expenditure on higher educationby approximately 10% per year.

The higher education budget in the new frameworkis allocated into three broad categories: blockgrants, earmarked funds and institutionalrestructuring.

The purpose of block grants is to provideperformance-related funds for higher educationinstitutions. These grants are subdivided into fivecategories: teaching input grant, teaching outputgrant, research output grant, institutional factorgrant and various types of earmarked grant.

Firstly, a teaching input grant is generated by full-timeequivalent (FTE) students. These are weighted interms of a cost-based funding grid and a detailedplanning grid as summarized in Table 3. Thisfunding is based on the classification of educationalsubject matter (CESM) categories used in thehigher education management information system(HEMIS). Student enrolment plans of institutionsmust also be pre-approved by the minister ofeducation.

FTE calculations are based on enrolments of theyear n-2. The teaching input grid applied in 2004continues to be used, although the minister hasindicated that it will be reviewed in the future(South Africa, 2004b). For 2007–08, approxi-mately 52% of the total public expenditure onhigher education has been allocated to highereducation institutions in the form of teaching inputgrants. Expenditure for this purpose will increaseby approximately 8% and 9% in 2008–09 and2009–10 respectively.

Table 2: Allocation of public expenditure on higher education in South Africa for 2007–2010

2007-2008(in ZAR millions)



BLOCK GRANTS 10,689 11,582 12,712

EARMARKED GRANTS 1,768 2,303 3,214

INSTITUTIONAL RESTRUCTURING 600 600 0

13,057 14,485 15,926

Source: South Africa, 2007:6.


Table 3: Funding grid used as weighting factors for the teaching input factor – South Africa, 2004

Price ratio (weight)Fundinggroup CESM categories U*

M+3Hons*M+4

M**M+5

D**M+6

1 Education, law, librarianship, psychology, socialservices/public administration 1.0 (0.5) 2.0 (1.0) 3.0 4.0

2 Business/commerce, communication, computer science,language, philosophy/religion, social sciences 1.5 (0.75) 3.0 (1.5) 4.5 6.0

3 Architecture/planning, engineering, home economics,industrial arts, mathematical sciences, physical education 2.5 (1.25) 5.0 (2.5) 7.5 10.0

4 Agriculture, fine and performing arts, health sciences, lifeand physical sciences 3.5 (1.75) 7.0 (3.5) 10.5 14.0

Source: South Africa, 2004a.Legend: U = undergraduate degree, Hons = honours degree, M=master's degree, D= doctoral degree, M+3 = grade 12 (last highschool grade) + minimum 3 years post-school education.* Weight for distance institutions is given in brackets. ** Ratios are the same for contact and distance institutions.

Teaching output grants are based on the graduateoutputs of universities, which are determined bythe weights attached to these outputs and thebenchmarks specified by the minister of education.The weighting and the benchmarks set are shownin Table 4.

For the 2007–08 academic year, approximately13% of the state higher education budget wasallocated for the teaching outputs of institutions.This will also increase by approximately 8% and9% in 2008–09 and 2009–10 respectively. Mostinstitutions failed to meet the teaching outputbenchmarks set by the minister of education. Inorder to allow institutions some time to improvetheir outputs, the minister of education approveda strategy to ensure that institutions will not facemajor financial setbacks through the applicationof the new funding framework. The minister hasreferred to this as a “migration” strategy, whichwill enable institutions to benefit from theallocation of a teaching development grant for aninterim period. This will be discussed later in thispaper.

Table 4: Weighting factors for calculation of graduates – South Africa, 2004

Weighting factor -actual teaching output *Graduation benchmark %

1st certificates and diplomas, 2 years or less 0.5 22.5 (13.5)

1st diplomas and bachelor's degrees, 3 years 1.0 22.5 (13.5)

Professional 1st bachelor's degrees, 4+ years 1.5 18 (9)

Postgraduate and post-diploma 0.5 54 (27)

Postgraduate degrees 1.0 54 (27)

Honours degrees/higher diplomas 0.5 54 (27)

Non-research master's degrees and master's diplomas 0.5 30 (22.5)Source: South Africa, 2004a.*Distance education institution benchmarks are indicated in brackets.

