Newsletter No. 129

CUHK Newsletter No. 129 19th June 1998 3 accountability on the performance of universities supported by taxpayers' money is hard to refute. In many countries, like the United Kingdom and Australia, universities have been asked repeatedly over the years to increase their productivity as their per student real expenditures are progressively cut. In the Hong Kong Special Administrative Region (HKSAR), the government, through the University Grants Committee, an agency which allocates funds to universities on its behalf, has requested the universities to increase their productivity to meet a 3 per cent per annum reduction in per student real expenditure from 1998 to 2001. In the developing world and some of the former Soviet bloc countries in Central and Eastern Europe, per student real expenditure is cut drastically and arbitrarily without the supporting argument on accountability and productivity, and the universities are left to cope with the reduction. Looking ahead into the early 21st century, the trend of expansion in higher education will continue. The base of the enrolment ratio in many middle-income and low-income countries is still quite low. There is still room and therefore pressure for it to increase, albeit at a slower pace than in the last few decades. Therefore, the pressure on reducing per student real expenditure will continue and publicly funded universities must be prepared to meet the challenge of maintaining and improving quality with fewer resources per student. University Responses to Financial Stringency There are several ways in which universities can deal with the reduction in per student real expenditure: cost- sharing with students, raising private funds, engaging in other income- generating activities, increasing productivity and efficiency, and reordering priorities and internal reallocation of resources. The relative effectiveness of these measures in meeting the financial challenge varies with the universities and the countries concerned. It is unlikely that a single measure is adequate. A combination of measures may well be necessary. Cost-sharing with Students A growing number of countries which have heavily subsidized university students in the past have moved in the direction of cost-sharing with students. Cost-sharing is usually pursued by charging tuition fees in countries where higher education was previously free. In countries where tuition fee has been charged, it is further raised to increase the cost recovery ratio. Cost-sharing is usually backed up by astudent finance scheme of grants and loans to provide aid for needy students. The general trend towards more cost- sharing, higher tuition fees, and higher cost recovery ratios is evident. Income from tuition fees in public universities represents 22 per cent of recurrent expenditure in Vietnam, 36 per cent in Chile, and 46 per cent in Korea, just to quote a few examples of high cost recovery ratios (World Bank, 1994). In the HKSAR, the cost recovery ratio has increased to 18 per cent over the last several years. Since 1989, university students on the mainland have also begun to pay tuition fees, and self-supporting students have been paying higher tuition fees than regular students. In some countries cost-sharing as a means to manage financial stringency is not apossibility for the public universities because tuition fees are set by the government, not the universities. Raising Private Funds To diversify the sources of financial support, public universities could make an effort to raise funds through donations from alumni, private corporations, and benefactors. Private donations are unlikely to be large enough as a source of income to finance a significant portion of the recurrent expenditure, but they can have a discernible impact in specific areas of university operations, e.g., construction of new facilities, provision of scholarships, purchase of scientific equipment. Success in fund-raising depends on many factors. An important factor is the government's tax exemption policy. Generous tax concessions on donations help universities to solicit private funds. Among the developing countries, India has one of the most generous tax exemption policies, allowing 150 per cent of the contributions by individuals and corporations to be tax deductible. In this regard the government on the mainland may need to review its tax policy to exempt private donations to universities from tax if they are to be encouraged. Other Income-generating Activities Another possible source of funding for universities is revenue from other income-generating activities. These include self-financing academic programmes, short training courses offered to participants from outside the university, contract research, and consultancy services. In universities on the mainland, some of these activities have extended beyond the conventional scope of teaching, research, and consultancy to include commercial operations and lease of retail properties owned by the universities. In some Chinese universities, revenue from income-generating activities could account for as large as 20 to 30 per cent of the budget. It is an important source of funds for supplementing academic salaries and financing other teaching expenses. Caution, however, has to be exercised so that the focus of the staff of the universities is not diverted from their primary missions of teaching and research. Increasing Productivity and Efficiency Another way to cope with declining per student real expenditure, besides increasing and diversifying the sources of income, is to contain or even reduce expenditure. To maintain and improve the quality of education wi th reduced expenditure, productivity and efficiency must increase. Universities can cope with expenditure cuts with less impact on quality if they are given the financial autonomy to manage their own budgets. In countries where the government exercises tight financial control of the universities and approves individual line items of their budgets, there is little room for the universities to adjust to funding cuts by internal allocation. In such situations, the cuts are invariably more arbitrary and have a greater adverse impact on quality. There are three principal systems by which governments fund their universities. Many developing countries distribute resources to the universities by negotiated budgets. Each university negotiates its budget w i th the government. Budget negotiation imposes a lot of uncertainty on the universities, particularly in times of financial stringency, and gives them little incentive to improve quality or efficiency. Many countries adopt input-based funding mechanisms. Funding for the universities is calculated on the basis of enrolment. A