-HIGHER- EDUCATION

PERGAMON Higher Education Policy I I (1998) 37-57 -PoLrcY--

A contribution towards a methodology for university public funding

J. Caraga”, P. Conceig2o”, M. V. Heitorbv*

Abstract

Following a system of indicators, a public funding methodology for the universities is proposed. This methodology is based on a formula and lies on the principle of differentiating universities amongst themselves according to the indicators previously defined. These indicators were developed in order to promote academic excellence in terms of the current understanding of the mission of the university. The result is a funding methodology aiming at leading the university to the prominent role that is required in the emerging knowledge-based economies and societies. @_> 1998 International Association of Universities. Published by Elsevier Science Ltd. All rights reserved.

1. Introduction

University funding has generally been considered from the point of view of the ‘university system’. The viewpoint of the institution itself in terms of the single university, has not always been adequately taken into account in this question. This paper sets out to help widen perspectives on the issue of university funding, by looking at it from the point of view of the institution (Concei@o, 1995). Implicit in this type of approach is the principle of the individual nature of each institution, a concept that tends to get somewhat lost in systematic approaches. Recognizing the individuality of each institution leads to differentiation between universities. This differentiation stems from several factors, among them size, quality, geographical location, history, legal

* Corresponding author

0952-8733!98/$19.00 i;l 1998 International Association of Universities. Published by Elsevier Science Ltd.

All rights reserved.

PII: SO952-8733(97)00026-3

structure, and areas of specialization. This approach is intended to provide a counter- point to more general and homogeneous approaches, stressing the individuality of each institution and, in the proposed funding methodology. respecting the identity and history of each university and its ambition and ability to achieve academic excellence.

The principal aim of this paper is to put forward a methodology for the public funding of public universities, and thereby to contribute towards the recent discussions of university funding (see, for example, Ziderman & Albrecht, 1995). To provide a foundation for the choices behind the proposed funding methodology, a system of indicators to be included in the funding methodology is developed. An explicit funding

formula, developed specifically for the case of Portugal, is presented, although the formula is developed and presented in a country context free format.

The different funding sources and the differences among them are discussed in

section 2, but the paper is focused almost exclusively on public funding. In section 3 the current situation of public funding of universities is discussed. Section 4 defines the indicators to be used as the criteria that set the public funding. In section 5 a new methodology for university public funding is developed. Section 6 summarizes the main conclusions.

2. Sources of university funding

Sources and methods of university funding may seem very numerous and complex. The State can fund university through block grants with no strings attached, but companies can also fund university R&D projects demanding very strict timetables and results. Students pay tuition and fees for education services, but universities may also benefit from endowments or donations.

Although there is a great variety of possibilities, five distinct categories of funding processes can be identified (OECD, 1990) corresponding to different combinations of the source of funding, the mechanism by which funding is awarded, conditions in

the use of funding, and the justification for funding (see Table 1). The first category refers to the situation in which the university funds itself by means

of its investments and the exploitation of its property, both fixed and intellectual, thus ensuring an independent source of income. These funds are used exclusively in accordance with the priorities of the university.

The second funding process has as its source a governmental body, typically the Ministry of Education, which determines the amount of funding to be provided to the university through a specific methodology. The university, in its turn, is not restricted in the uses to which the funds are put, so long as it carries out its activities in such a way as to contribute towards the attainment of general political, economic and social goals.

The third type of funding process also refers to funding through a government

Tab

le

1

Five

ca

tego

ries

of

fun

ding

pr

oces

ses

Sour

ce

Mec

hani

sm

I T

he

univ

ersi

ty’s

in

vest

men

ts,

righ

ts

Fund

ing

thro

ugh

the

univ

ersi

ty’s

and

prop

erty

in

vest

men

ts

and

righ

ts

(e.g

.

inte

llect

ual

prop

erty

)

2 G

over

nmen

t bo

dy

The

St

ate

fund

s th

e un

iver

sity

thro

ugh

a go

vern

men

t bo

dy

resp

onsi

ble

for

univ

ersi

ties

3 G

over

nmen

t bo

dy

The

St

ate

fund

s th

e un

iver

sity

thro

ugh

a go

vern

men

t bo

dy

resp

onsi

ble

for

univ

ersi

ties

4 V

ario

us

gove

rnm

ent

bodi

es

The

St

ate

fund

s th

e un

iver

sity

thro

ugh

vari

ous

gove

rnm

ent

bodi

es,

regi

onal

or

loc

al

5 St

uden

ts.

com

pani

es,

publ

ic

and

Fund

ing

com

es

from

th

e sa

le

of

priv

ate

inst

itutio

ns

acad

emic

se

rvic

es

(tea

chin

g or

rese

arch

)

Use

Ju

stif

icat

ion

In a

ccor

danc

e w

ith

the

univ

ersi

ty’s

prio

ritie

s,

with

out

any

exte

rnal

rest

rict

ions

With

out

rest

rict

ions

Subj

ect

to c

onsi

dera

ble

adm

inis

trat

ive

regu

latio

n

Com

plet

ion

of t

he

prog

ram

or

proj

ect

that

ga

ve

rise

to

th

e fu

ndin

g

Fund

ing

of a

ctiv

ities

sp

ecif

ied

by

the

requ

irem

ents

of

th

e co

nsum

er

The

un

iver

sity

’s

inte

rnal

pr

iori

ties

Con

trib

utio

n to

war

ds

the

atta

inm

ent

&

of g

ener

al

polit

ical

, ec

onom

ic

and

9

soci

al

goal

s 2 2.

