1. Funding Mechanisms to Ensure Stability, Innovation and Sustainability in Higher Education Arthur M. Hauptman IUA Symposium-21 st Century Universities Dublin, Ireland 29 September 2014

2. Four Considerations in Developing HE Funding Strategies Worldwide A country’s economic strength and demographic profile should be critical factors in determining the type of HE system as well as how that system is financed. Funding sustainability is a critical policy goal but should not be the sole policy objective. Funding stability and promoting innovation are other critical goals. Each should be applied to research as well as instruction. It is difficult to have an effective higher education financing system without first having a governance structure that properly sorts out the roles and responsibilities of key stakeholders. Efforts to expand access to HE inevitably will have effects on the quality of the enterprise; these possible effects should be factored into the policy-making process.

3. Structure of this presentation First, the presentation considers the importance of economic strength and demographic profile in determining the design of a country’s higher education system and its financing strategy Second, the presentation considers how to achieve stability, innovation, and sustainability in the funding of both instruction and research – Particular emphasis here on sustainability strategies This presentation does not address the question of how to ensure an effective governance structure or the extent to which a tradeoff exists between access and quality – These two issues will be the primary topics of the IA-HERO discussion scheduled for December this year

4. I. Economic Strength and Demographic Profile as Key Factors in Developing HE Funding Strategies Economic strength and demographic profile should be important factors both in designing the HE system as well as developing strategies to fund it. This is often not the case as countries fail to consider these factors in deciding the structure and financing of the HE system. Economic and demographic factors to consider in deciding on the structure and financing of the HE system include: Does the country have a strong economic base? Is the economy closed or open? Is there significant inward and outward migration? Do university graduates stay in country r move away? Are the number of young people increasing, stable, or declining? Economic and demographic factors affect a number of critical decisions such as: – How big is the HE system and whether massification is feasible – What kind of expansion makes the most sense – What is appropriate balance between higher education and further education – How to maintain or improve the quality of the system, particularly in the context of expanded access – What type of research strategy should be adopted These issues are addressed in the following chart with regard to instruction – Research issues not addressed in the chart

5. Possible Effects of a Country’s Economic Strength and Demographic Profile on Access and Quality EconomicDemographic Profile Strength GrowingStable Decreasing High Income -Massification challenging due to growing demand -Quality of instruction difficult to maintain as numbers grow -Massification possible with stable demand without threatening quality but still very challenging -Massification and maintaining high quality are more feasible when numbers of students are declining Middle Income -Massification very difficult to achieve with growing demand and limited financial resources - Maintaining quality also a great challenge -Massification and high quality instruction difficult to achieve -But increasing HE participation and maintaining quality should be feasible -Massification is a reasonable strategy for these countries -High quality instruction may be less feasible due to limited future growth in resources Low Income -Massification not feasible -Achieving high quality in instruction also difficult due to limited resources -Massification highly unlikely -Increasing HE participation and having high quality instruction are feasible but challenging -Massification may be feasible with low numbers of students but may not be advisable given competing demands for funds

6. II. Stability, Innovation and Sustainability: The Importance of Achieving Multiple Goals International experience confirms that sustainability must be a key goal in how HE systems are funded – Sustainability defined as providing adequate resources per student and funding research adequately to assure good quality in both teaching and research But sustainability should not be the only policy goal. Other important objectives include ensuring stability and encouraging innovation and risk-taking – Stability defined as having a funding process where all stakeholders can predictably plan for the future – Encouraging innovation requires a funding process that does not punish participants for taking risks or experimenting with alternative approaches

7. What Policies are Most Likely to Produce the Desired Results? A key issue for policymakers and other stakeholders to consider is which set of policies are likely to produce the highest level of stability, innovation, and sustainability in both instruction and research The following chart lays out a general set of strategies that countries may consider pursuing in seeking each of these objectives in both instruction and research

8. Mechanisms for Ensuring Higher Education Stability, Innovation, And Sustainability InstructionResearch Stability -Forward fund allocations to all HE institutions -Use actual numbers in designing funding formulas -Adopt multiyear budgets -Fully fund approved research projects on a multi-year basis -Establish policy goals for research Innovation -Fund competitive grants to spur innovative instruction -Fund alternative institutions to spur greater innovation -Support ‘Blue Skies’ research -Competitive research grants Sustainability -Increase the level of public investment in HE -Design formulas to spur more efficiency &performance -Increase share of public funds to more efficient sectors -Shrink the size of the HE system -Increase tuition fee revenues in various ways -Redesign student support systems -Encourage more private funding of public HE -Expand the private provision on HE -Employ more technology to improve productivity -Increase institutional autonomy to increase flexibility -Achieve appropriate mix of direct/indirect costs of research -Adequately fund approved research projects separately from core grants for instruction -Encourage more private sector support of research -Require research collaboration from multiple institutions

9. III. Achieving Sustainability In designing policies to achieve sustainability, it is important first to define what it means for both instruction and research funding to be sustainable What it should mean is to ensure that adequate resources are available to provide a high quality level of instruction and a robust research program What it should not mean is simply maintaining current levels of funding per student or per research project – Adequate levels of instructional funding will change with growth or shrinkage of enrollments given economies of scale, capacity limits, and the ability of institutions to adjust to changing conditions – Research funding adequacy will also depend on institutional arrangements such as mix of direct and indirect cost funding and determination of what constitutes a critical mass of research in different fields of inquiry

10. Sustainable Strategies for Financing Instruction Increase the level of public investment in HE Design funding formulas to spur more efficiency & performance Increase share of public funds allocated to more efficient sectors – Rely more on further education to accommodate demand Shrink the size of the higher education system Increase tuition fee revenues in various ways – Increase fees for current domestic students – Increase numbers of domestic students at current prices – Increase numbers of international students and prices they are charged Redesign student support systems – Target non-repayable aid on students with most financial need – Adopt income contingent repayment of student loans Encourage more private funding of public higher education Expand the private provision on higher education Employ more technology to improve productivity Enhance institutional autonomy to increase system flexibility

11. Sustainable Strategies for Funding Research -Achieve an appropriate mix of paying for the direct and indirect costs of research -Adequately fund approved research projects separately from core grants for instruction -Encourage more private sector support of research – Provide government matching funds for private funding – Provide R&D tax credits -Require research collaboration from multiple institutions

12. IV. Key Conditions for Achieving Stability and Sustainability in Funding Instruction and Research Sustainability and stability requires a funding regime that: funds both instruction and research adequately at predictable and stable levels that allow for the achievement of high levels of quality relies on a mix of public and private funding to achieve sustainable and stable funding levels provides a research agenda that recognizes the importance of both basic and applied research relies more on institutional accountability than government control to determine spending patterns and priorities, an approach which allows for greater innovation and agility at the institutional level