funding formula which differentiates unit costs and assigns different weights to different fields of study and levels of education (undergraduate versus postgraduate etc.) is used to determine budget allocation. Increasingly, there are more countries that adopt output-based or performance-based funding mechanisms which allocate funding on the basis of certain output measures, such as effectiveness in producing graduates. Examples are Australia, Denmark, Finland, the Netherlands, and Israel. In the HKSAR, the funding methodology adopted by the University Grants Committee is a combination of input-based and performance-based mechanisms. About 70 per cent of the funds is allocated according to student numbers and the remaining 30 per cent based on research performance which is assessed in a three-year cycle. After the grant has been calculated according to the funding formula, it is allocated as a block grant. Universities have autonomy in the use of the funds within the block grant to further their educational purposes in the manner they see fit, subject to some standing regulations on salary scales and staff benefits. The general international trend is towards more decentralization and greater autonomy for universities to manage their own finance, and to move towards more performance-based funding mechanisms. The argument for more decentralization and autonomy is persuasive. It accords with the principle of unity of responsibility — universities should, being responsible for coping with reductions in per student real expenditure, be given greater authority to manage their own finance. After all governments or their funding agencies do not have as good information on the internal finance and operation of universities as university administrators. Universities themselves know best how to improve efficiency, and where cost savings should come from. As governments allow universities to have greater financial autonomy, they will demand greater accountability. In countries where there is increased political participation of citizens, the call for greater transparency in the allocation process and greater accountability for the performance of the universities is irresistible. In response to reduction in resources per student, increasingly performance-based funding, and demand for greater accountability, universities under centralized management must consider restructuring their management. Universities are increasingly complex organizations. In acomplex organization, the flow of information and the alignment of objectives between hierarchies of management are problems of concern. A centralized mode of management assumes that the management has full information and makes better decisions on daily operations than front-line staff in the departments and units. This assumption is hardly justified. The consequence of centralized management control is often inefficiency and lack of incentives and initiatives. The principle of unity of responsibility and the rationale for governments to decentralize financial autonomy to universities apply equally well to the relation within a university between the administration and the various departments and units. The responsibility to cope with reduction in resources per student should be delegated to the departmental level. It should be accompanied by greater budget authority and accountability. Responsibility for managing cuts in funding, incentives for performance, and demand for accountability can be transmitted from the government to the university administration, and from the administration to the department heads. If decentralization is to be an effective means of increasing efficiency to cope with funding cuts, it is essential that as responsibility, authority, incentives and accountability cascade down the organizational levels wi t h in the university, they do not get diluted along the way. It is also important that decentralization of authority does not go to such extremes as to splinter the management of the university. Senior management should continue to have a tight grip on the strategic development of the institution and the allocation of resources. One way to decentralize budget authority within the university is to allocate one-line budgets to departments and units. The budget may be calculated according to afunding formula which can be input-based or performance-based, or a combination of the two. Funds are allocated in one-line to give budget- holders flexibility in the use of resources, in much the same way as the allocation of block grants by governments to universities in some countries. Incentives should be put in place to align the budget- holders' objectives with the objectives of the university administration. The budget- holders should be held responsible for the exercise of financial and management authority, while checks and balances to this authority should be instituted. Re-ordering Priorities and Reallocation of Resources I have discussed several means of diversifying the sources of income and increasing efficiency. They should be sufficient in coping wi th a gradual reduction in per student real expenditure. However, in situations of drastic reduction, there may be no alternative but to re-order priorities and to reallocate resources accordingly. This could mean terminating programmes, eliminating departments and closing down service units. Eliminating teaching programmes and retrenching teaching staff are not something that educators like to do but if university finance is in dire straits, these unpleasant decisions cannot be avoided. Some universities have gone through these difficult elimination exercises. Concluding Remarks I have reviewed the economic, social, and political forces that drive the higher education sector to expand, and in the very process, also drive down the per student real expenditure. When governments make the popular decision to expand higher education rapidly but shy away from the difficult decision of cutting other social spending to accommodate the expansion, they often assert that universities can cope with the funding cuts without affecting quality. They are neither well informed nor have they done any research to substantiate their assertion. There is obviously a limit to how much reduction in per student real expenditure that universities can cope without hurting quality. The public should be educated that ultimately it is the students and their parents who suffer from a decline in educational quality, a decline which can be quite drastic, as we witness in universities in some developing countries. The public should be well informed so that governments are themselves held accountable if they decide to expand higher education without a corresponding increase in resources.