C

ontr

ibut

ion

tow

ards

th

e at

tain

men

t g

of g

ener

al

polit

ical

, ec

onom

ic

and

b %

soci

al

goal

s z

Con

trib

utio

n to

war

ds

achi

evin

g th

e r

polit

ical

, ec

onom

ic

and

soci

al

mis

sion

of

the

fu

ndin

g bo

dy

2

Ben

efits

fo

r th

e fu

nder

(p

urch

aser

) 2 L

resu

lting

fr

om

the

cons

umpt

ion

of

? se

rvic

es

prov

ided

by

the

un

iver

sity

%

40 J. Caraqa et al.iHigher Education Policy II 11998) 37-57

body, but in contrast to the previous type, a detailed series of rules and procedures is imposed upon the use of the resources provided to the university.

Fourth, the university can be funded by a range of government bodies and public institutions, including local and regional government, although it will not be depen- dent either financially or administratively on any one of them.

Finally, the fifth process refers to the sale, in the commercial sense, by the university of educational and research services.

The most important point to address in this section refers to the identification of the funding source. Families, companies and the State are the main sources of university funding. Besides these, there are a considerable number of other institutions, public and private, national and supranational, that may fund the universities, such as foundations, private non-profit institutions, and supranational organizations. Besides funding the universities directly, through payment of tuition fees or contracts, families,

companies and other institutions are the source of the funds paid by the State through the payment of taxes.

The State assures the functioning of the universities by providing them with a considerable proportion of their total funding through the government body respon- sible for the universities (Either & Chevalier, 1993). Following Conceicao (199.5) for analytical purposes, it is possible to simplify all these situations by assuming the separation of university funding in two main portions: core funding or core finance (F,), corresponding to a specific contribution by a governmental organization, and complementary funding (F,), which covers funding provided by the other three sources. The total funding of the universities (F) can thus be expressed by eqn (1):

F= F,,+F, (1)

The public core finance corresponds to the direct attribution by the State, through a specific governmental agency, of a funding amount intended to assure that the political objectives regarded as necessary by the State are performed by the Universities. This amount varies from country to country. In Germany and Portugal, for example, F,, corresponds to the bulk of the funds available to universities. In the U.S. and in Japan, for example, Ft assumes a considerable greater importance.

Complementary funding includes three portions. Firstly, financing through the development of R&D activities, where the paying institution can come either from the public or from the private sphere. Secondly, tuition and fees that are paid for by students, in exchange for educational services. This portion assumes, usually, a particularly relevant place in the discussion of university funding, for it has strong social implications. Thirdly, we can consider the selling of other services, excluding R&D and education. that the universities still have an ability to perform, such as vocational training, intellectual property, among others.

In this paper we will be dealing only with the public core funding. The comp- lementary funding is regarded as given. In particular, aspects related with tuition and fees will not be addressed. The assumption is that, although there may be a shift of emphasis on who should pay for university activities, the State is still going to remain a major funder of higher education, especially in countries where the university still needs to expand and to improve its quality. In this paper, a methodology to guide

J. Caraqa et al.iHiyhrr Education Policy’ II (1998) 37-57 41

public funding of university activities is presented, grounded on a set of principles that determine good policy options.

3. A brief description of the current situation in university public funding

3.1. Buckground

The contemporary university is faced with a twofold challenge: on one hand, society presents it with new and growing demands, while at the same time the State applies increasingly restrictive policies to the funding of its activities. The combination of these two factors is reflected in a growing diversity of funding sources and mechanisms which, in turn, brings about changes in the university’s organization and traditional role (Conceicao, 1995).

Strongly marked by the rapid expansion of the 1960s and the crisis of the 19705 universities are seeking creative responses to the new demands of society, by reforming the structure and organization of the activities inherited from this period. Investing in closer links with the community, the University sets itself the task of examining the

quantitative and qualitative needs of its activities and new ways to exploit its scientific and technological potential, while striving to maintain its effective autonomy (OECD, 1987). The impact of these efforts has led to the recognition that, as well as its traditional roles in education and research, a wide range of other activities, usually grouped together under the heading of ‘provision of services’ or ‘links to society’, are now part of the university’s mission.

Despite the increasing diversity of funding services, in most university systems (including the public universities of Portugal) the State remains the main or sole funding source (Either & Chevalier, 1993). The growing pressure to reduce public spending, the emergence of demands arising from other social policies, and the

rethinking of the relationship between State and public bodies in general, all put considerable pressure on public funding of universities. At the same time, in a society in which knowledge is assuming growing importance, the State seeks creative ways of funding the activities and institutions that help to strengthen this factor. Among these

institutions, the university occupies a prominent place (Weiss & Passman, 1991). These factors, in which the function of the university as an institution for creating

and distributing knowledge takes on new importance while at the same time the means of funding these institutions are being questioned, shape the way in which universities relate to the contemporary societies of which they are a part. University funding thus assumes crucial importance for the development of universities and of society, especially, at a time when non-material aspects of society and of the economy are becoming predominant.

