Evaluation and Allocation of Resources in Higher Education: The Potential and Challenges of Performance-Based Funding

In April 2004, National universities in Japan were incorporated and the basic costs of education and research were distributed to them, by the central government, in the form of a subsidy for operating expenses, without any restrictions on how the money is used. Basically, the subsidy for operating expenses is calculated by multiplying the amount of the previous year’s subsidy by certain coefficients. Ultimately, the distribution of the subsidy reflects the historical funding of the former Special Account for National Schools, and fails to deliver an incentive to improve the quality of education and research. Following this criticism, reform of the subsidy for operating expenses has become an important issue, and the Japanese government has decided to distribute the subsidy in a way that takes into account the performance and accomplishments of each university, starting from the next medium-term plan (beginning in fiscal 2010). The purpose of this paper is to analyze the problems relating to the current subsidy for operating expenses and the performance evaluation of higher education, and to discuss the potential and challenges of a performance-based funding for operating expenses that distributes resources based on a performance evaluation. The paper also analyzes the schemes and results of performance-based funding for operating expenses in other countries and estimates the distribution of such subsidies to each university in Japan, when a new allocation rule based on factors such as the number of students and performance is introduced. Under the current system, the subsidy for operating expenses is not distributed fairly to universities in light of factors such as the numbers of students and teaching staff, and the lack of transparency in the distribution rule. In the medium-term objectives and plans, items for evaluating education and research are centered on processes, services, and activities, and there are few performance indicators that measure the outcome and quality of education and research. Evaluation in the medium-term objectives is an assessment of the level of attainment of objectives set by each university and is not based on benchmarks common to all universities. Reflecting these evaluation results in the calculation of the subsidy for operating expenses, during the term of the next medium-term plan, would likely carry the risk that evaluation activities and the allocation of resources could become distorted. There are some issues between the government and universities, such as asymmetrical information and transaction costs, and to resolve these issues and improve the quality of education and research, a hybrid funding system for operating expenses (based on both numerical indicators and performance indicators) should be introduced after clarifying the roles and functions of national university corporations. As specific measures, it is necessary to divide the funding for education and research and introduce a fair and transparent distribution rule based on the number of students and other factors. To introduce performance-based funding, it is important to develop methods to measure the quality and outcome of education and research and introduce a system to control the side-effects of these methods.