The improvement in student graduation rates isone of the planned outcomes of the National Planfor Higher Education (South Africa, 2001a:27).Research master’s and doctoral graduates do notqualify for teaching output grants, as these fallunder the research output grant.

Research output grants are performance grantsallocated to institutions for actual publication injournals accredited by the Department ofEducation and for research master’s and doctoralgraduates. Research subsidies are distributed usingweighting and prices for research as it is presentedin Table 5.

Table 5: Weighting factors used to calculateresearch output grants – South Africa, 2004

OUTPUT WEIGHT

Publication 1.0

Master's degree 1.0

Doctoral degree 3.0

Source: South Africa, 2004a.


The minister of education annually determines theelements of research output, the weighting to beattached to different research outputs, and thebenchmark ratios applicable to the differentcategories of higher education institutions. Thecurrent benchmark (2007–08) is 1.25 units and0.5 units (per permanent teaching/research staff)for universities and former technikons (now mostlyuniversities of technology) respectively.

For 2007–08, approximately 11% of the total highereducation budget has been allocated to institutionsfor actual research output. This will also increaseby approximately 8% and 9% in 2008–09 and2009–10 respectively. Most institutions failed tomeet the research output benchmark set by theminister of education. In order to allow institutionssome time to improve their research outputs, theminister of education approved a special strategy,similar to that of the teaching development grant,which enabled institutions to benefit from theallocation of a research development grant for aninterim period.

An institutional factor grant is also built into the fundingframework to address socio-economic inequitiesand institutions that may receive a smaller subsidybecause of their size. The Department ofEducation has decided to use the percentage ofstudents classified as African and Coloured tocalculate a “disadvantaged factor” for an institution.The current application is on the basis that highereducation institutions with less than 40% FTEstudents (disadvantaged) will receive no additionalfunds to their teaching input grant. Thoseinstitutions with FTE students (disadvantaged) ofabove 80% will receive the maximum 10% inaddition to their teaching input grant, while thosewith above 40% but less than 80% FTE students(disadvantaged) will receive a proportionateincrease in their teaching input grant, greater than0% but less than 10%. The institutional factor grantalso enables smaller institutions to benefit due totheir number of FTE students. A sliding scale isused in which institutions with more than 25,000FTE students receive no additional benefits, whilstinstitutions with 12,000 FTE students receive 9.3%in addition to their teaching input grants, and upto a maximum scale of 15% added on to theteaching input units for higher educationinstitutions with 4,000 or less FTE students.

The new funding framework also providesadditional funds in the form of a multi-campusallocation for institutions which are required todeliver teaching services on more than one campusas a result of the changes in the higher educationlandscape of the country. As an interim measure,

merged institutions have been allocated a largerinstitutional factor grant on the assumption thatthe “old” institutions prior to mergers still exist.The total amount allocated as institutional factorgrants will be held as a constant value ofapproximately 6% of the total higher educationbudget, with annual increases of approximately 8%.

Whilst block grants represent the largest percentageof the state higher education budget, the ministerhas earmarked grants for specific purposes. The firstcategory of these grants is the National StudentFinancial Aid Scheme (NSFAS), which was initiated toassist students who have academic potential butcannot afford to pursue higher education. The basisof the scheme is that students meeting therequirements for the provision of funds based ontheir poverty level receive a low-interest loan, therepayment of which starts only when they aregainfully employed above a certain incomethreshold. For 2007–08, qualifying students aregranted a maximum loan of up to ZAR 35,000,which is sufficient to pay for their tuition fees andbooks and provide them with a reasonable livingallowance. Depending on the students’ academicperformance, up to 40% of the loan could beconverted by NSFAS into an outright bursary. For2007–08, approximately 9% of the total highereducation budget has been allocated for NSFAS.

A second category of earmarked grants relate tofunds for infrastructure and output efficiency funds. Themain purpose of these funds is to improve theinstitutional infrastructure so that institutions canincrease their graduate and research output toacceptable benchmarks. The minister intends toprovide an increase of over 63% in 2008–09 andan increase of over 100% in 2009–10. These fundsalso assist institutions that were affected by thechanges in the higher education landscape.