It is important, therefore, to analyze the main trends in recent developments in systems of higher education funding. Given these trends, the main core funding mechanisms mentioned above are discussed. One of the most striking aspects of recent developments in the universities is the increased importance of complementary

42 J. Curaqa et ul./Highu Education Policy 11 (1998) 37-57

funding, including tuition fees and contracts, but, since these aspects do not constitute the focus of the paper, the discussion will be brief.

The considerable expansion in higher education during the 1950s 1960s and the beginning of the 1970s led to the establishment of incremental funding mechanisms. In an incremental system, the amount of funding that is received this year is a continuation of the one received in the previous, after adjusting for inflation and increasing scale, for both the State and the institutions themselves. However, during the 1980s there were significant changes in social, political and economic conditions, as well as in the universities’ status in society. A quotation from Unicersities Un&r

Scrutiny (OECD, 1987) gives an example of the climate of the time, which continues to a large extent to this day:

When there is no growth and money is scarce, universities organized according to the college system have difficulties in internal allocation of resources, par- ticularly in such a way as to meet official political priorities. The government,

and other funding sources, react by being more selective and focused in the way they distribute funds, but they are not always in a position to realize the effects this can have on the institutions. The desire to maximize income from private

sources in order to resolve short-term funding crises, for example, can lead research in the direction of applied and routine work. A readiness to accept fashionable research areas can limit the ability of institutions to guide research into areas of greater long-term importance.

The factors behind this climate have had many of its implications for the universities, but concerning university funding, two aspects need to be highlighted: demographic pressures and public spending cuts (OECD, 1987).

Demographic pressures are converging in such a way as to accentuate the con- traction of university funding. On one hand, the number of students enrolled in the universities may decrease, leading to a tendency to reduce the availability of public funds. On the other hand, the increase in the numbers of the elderly may force the State to pay more attention to institutions designed for older people, reflecting in funding flows towards the latter to the detriment of, particularly, the universities.

Public spending cuts, although affecting all areas in which the State traditionally intervenes, are a particular threat to the universities. The advent of mass education led to such an expansion of the university system that, by the end of the 1980s it could no longer be considered a minor part of public spending, as had been the case at the beginning of the expansion, and became a favorite target for cuts in public spending.

In the context of demographic pressure and trends towards restrictions in public spending, the State’s main current priorities with regard to core funding of the universities are (OECD, 1992):

l to increase efficiency and effectiveness in the institutions; l to promote a social market for the universities’ activities, encouraging a certain

amount of competition between institutions;

J. Curap et al.lHigher Education Policy 11 (1998) 37-57 43

l to implement mechanisms to recoup costs, notably by means of introducing or widening the payment of fees;

l to encourage the sale of research and education services, with the aim of increasing the proportion of complementary funding.

3.2. Trends in funding mechanisms

To put these principles into practice requires the conjunction of two factors, namely, the role of the State in direct regulation of university activity and the importance of funding through market mechanisms.

The State may assume an interventionist role in university management, appointing an administration which ensures that activities are carried out in accordance with the

political priorities of the government. It can thus be argued that this model of intervention can help to ensure that resources are allocated within the framework of the government’s priorities, allowing the State to control how the scarce resources at

its disposal are used. At the same time, given that the benefits provided by the universities have a strong

social component, the reason that largely justifies its core funding, the State is in a good position to understand the expectations and needs of society and to allocate resources in accordance with relevant social and economic criteria. In some countries, these arguments support considerable state intervention in university management. However, this model of intervention may clash with the cherished academic freedom

of the universities, with the result that this approach may, if used exclusively, limit the university’s ability to carry out activities whose importance is not obvious to the

non-specialist. A balance between academic interests and those of the State tends nowadays to be

sought through university autonomy and their acceptance of responsibility for the quality, impact and relevance of their activities.

The principle of academic freedom is currently safeguarded in the great majority of countries, embodied in university autonomy, particularly in financial terms. Financial autonomy allows the university to allocate resources in accordance with its own, predominantly academic, priorities, without external restrictions of a political, econ- omic or social nature. This results in the more effective performance of the organ- ization, since any activity that demands high levels of technical knowledge depends on the involvement in decision-making of those in possession of that knowledge.

At the same time, greater freedom in the use of resources within the organization also improves efficiency, since there will be greater internal responsibility for decisions, and provides stimuli to avoid wastage as a result of internal competition for resources. According to Kaiser, Florax, Kodman and Van Vught (I 992) maximum efficiency is obtained through a normative funding mechanism, based on the university’s results and with the greatest possible freedom in the use of resources (see Fig. 1).

Also according to Kaiser et al. (1992) there is further stimuli for efficiency if, as well as core funding, the university has to have recourse to complementary funding. This situation, of needing to call upon other sources, should for that reason be promoted by the State. Indeed, funding by market mechanisms is nowadays a wide-

44 J. CuraCa et aI.!Highrr- Educution Policy II (19!?8) 37-57

L

Fig. I, Incentives for efficiency according to funding mechanism.

spread trend in funding systems. One of the reasons for this is the stimulus it gives to efficiency in the institutions, since competition between institutions encourages greater care in the allocation and use of resources, as well as improvements in quality and effectiveness.

Besides improvements in efficiency and effectiveness, there are two further reasons for the current emphasis on funding by market mechanisms. The first has to do with

the fact that the State frequently acts as an external body that ‘purchases’ education and research services from the universities, particularly when core funding is effected

by means of contracts or even, in some cases. formulas. The second reason is due to the mass expansion of higher education, since this increases the amount of individual rather than social benefit, and thereby strengthens the justification for charging fees. The market forces in the relationship between student and university are therefore stronger, with the former demanding service in line with the expectations that have been created and the latter seeking to maximize funding by this means, by offering an effective and efficient service.

The trend towards increased funding by market mechanisms is connected with cuts in core funding and with the increased importance of complementary funding, and can in some cases lead to considerable real increases in an institution’s budget.

The increased importance of complementary funding is accompanied by the grow- ing importance of market mechanisms in the funding of institutions, not only in the allocation of private funds, but also, and increasingly, of public funds. In institutional terms, there is a tendency to grant autonomy to the universities, including financial autonomy. However, the growing importance of market mechanisms may give rise to a tendency for decisions to be made exclusively according with the market demands, which in turn reduces the weight given to academic interests, like knowledge for its own sake.

The influence of the market on the future of the universities is not necessarily obvious. For this reason, the risks of neglecting academic aspects are perhaps more serious. Education is in an extremely vulnerable position, seeing that increased comp-

J. Caraqa et al.,‘Higlzer Educurion Policy, II (IWSj 37-57 4s

lementary funding may encourage academics to dedicate themselves to more fin-

ancially rewarding activities, such as vocational training and contract research, frequently in experimental development, at the expense of teaching. In this case the quality of education can be seriously affected, as can basic research (OECD, 1992).

Another negative aspect for the universities resulting from funding of research by business has to do with the intellectual property of R&D results. Although as a rule the university reserves this right for itself, a company may temporarily restrict publication or presentation of results, thereby limiting academic freedom. This aspect is particularly important in those systems, such as that of the United States, in which funding by market mechanisms is well established.

In this context, core funding assumes particular importance as an essential com- ponent of the funding received by the university. Indeed, the existence of core funding, even if its provision follows market rules, assures a certain stability in the university system and helps to minimize some of the negative effects mentioned above, so long as the core funding mechanism is properly designed to this effect. This process is increasingly carried out through mechanisms to evaluate universities’ performance in accordance with preselected criteria, in which indicators have a particularly important role. In contract funding mechanisms the specification of criteria is explicit; while it is implicit in funding by formulas. there is nonetheless generally some judgement of the universities’ performance.

In a situation where complementary funding is gaining in importance, where uni- versities are strengthening their autonomy and where funding by market mechanisms is assuming a higher profile in core funding as well as in private funding, the question arises of how the State should determine the amount of core funding to be allocated to the universities. The answer to this question varies considerably from country to country, according to the overall context of higher education funding. No core funding mechanism can benefit, however, all the universities at a time of public spending restrictions. However, some characteristics of university funding mechanisms in the context that we have been describing that can be applied virtually to all university systems are (Papadopoulos, 1994):

l public funding oriented more towards specific goals, for which specific results are expected;

l increased sophistication in the formulas used to allocate resources to institutions, including performance-related rewards;

l greater autonomy and financial responsibility; l a clearer distinction between funding for research and funding for teaching; l an increase in the proportion of university funds coming from tuition fees and

contracts.

The proposal presented in this paper, which will be developed in the following sections, reflects, and incorporates, these trends.

4. Structuring university indicators

The present section develops a system of indicators that will be central to the funding methodology to be presented later.

46 J. Curaca et al.iHigher Education Polic:, II (1998) 37-57

According to Nuttall (1994) four considerations should be borne in mind in the

construction of a system of indicators, namely:

(1) relevance, meaning that the choice of indicators should bear in mind the objectives of the ‘users’ of the system;

(2) framing in a conceptual model, to explain the context that gave rise to the choice of indicators, which will also enable them to be interpreted correctly;

(3) consistency of technique, so that the indicators can be considered valid and reliable;

(4) practicality in determining and using the indicators, concerned with pragmatic considerations regarding the possibility of obtaining the desired indicators and of

limiting their number to an amount that can be used intelligibly.

The aim of the structure of indicators defined in this section is to characterize each university in terms of dimension, quality, and cost. This defines the criteria for relevance of our system of indicators, the first consideration that Nutall considers to be critical. On the basis of these separately determined ‘cost’ and ‘dimension/quality’ indicators, the funding to be allocated to each university is calculated by means of a

formula, to be developed in section 5. Moving to the second consideration suggested by Nuttall, we must be able to

conceptualize the university’s operation. This conceptualization entails the choice of a model, which means that it is important to begin by defining what we know by

‘model’. According to Tavares (1995):

. a model is a description with an explicable construction which should faith-

fully represent the real-life situation under consideration, taking into account the desired levels of extent, detail, rigor and precision.