The new framework also earmarks funds forfoundation programmes. These programmes are entry-level programmes designed to assist students fromdisadvantaged educational backgrounds to acquiresufficient knowledge and skills to enable them toregister for a mainstream diploma or degreeprogramme at public higher education institutions.Institutions will have to make formal applicationsfor funding for a three-year period. Once anapplication is approved, the grant applies for athree-year period. The funding grant will bedependent on the funds available for a particularyear. For the 2007–08 financial year approximately1% of the total higher education budget has beenallocated for this purpose, with an increase ofapproximately 8% in 2008–09 and 6% in 2009–10.


For the first time in the 2007–08 fiscal year, theminister has allocated an initial amount of ZAR 8million for the clinical training of healthprofessionals in the form of other earmarked funds.This will increase substantially in the period2008–10.

Before applying the new funding framework in2004–05, the ministry took into account that thefull application of the new framework coulddestabilise the higher education system becausesome institutions would have faced a massivereduction in state grants. The minister of educationapplied a strategy from 2004–05 that ensuredinstitutions would not become unsustainable as aresult of the application of the new fundingframework.

In 2006–07 the minister first used the teachingand research output benchmark of the fundingframework to determine the normative values ofthese outputs. After allocating the funds availablefor teaching and research outputs actually earnedby institutions, the minister decided to allocatethe remaining funds to help institutions improveboth their teaching and research outputs. Theseallocations are referred to as “teaching develop-ment grants” and “research development grants”.The minister has stressed that the allocation ofboth grants will not be automatically awarded toinstitutions. All future allocations will be basedon the progress made by institutions in respect ofteaching and research outputs in each cycle.

In 2007 the minister also recognized that eachinstitution had to be considered on its own merits,and therefore set institution-specific benchmarksfor teaching and research outputs to be achievedby the end of this MTEF cycle, i.e. 2009–10.

5. The realities and challenges of thenew funding framework

Like many other countries, South Africa has alsosought an innovative approach to financing highereducation. As we have seen, the demand for highereducation in South Africa has risen sharply in thepost-apartheid years. Salmi and Hauptman’s(2006:3) reasoning for such high demands forhigher education corresponds to the South Africansituation. These reasons include the following: theeconomic value of having higher education isgreater than just having secondary education,social pressures encourage children to enter oncethey have finished their secondary education, andhigher education curricula are becoming morerelevant to the real economy.

This acute demand for access to higher educationplaces an additional demand on the state to providesufficient funding for aspiring entrants into highereducation. Many of these aspirations are furtherfuelled by pressure from parents who did not havethe opportunity to continue their education foreither political or financial reasons.

The South African government has done well inproviding a funding framework that addresses thefollowing key objectives, also spelt out in theEducation White Paper 3 (South Africa, 1997):

• equitable distribution of funds amongstinstitutions;

• providing access to students who could notnormally afford to enter higher educationinstitutions;

• efficiencies through setting benchmarks for bothteaching output and research output;

• additional funding to assist institutions withspecific needs.

A deeper analysis suggests that more ought to bedone to address the expectation created in a post-apartheid South Africa. Whilst the higher educationsystem has undoubtedly addressed the previousfragmented higher education system, the systemmay have not changed the elite status accorded tosome institutions. Institutions like the Universityof Cape Town, University of Pretoria, Universityof the Witwatersrand, Rhodes University,University of Stellenbosch and other formerlyadvantaged institutions are still regarded by manyas preferred institutions. They attract the best-quality students, both black and white. There mightseem nothing wrong with this, but the currentfunding framework does not fully take intoaccount that many of the less elite institutions arecompeting on equal footing for funds. Eliteinstitutions attract better-quality students andwould therefore find it easier to achieve the highereducation benchmarks set by the Department ofEducation. In addition, the elite institutions neverseem to turn away students who come from lessimpoverished backgrounds and therefore have theability to pay a higher tuition fee, afford betteraccommodation and be more focused on theirstudies.