Following Max van Herpen (1992), it is possible to identify various elements that differentiate the possible approaches to the construction of a model, ranging from the scope of the unit of analysis to the aim of the use of indicators, and conceptual models can thereby be grouped into various categories. Van Herpen’s (1992) review identifies the following categories, among others: models that emphasize social indicators (which have been developed for other social areas such as health, as well as in education and science, and the aim of measuring the impact of these activities on well-being); inductive models (determined by practical considerations related to ease in obtaining statistical data); models determined by the need to achieve political goals; and models which take the school as the unit of analysis.

The framework of the model developed in this work is that of the economics of education and science and technology, the unit of analysis being the university. Considerations of the university should be applied to faculties or university schools in cases where the size of universities requires an organizational structure that involves a division into substructures. The designation ‘university’ thus refers not only to a university in the strict sense of the term but also to a faculty or university school. The main motivation behind this type of approach is that it enables schools to be differentiated, allowing the individual efficiency and effectiveness of an institution to

J. Caraqa et al.lHigher Education Policy II (1998) 37-57 47

be determined, distinguishing between schools according to their merit, rewarding those that achieve good performance and assisting those that perform less well.

According to Scheerens (1992) the conceptual structure of Fig. 2 is best suited to the choice of the school as the unit of analysis. With this conceptual structure, Scheerens considers that the approach can be carried out from various standpoints: it can be sociological (in which case the emphasis is on the social characteristics of

students, teachers and their surroundings, as well as on the relationship established with the context), psychological (in which the relationship between teachers and students is investigated), or economic. In this paper, an approach close to that of the economic standpoint has been adopted, allowing financial flows to be identified and the criteria that should be applied to funding to be determined.

This mode1 consists in a classic four-stage input-process-output-outcome frame- work of reference. Applying this mode1 to the university, we must identify indicators that reflect what is happening at each of the four stages. Table 2 summarizes the indicators used in this section, which enable the size and quality of a university to be determined, our initial aim, and that allow us to characterize the elements presented in the model. The column ‘type’ in Table 2 refers to the elements present in the model of Fig. 2.

We now move to the discussion of all the indicators presented in the previous table. As the first indicator in Table 2 shows, the existence of an indicator that gives information on the results of evaluations of the quality of each university is assumed. This is laid down in the Portuguese Law Governing Evaluation of Universities, and is a procedure that is present in several other university systems. Aspects related to evaluation of the quality of the universities are thus outside the scope of the structure of indicators that is being proposed, bearing in mind that for each university it is assumed that there exist results of comprehensive university evaluations. This is a measure of the outcome of the university activities.

The questions of prestige of courses and scientific skills are both closely related to assessment of quality. At the same time, given that it is intended to include these

J

Fig. 2. General reference model for the development of indicators.

48 J. Curaqa et rrl./Hiylzrr Educarion Polk:, II (1998) 37-57

Table 2

Indicators of dimension and quality

Designation Level of Type Associated information

differentiation

Results of Quality Assessment

Average entrance grades

Proportion placed in first option

No. of Master’s students

No. of doctorate students

Complementary R&D funding

No. of undergraduate degree students

Success in graduation

[Undergrad. student]/[FTE teacher] ratio

[Master’s student]/[FTE teacher] ratio

[Doctorate student]:‘[FTE teacher] ratio

[FTE teacher]![Admin. staffj ratio

University

Course

Course

Course

Course

University

Course

Course

Course

Course

Course

Course

Outcome

output

output

Input

Input

Input

Input

output

Process

Process

Process

Process

Quality

Quality

Quality

Dimension

Dimension

Dimension and quality

Dimension

Quality

Dimension and quality

Dimension and quality

Dimension and quality

Dimension and quality

aspects in the funding methodology, it is important to include them in the discussion of the structure of indicators.

With regard to the prestige of courses, indicators are used that reflect two aspects: the entrance qualifications of students admitted, and the demand for courses among applicants. Cave, Hanney and Kogan (1991) propose an indicator solely for the popularity of courses, associated with entrance qualifications, since, according to the authors, this factor is related to the strength of demand. Despite empirical evidence for this view, a direct analysis of demand provides an important refinement, allowing a two-sided view of the characteristic of the intake.

Specifically, as an indicator of entrance qualifications, it is proposed to use the average grades in entrance examinations obtained by students admitted to a given

course, and as an indicator of demand, the proportion of students accepted on a course who chose it as their first option. These indicators are particularly suitable for dealing with undergraduate degree courses, the data being normally easy to obtain.

With reference to scientific competence the question is more complex, and dis- cussion of this point will reveal the ways in which research activities are dealt with in the system of indicators. Although there are a wide variety of methods for ‘measuring’ university R&D results, including different units of analysis (individual. research group, department, faculty, university, country, region), and different temporal per- spectives (e.~-ante and ex-post), in the Supplement to the OECD Frascati Manual dealing with R&D in higher education, qualitative assessments (peer review) are distinguished from quantitative assessments (OECD, 1989).