It is commendable that the new higher educationlandscape in South Africa has created open accessfor all those who qualify to enter it. Wallace(1993:15) correctly emphasizes that targetedfinancial aid will subsidize those who do not havethe financial resources to enable them to enterhigher education. In South Africa poor studentspassing a family income means test will be able toreceive support via the National Student Financial


Aid Scheme. The reality of this is that these poorstudents will also be saddled with a debt burdenwell before they earn enough to pay it back. Since1989 the number of students entering highereducation has almost doubled; public expenditureon higher education has increased more slowly.The obvious result is that pressure will be onincreasing tuition fees to ensure that there aresufficient funds to provide a quality education.

The Department of Education provides clearguidelines on how the funding framework will beapplied via a ministerial statement in every cycle.The timing of this information may create timelags in the planning cycle of institutions, whichcould have a negative impact especially onenrolment patterns. In addition, the actual highereducation funding support of the government isnot in balance with the political perception thatthere are no restrictions on the number of studentsthat can be accommodated in the higher educationsector.

The drive to achieve benchmarks set by theDepartment of Education for teaching output grantscould lead to concerns about the quality of output,despite quality being checked by the HigherEducation Quality Committee every five years.This must be seen against the background of anapproximately 100% increase in student numberssince 1989, with no state provision forinfrastructure development in the application ofthe new framework up to the 2006–07 financialyear. Infrastructure development relates both toacademic infrastructure and support for the welfareof students, e.g. a better residential environment,sports facilities, etc.

The greatest challenge still remains the shifting ofhigher education access for an increasingproportion of the previously disadvantagedpopulation, as envisaged in the Education WhitePaper 3 (South Africa, 1997a). This has to be donein a country where the sectors of health, transportand housing are also facing huge resourceconstraints.

6. Concluding remarks

The country experienced a reasonable economicgrowth of around 5% in the past year (Manuel,2007), thus suggesting more funds will be availablefor education. The minister of education’s hopesof increasing the participation rate to 20% by 2015may meet with some difficulty if fewer studentspass mathematics and sciences with gradesacceptable for university entrance (Jansen, 2006).

In 2005 only 12% of the headcount enrolledstudents attained their first qualification and 4%completed their postgraduate qualification (SouthAfrica 2006b:34). This clearly suggests that moreresources, amongst other factors, are needed toimprove the graduate rate in higher education.

Whilst most higher education institutions haveintroduced additional academic supportprogrammes for students coming from substandardschools, it will not be possible to achieve a highergraduation rate within a context of relativelydecreasing funds. At the same time universitiesare reluctant to force substantial tuition feeincreases, especially in an environment where over70% of university drop-outs were black studentscoming from very low income families (Letseka,2007).

Financial dependence on the state means thatfunding levels vary with the availability ofgovernment resources for higher education. Theimportance of higher education needs to bematched by adequate public and private investmentto enable institutions to produce the graduatesrequired by both the public and private sector,without interfering with the autonomy ofinstitutions. It is clear that the economy is greatlydependent on the skilled workforce produced byhigher education institutions, but the contradictionremains that higher education institutions needmore resources.

This paper has discussed many questions whichmust be solved for the better operation of highereducation institutions in South Africa. Moreimportantly, the issues of access, academicperformance and moving away from elitism mustbe more fully discussed and communicated to thepublic.

The new funding framework has in some aspectsmoved away from the old formula to create a bettersystem for planning the growth and financialsustainability of institutions. The results of theimplementation of the new funding framework upto 2009–10 will provide valuable information onwhether real benefits are derived from thisinnovative approach.

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Wallace T.P. 1993. Public Higher Education Finance.Change. U.S.A.


Hans Vossensteyn*, Petr Matějů**

Challenges in funding, equity andefficiency in higher education

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Summary

Equity and efficiency are complexissues in higher education financ-ing. The issue is whether or not itis fair and efficient to have stu-dents pay for part of their highereducation costs. This paper, basedon a discussion by a panel of ex-perts, explores whether tuition feesand student support can be gearedin a constellation so that partici-

pation in higher education can beexpanded without interfering withthe accessibility of higher educa-tion for students from disadvan-taged socio-economic groups. Thediscussion indicates that an opti-mal level of tuition fees cannot befound, nor an optimal level ofgrants, scholarships or loans. Allis context related, in which history

and the labour market are impor-tant factors. But whatever the situ-ation, it seems fair that studentsshould have to pay part of thecosts, but will also be insuredagainst major financial punish-ments if they end up in lower-earn-ing jobs after leaving higher edu-cation.

1. Introduction

The concluding session of the conference “Funding,Equity and Efficiency in Higher Education”, held21–24 November in Portorož, Slovenia, wrappedup many of the issues presented in the previoussessions and placed those issues into the widerperspective of higher education policy. Thediscussion panel consisted of:

Dr Milena BevcDr Petr Matějů (co-chair)Dr George PsacharopoulosDr Hans Vossensteyn (chair)Dr Maureen Woodhall

The discussion was structured along a number oftopics:

• Equity and efficiency in the debate on fundinghigher education.

• Do we want to increase participation in highereducation and, if so, how?

• Do students need to pay a larger share of thecosts?

• Do we want tuition fees?

• How should students be supported: grants,family support or loans?

• If loans, what type of loans?

• What about transparency of the financingsystem?

• If we want to make changes, where do we start?

The following text reflects the opinions of thepanellists as well as the audience, and addressesthe questions stated above separately.

2. Are equity and efficiency in highereducation at odds?

There was a general conviction that efficiency (i.e.cost effectiveness) and equity are multi-facetedconcepts in the debate on higher education. Onthe one hand, higher education systems in manycountries produce more graduates and researchwith relatively less funding, making highereducation more efficient. On the other hand, thereare still many unexploited resources that couldmake higher education more efficient – for

Key words: Cost-sharing, tuition fees, student support.

JEL: I220

* Center for Higher Education Policy Studies (CHEPS), University of Twente, Enschede, Netherlands** Institute of Sociology, Academy of Sciences of the Czech Republic, Prague, Czech Republic


example, parental contributions from high-incomefamilies in systems with no or low tuition fees. Inaddition, one could consider students’ own financialcontributions, for example, through student loansystems.

In terms of equity, public opinion as well as theopinion of politicians inclines toward free highereducation because this is felt to be “fair”. However,the conference concluded that this often has aperverse regressive economic effect because itimplies that the average taxpayers pay for theeducation of people that primarily come fromhigher socio-economic backgrounds and that willbelong to higher socio-economic classes in thefuture. As such, free higher education stimulatessocial reproduction at the expense of the averagetaxpayer.

Regarding the question of whether equity andefficiency can be developed at the same time, theanswer was to charge tuition fees and develop afair system of financial support for students. Inmost countries, the majority of students come fromhigher socio-economic classes with distinct under-representation of students from lower socio-economic groups. Many studies have shown thatthe introduction or abolishment of tuition fees andchanges in student support mechanisms have hadno impact or a very small temporary impact onthe socio-economic composition of the studentpopulation. These findings call for further researchinto more efficient and equitable mechanisms tofinance higher education, with precise design andcareful implementation.

3. Participation in higher education

There are mixed answers to the question of whetherwe want to further expand participation in highereducation. Some countries already have a relativelyhigh participation rate, whereas others would stilllike to expand their systems substantially. Manylabour markets can handle higher numbers ofgraduates for high-skilled jobs. The issue is whodecides on the expansion of the system and in whatdirection. The audience called for greaterdifferentiation in terms of types of higher educationinstitutions, programmes and qualifications. Inaddition, it was stated that merely expandingcurrent public systems without charging tuitionfees would attract greater numbers of studentswithout increasing quality, or perhaps even lowerthe average quality of students and graduates.

The conference agreed that it is necessary tostimulate participation in higher education bytalented but disadvantaged socio-economic groups.

The larger issue highlighted at the conference isthat major educational inequalities becomemanifest much earlier than in higher education;these begin as early as preschool and primaryeducation. In addition, strong tracking systems insecondary education may discourage transition intohigher education.

4. Do students need to pay a largershare of the costs through tuitionfees?

Previous analysis presented at the conferencealready indicated that the majority of participantsfavour tuition fees in higher education. Studentsshould contribute to the costs of education throughuser charges (i.e. tuition fees) for both quality (ofstudents and of programmes) and efficiency, as wellas for equity reasons.