The chosen indicator associated with university R&D activity is the number of post-graduate students. Post-graduate students are indeed associated with the per- formance of R&D, therefore the indicators associated with research, reflecting the university’s competence in R&D, the amount of complementary funding and the

J. Camp et al./Highcr Education Poliq II (1998) 37-57 49

number of post-graduate students, i.e. those enrolled in Master’s and doctorate programs.

The number of undergraduate degree students is an essential indicator for the quantitative characterization of teaching (OECD, 1994). For qualitative charac- terization, besides the indicators of popularity already discussed, it is important to define an indicator of efficiency. This indicator should relate the number of graduates with the number of students who entered at least n years ago, where II designates the number of years required to complete the course.

Thus, in order to measure the efficiency of undergraduate degree teaching, the indicator of success in graduation is used, which is defined as the result of the ratio between, on one hand, the number of students enrolled in the first year for the first time nf 1 years ago and already graduated, and on the other hand the number of students who enrolled in the first year for the first time IZ + 1 years ago. Success is thus measured by adding one year to the n set out in the curriculum. In practice, academic criteria inevitably affect graduation levels in the planned number of years, which means that there is always a certain inefficiency in the educational process (Cave et al., 1991).

Regarding teaching and non-teaching staff, it was decided to consider the [student],

[FTE teacher] ratio and the [administrative sta@/[FTE teacher] ratio, instead of the direct number that quantifies these resources as presented in Table 2. These ratios

must be determined for each course, which brings an additional difficulty, since teachers and administrative staff are assigned to departments rather than to courses. For the funding methodology proposed here this question is irrelevant, since these ratios are defined externally to the university, in the form of standard ratios which, as a function of the number of students enrolled, enable the university to determine the absolute number of teachers and of administrative staff for each course.

We must now have a measure of the costs involved in the university activities. Crossing the information on costs with the quality/dimension indicators, we are able to determine funding. The discussion that follows deals with the determination of costs in the university, and, at the end of this section, the financial indicators to be

used in the funding formula will be proposed. Costs, according to the economic definition, should take account of all the factors

of production used, including depreciation and opportunity costs. The latter items do

not take the form of explicit financial flows, that is expenditure. Various types of costs can be considered, from total costs, which include the sum of fixed costs (those incurred independently of intensity of activity) and variable costs (dependent on production), to marginal costs associated with a particular output (which indicate the additional cost of producing one more unit of output).

It is not intended to measure the cost of a university in the formal economic sense of the term, but rather to determine the indicators that will enable a funding unit to be calculated. This funding unit, when included in a formula containing indicators of quality and quantity, should allow the funding to be allocated to any given university to be determined. The determination of the funding unit is part of the development of the funding methodology carried out in the following section. In this section the indicators that will permit this determination are proposed.

Expenditure on teaching and non-teaching administrative staff thus gives important information about the financial structure of a university. It is accordingly proposed to use as financial indicators the average salary of teaching staff and the average salary of non-teaching administrative staff. Average salary is defined as the sum of the total gross remuneration of teaching staff (in the first case) and the administrative staff (in the second case), divided by the number of FTE teachers and the number of administrative staff respectively.

As well as information on the financial structure of expenditure in the university, these indicators also give additional information related to the structure of skill levels in the teaching and non-teaching body.

5. Proposal for a methodology for university public funding

5.1. A discussion qfformulu,ftlndinq

The funding of activities on the basis of performance indicators can be achieved by means of a formula. This methodology, integrated into a system that will allow the universities freedom in the use of their funding, and based on an appropriate system of indicators, encourages maximum efficiency (Kaiser et al., 1992). It is worth making a general characterization of funding by formula from the standpoint of both the government and the universities.

Beginning with the perspective of the government, funding by formulas presents several characteristics that can be considered advantageous, namely (Darling, England, Lang & Lopers-Sweetman, 1989):

. It constitutes an explicit platform for allocation of resources, particularly important at a time when there is a need to justify public spending;

l it provides a basis for medium-term planning of public spending budgets for the

universities; . it enables differentiation to be made between allocations to different institutions in

a clear and transparent manner; . it serves as an instrument for implementing educational, social, and fiscal policies.

From the viewpoint of the universities formulas may also be advantageous, seeing

that:

. they permit clear public demonstration of income and how it was obtained; l they establish equal funding for similar performances and characteristics, a par-

ticularly important point in an environment in which market mechanisms are increasingly being implemented;

. they reduce the effect of political influence in determining the amounts to be

attributed; . they constitute a common basis for decision-making criteria, thereby clarifying the

universities’ options; . they allow various incentive schemes, such as the encouragement of increases in

J. Curap et ul.lHigher Educution Policy II 11998) 37-57 51

complementary funding as a complement to rather than a replacement for core funding.

Before presenting the development of the formula itself, it is worth explaining three important points that were taken into consideration in the development of the formula.

First of all, formulas, when excessively complex, with too many coefficients and weightings, can become virtually arbitrary instruments for allocating funds, thereby losing one of their advantages, namely the clear allocation of funding following

explicitly defined criteria. For this reason, it is necessary to seek to minimize the number of indicators and coefficients to be applied or defined beforehand.