The debate then moved to the returns of highereducation. Analyses at the conference showed thatindividuals benefit greatly from higher education,both in financial terms as well as in non-monetaryterms, such as cultural development, appreciationof leisure and happiness. Of course these benefitsdiffer between countries, institutions, disciplinesand individuals. Regardless of such differences,tuition fees can easily be argued for due to theprivate rates of return. Nevertheless, it was alsowidely recognised that higher education alsogenerates substantial externalities and positivesocial rates of return. These call for continuedpublic investment in higher education.

Some participants claimed that higher educationshould be tuition-free because graduates pay tax athigher levels. Although higher-earning graduatesindeed move into higher taxation brackets, thisalso holds for high-earning non-graduates that didnot make use of the expensive higher educationsystem. In addition, general income taxes do notdifferentiate between the public services that theypay for. Therefore higher education costs cannotbe addressed through presumed higher taxationrates.

Addressing private contributions to the costs ofhigher education, the audience was undecidedabout the level of fees to be charged. Somearguments were made that the marginal costs ofeducation should somehow be brought into balancewith the marginal benefits. Of course, this is verydifficult to calculate for individual students withdifferent capacities and in different institutions andprogrammes. The issue of differential tuition feesalso created some mixed opinions. On the one


hand, differential fees accommodate greaterdiversity in the system very well; on the other hand,it was also feared that differential fees might leadto a greater disparity between students fromadvantaged and disadvantaged backgrounds becausethe latter have more difficulty investing in higher-cost programmes.

With regard to whether tuition fees should becharged up-front or through a deferred paymentsystem, the latter option was preferred because itis viewed as related to future income positionrather than family background. It also removesany argument about liquidity constraints at themoment of enrolment. International practice hasshown that deferred payment mechanisms such asthose in Australia and the UK do not hamperaccess.

5. How should students besupported?

Practice shows that governments make use of anenormous range of arrangements to supportstudents and their families. Systems that are inplace are not easy to change. For example, indirectsupport through students’ parents in the form offamily allowances and tax benefits may not bechanged easily because these often are more genericarrangements for larger target groups. In addition,these are often accompanied by parental main-tenance obligations towards children that areformulated in national (i.e. constitutional) law. Inaddition, such support often can take hidden forms,such as free health insurance and transportationsubsidies.

Grants to students are often more explicitly targetedto full-time students, to high-performing students,to poor students, or to a combination of these.Such direct subsidies may be vulnerable to politicalchange and public demands for budget cuts.Regardless of their more targeted nature, grantsoften provide subsidies to students who do notreally need them, particularly generic or merit-based grants. Generic grants often go together withthe idea of making students financially independent(as much as possible), as in the Nordic countries.However, the participants agreed that addressingaccess issues particularly requires grants based onparental income as a way to stimulate studentsfrom disadvantaged backgrounds to participate inhigher education.

However, student support in the form of studentloans was generally preferred by the participantsas a way to overcome liquidity constraints and tomove the burden of higher education costs to the

time when future graduates are realising theeconomic benefits of their education, mainlythrough employment.

6. What type of loans?

How student loans should be given shape was stillan issue of debate. Whether loans should beavailable to all students or only to needy studentsto a large extent depends on the amount ofresources/capital that can be made available. Itwas undecided whether loans should cover livingcosts or tuition costs in particular; nevertheless,loans do have an investment character, and tuitionpaid for education is an investment in futureemployability. As such, they may be a natural linkbetween tuition and employability.

With relation to the repayment mechanism, someprefer income-related repayment schedules inwhich one repays faster if one earns more, whereasothers prefer traditional mortgage-style loansbecause national tax and debt collection mecha-nisms are not as efficient as needed.

An important issue regarding student loans iswhether or not interest subsidies should be applied.The basic argument is that one should not offerstudent loans with interest subsidies. In doing so,the government subsidises students in a hiddenway; the longer the repayment period, the greaterthe burden on public funds, and students do notperceive this as a subsidy or gift. Of course thereis a case for keeping student loans as attractive aspossible – for example, through using governmentborrowing rates that often are lower than privatebanking interest rates, which are often perceivedas too high for students.

However, there may be very strong political reasonsfor interest subsidies on student loans – forexample, to make loans acceptable politically andin the media. Furthermore, if one switches fromgrants to loans, the subsidy on loans is lower thanon grants. Nevertheless, systems with low or nointerest rates may lead to situations in which loansare in fact a gift of 50% to even 70%. This is anexpensive way to lend money to students whilethose students continue to regard the instrumentas a loan rather than a grant. This should be aserious consideration for student loan policies.

Finally, some loan systems include a risk premium.For example, in the Hungarian case the interestrate has a top-up risk premium of 1.7% to 2.0% tocover default costs. This represents solidarityamong the pool of borrowers, whereby the well-earning graduates pay a little extra for the low-


earning graduates. This means that public subsidiescan be fully used for direct grants to needy students.

7. Transparency and quality

This part of the discussion argued that any studentfinancing mechanism should be clear andtransparent. The government or student financingagency, as well as the media, should communicatevery clearly the objectives of the student financialarrangements by providing proper statements onthe following issues:

• What are the costs of higher education: study-related costs and maintenance costs?

• What are the benefits of higher education?(Rates of return, non-financial returns,differences for various disciplines, etc.)

• What are the tuition arrangements?

• How are students supported? What are thesubsidies? (Direct subsidies such as grants andhidden subsidies through family support, taxrelief, interest subsidies, debt remission, etc.)

• What are the eligibility criteria?

• Have as few instruments as possible and makeuni-directional incentives: tuition fees can beaddressed through loans, and maintenance costscan be subsidised through grants (and loans).

• Use similar mechanisms for differentinstitutions, regions and target groups (evensimple systems are often barely understood byprospective students and their parents).

• Monitor what is happening through studentchoice behaviour.

An interesting part of this discussion also addressedissues of efficiency, equity, tuition fees and studentsupport in relation to teaching quality. What dostudents receive in return for their investments?To what extent does efficient operation lead toreduced quality? If resources are reduced or thenumber of students is increased, to what extentwill this harm the quality of instruction? Finallyit was argued that increases in private contributionsthrough tuition fees and student loans should notbe accompanied by decreases in public funding.Students should have the idea that they receivevalue for money alongside the fact that higherprivate costs should make them more responsiblein the decisions they make.

Another interesting aspect touched upon was thatwe may ask students to contribute more toeducation costs, but that this is not the only wayin which the current generation needs to contributemore to public and semi-public services, such ashealth care, social security and pension schemes.

Regardless of the fact that each of these changesin public systems can be persuasively argued for,together these arrangements can lead to ageneration that is much poorer than previousgenerations, particularly in countries with strongdemographic declines.

8. Where do we start?

The final part of the discussion was devoted to thequestion of “where we need to start” if we want tomake higher education more efficient andequitable. There was a general sense of urgencythat higher education institutions should firstbecome more autonomous in how they spend theirmoney without having to face budget cuts.

Because resources (money, political will,administrative capacity) are often insufficient torealise all the desired changes simultaneously andwithin a short timeframe, selected instrumentsshould be implemented gradually. Introducingtuition fees and student loans, as well as clarifyinginformation on hidden subsidies and perhaps alsorestructuring them into direct subsidies, requiresa great deal of political will and strength. This isparticularly difficult because many such measuresare not favoured by students (who benefit from“free” higher education), and public opinion,political actors and the media remain convincedthat private contributions will have a harmful effecton the participation of disadvantaged students.Nonetheless, most international research on theseissues shows that these convictions are notsupported by such arguments.

Nevertheless, the participants were convinced thatmore research is needed on the impact of financialincentives on student choice behaviour, particularlyon people who do not participate in highereducation.

The final remarks at this conference related to thepotential impact on student financing policies fromthe European Union. The EU could provideincentives for national governments to developmore efficient and equitable higher educationsystems.

All in all, the conference made a valuablecontribution to the general understanding ofefficiency and equity in higher education. Oneimportant step was recognition of the impact ofstructures and opportunities in preschool, primaryand secondary education on opportunities forstudents from disadvantaged backgrounds to enterhigher education. The more egalitarian aneducation system is, the more likely it is that


students will be accepted into higher educationon the basis of ability rather than socialbackground. Student financing is a mechanism tofurther fine-tune participation policies and theincentives for investing in higher education.

doc. dr. milena bevc* funding, equity and efficiency of higher … · 2008. 5. 27. · ib revija...

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