Secondly, the formula should take account of an appropriate number of indicators defined by the State, which will on the one hand facilitate the achievement of priorities in national science and education policy, and on the other hand will enable university autonomy to be maintained. In fact, an excessive number of indicators and coefficients can encourage the manipulation of indicators at a governmental level, exaggerating the State’s influence on the universities.

Finally, the formula should avoid situations that will disrupt the system, which can

happen if the university, seeking to maximize its funding, endangers essential aspects of its function, as in the abolition of courses when the weightings of particular areas

of study are very low.

5.2. Corefinding

The structure of the formula for determining core funding, F, results from the sum of two components, one directly allocated to the educational and research activities of the university (funding for activities), and another which is related to complementary funding (the School’s own income), in accordance with expression (2). It should be stressed that funding is determined for a faculty or a school and not for a university, in accordance with one of the principles defined in the previous section:

F = ( fo~~~~ie~ * (level of School) + (“nd:~ncc~~ging)

The first portion aims to assure funding for the proper functioning of the school, granting funds for current and capital expenditure, while the second is intended as an incentive for the schools to obtain their own income, based on the concept of matching funds, where the State matches funds received through complementary funding. The 1~~1 ~f’Sc/?ool is the result of the process of assessing the quality of the faculty, and has the purpose of ‘rewarding’ those university schools with the best results in the assessment process. Therefore, the formula is divided into two portions, the first correspondening to the financing of activities, and that will be discussed immediately, and a second portion that intends to encourage self-funding. which will be discussed subsequently.

52 J. Curcrp ei ul.!Higher Education Policy II (1998) 37-57

5.2.1. Funding qf’acticities

The formula corresponding to the funding of activities is given by expression (3) in which N,, denotes the correction factor for the level of the school, and it is considered that funding for activities results from the sum of funding intended for the various

degree programs j; in operation in the school (undergraduate, Master’s and PhD degrees). Index k has been omitted so as not to overload the notation, but it is taken that all the indicators refer to the year k for which the funding is calculated, unless expressly stated otherwise:

Subporti0ns.f;. are determined in accordance with the structure presented in expression (4), in which c designates a graduate degree, master’s, or doctorate course.

Expression (4) shows that funding for each course c results from multiplying a ‘cost’ per student by the number of students enrolled in that course, as well as the quality factor which has the purpose of limiting the tendency to increase the number of students in order to maximize funding ignoring criteria of quality. The discussion of the structure of this quality factor, which follows on from the analysis of the ‘cost’ of each student, demonstrates how the desired effect may be achieved.

Expression (5) shows the formula for calculating the funding for course L’, in which u,. is the funding unit (with dimensions of ‘cost’ per student), 11, is the number of

students enrolled, and qc is the quality factor:

f; = 24,. * 12, * q< (5) The funding unit, u,, is calculated in accordance with the structure presented in

expression (6):

r [~~~t?~~r] [per ~~[~~.~~~yember]

u, =

j

standard ratio +

standard ratio

students/FTE teacher students/admin. staff members

oft Of<

percentage increase

for structural costs (6)

oft

The funding unit for each course depends on the expenditure on teaching and non- teaching administrative staff, defined as a function of average salaries in the school,

J. Caraqa et al.iH(yher Education Polk), 1 I (1998) 37- 57 53

which are divided by standard ratios for each course. In this way, standard staff costs per student are obtained. To these must be added structural costs related to the maintenance of physical infrastructure (water, energy, cleaning, security, com- munications, conservation work) services (libraries, computer centers), and an allo- cation for capital expenditure. The funding unit is thus calculated by multiplying staff costs by a percentage increase to take structural costs into account.

Expression (7) gives the formula for determining the funding unit for each course, in which SD,. denotes the average salary of FTE teachers by school and SF, the average salary of non-teaching administrative staff, also by school (both determined

for the year before the current), RAD, and RFD,. are the standard ratios per course [students/FTE teachers] and [non-teaching administrative workers/FTE teachers] respectively, and S, is the standard value that represents the percentage increase per course for structural expenditure:

SD,,

” = -+ RAD,

(7)

The structure of q‘, the quality factor per course, is given by expression (8) which results from considering three quality criteria: success in graduation, quality of student intake. and students demand:

qC. = (success in graduation) * {quality of intake} * (entrance demand) (8)

Each term in the right-hand side of expression (8) is a function of an indicator associated with the criterion that it intends to cover, of a standard value for that indicator, and of a weighting for the effect of the indicator on the funding formula, this weighting having a value strictly between 0 and I. It is assumed that the indicators associated with the quality criteria included in expression (8) also vary between 0 and 1. The structure of each of the three terms in the right-hand side of (8) is given by expression (9):

i

indicator - standard value

standard value

Expression (IO) shows the formula for determining q,. The indicators selected were. in accordance with the definitions given in section 5, students’ success in graduation (designated by y,,, with z as the standard value), the average of entrance examination grades (represented by m,, with e as the standard value), and finally the proportion of students placed in their first option (represented by p(, the standard value being pC). Weightings are given by the coefficients x~,,, SI,,,,,, and LX,,,,, and depend on the level of the course, in other words on whether the course is for undergraduate degree, Master’s, or doctorate. The values of the indicators are taken in the year k- 1, that is in the latest year for which they are known:

54 .I. Cavap ef al./Higher Education Policy II (1998J 37-57

From expression (5) it can be concluded that funding depends on the product of the number of students and the quality factor qC. In this way the indicators in expression (10) introduce a stimuius towards improvement in the school’s performance, and constrain the natural tendency to seek increases in student numbers as the only criterion for maximizing income. In fact, the conclusion of indicator yC encourages academic success, that is the efficiency of the teaching process, discouraging a possible strategy of limiting graduations as a way of increasing the number of students enrolled with the aim of maximizing funding. Indicator IW,. promotes quality in education, in that it rewards student intakes with higher than national average performance in entrance examinations. Finally, indicator pC reflects the popularity of courses, encour- aging proper quantification of the supply (number of places) in relation to demand, since optimum performance is achieved with a high proportion of students placed in their first option.

Returning to the formula for calculating funding for activities, given in expression (3), it is important to discuss the determination of coefficient N,, which takes account of the level of the school, resulting from a quality assessment. The structure for calculating N, is given by expression (1 I), which is analogous to the one used as a

basis for determining the terms of q<. In expression (11) B represents the weighting attributed to the assessment, n, is the level achieved by the school in the quality assessment process (corresponding to the indicator presented in section 5) and np is the standard value for the quality indicator corresponding to the average, in which case the contribution of the quality assessment is nil:

N, = [l +f~*(tz-n,)] (11)

5.2.2. Self-funding The last term of the expression for determining overall funding corresponds to the fund for encouraging self-funding, as expressed in formula (2). This part is intended to stimulate more dynamic schools to obtain funds by means of complementary funding. This part is calculated in accordance with expression (12) in which F,

designates complementary funding obtained in the previous year, and 0,. represents the standard value which quantifies the amount of complementary funding for each school. Seen in another way, for each currency unit that the school receives through complementary funding in year k - 1, in year k it will receive v, currency units through public core funding:

,funding for rewarding self-funding = v, * F, (12)

5.3. Implications qf’the quality indicators on funding

In the process of developing the formula presented above, various indicators were used, which were described in section 4. However, various coefficients and standard values have also been introduced, the meaning and method of determination of which should be described. Following is a discussion on the impact of the standard values.

J. Caraqa et al./Higher Education Policy II (1998) 37-57 55

Their impact on the funding formula is clarified, and their role in the funding formula

is discussed. The numeric values of gL, m,., and pC define standards that are ‘compared’ with the

values actually taken by the corresponding indicators. This comparison is made through the determination of the relative difference of the indicator to the standard value. Generically, each indicator i has a corresponding standard value, T, and the impact in the funding formula is given by expression (13) where c( is the weight:

4 = [I++]] It is important to understand the impact of the choice of the standard values on the impact on the funding formula. This impact can be understood by analyzing the values that q can assume. Figure 3 shows that whatever the values chosen for the standard value, the minimum of q, that occurs when i = 0, is given by 1 --c(. The maximum value of q, which occurs when i = 1, depends on the standard value.

The figure shows that the lower the standard value, the higher the maximum value of q. A standard value of 0.5 yields a balanced difference between the upper and lower

Q A

P-1 ------ _-.____._-_---___ ,,A

/ 0 i

(,+ ) _ ___---------_--/___ 1 __-- &o,s

/ :- Lo.5 / q#q& . _..---_.----_.._7LT< . . . . . . _ __./rLl *---____ i>o*s . . . .._ -.I_

1 -,L. : _,_ =----- i

0 : _j,.- _--- : 0

/ /

i__-- ;

(1-l - 0__-”

__.-?

I 1 c : '1 0.5 & 1 i

Fig. 3. Impact of standard values on the funding formulas

56 J. CaraGa et al.iHighrr Educution Policy 1 I i 1998) 37-57

deviations from the standard value, in the sense that the maximum of q is, in this case, equal to 1 +cc.

This analysis shows that to have a balanced impact of the quality correction on funding, the standard value should be close to 0.5.

6. Conclusions

A funding methodology is presented that aims at promoting excellence in all the activities included in the university mission, through the rewards to quality. The

explicit formula that is proposed is structured in order to benefit outstanding per- formance by institutions, creating a positive cycle that reinforces quality in the entire system. The unique outputs that society receives from the university, and that result from its mission, include knowledge creation and knowledge diffusion. Funding is based on the university proficiency to provide these elements in adequate quantity and quality.

Based on the assumption that a funding methodology is particularly suited to influence institutional behavior, the implementation of a new methodology should be regarded not only as a means to achieve an efficient allocation of resources, but also, and primarily, as a way to enhance the university and its impact on social and economic development. Leaving the financing of the university only to market mech- anisms can result in a lost opportunity to lead the university to the prominent role

that is required in the emerging knowledge-based economies and societies.

Acknowledgements

The authors would like to acknowledge to Prof. Diamantino F. G. Durr?o for all the support provided during the development of the project that yielded the present paper. The assistance of Prof. Luis Magalhaen is also gratefully acknowledged. Very able research assistantship from Pedro Janela and from Tiago Caseiro should also be acknowledged. The revision of the written English by Paul Covill is appreciated.

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