RIETI Policy Symposium

Universities of the Future from Social and Economic Perspectives

Information

Session 2: "Structural Analysis and Reform of Operating Grants"

Session Chair

  • SHIMA Kazunori (Associate Professor, Research Institute for Higher Education, Hiroshima University)

Presentation: "Analysis of the Financial System of National Universities - An Approach from the Structure of University Operating Grants"

  • AKAI Nobuo (Faculty Fellow, RIETI / Associate Professor, Osaka School of International Public Policy, Osaka University)

Presentation: "University Operating Grant Reform: Japan's Issues and Overseas Case Studies"

  • TANAKA Hideaki (Associate Professor, Institute of Economic Research, Hitotsubashi University)

Presentation: "Lessons from Management and Finance Reforms in the UK"

  • Quentin THOMPSON (Education Consultant)

Session Outline

In Session 2, three reports were presented on the issues outlined below. All three reports reflect empirical, institutional, and foreign case-study research conducted on the structure and conditions of operating grants for national universities.

  • Structure of the operating grant system.
  • Criteria used in the allocation of operating grants.
  • Reform of operating grant systems in foreign countries.

Nobuo Akai Report

The report presented an analysis of the structure of the operating grants system for national universities from a fiscal and economic perspective. The first half focused on the current state and problems of the operating grants systems for university hospital management, while the second half presented the results of empirical analysis on the determinants of operating grants.

  1. Structure of the Operating Grants System
    • The operating grants system is designed to cover deficits between revenues and expenditures. As in the case of local tax grants, allocations are made to ensure the availability of funds. This is a superior system from the perspective of fairness and equity, but contains problems from the perspective of efficiency.
    • In operating grants for university hospitals, a comparison between budgets and the final settlement of accounts shows that "grants to university hospitals (budget)" is smaller than "revenues from grants to university hospitals (account settlement)." The discrepancy between budgets and account settlements arises from differences between standards for the calculation of expenses used in the computation of operating grants and accounting standards used by university hospitals for the recognition of revenues from operating grants. These standards should be unified to establish greater transparency.
    • The computational rules of grants to university hospitals assume that revenues can be increased by two percent while expenses remain unchanged. A test to validate this assumption indicated that while the revenue assumption (two percent increase) was satisfied in the case of many university hospitals, the expenditure assumption (no change) was not necessarily being met. In light of this fact, changes should be made in the computation of operating grants for fiscal 2010 and beyond.
  2. Analysis of the Determinants of Operating Grants
    • There is a significant positive correlation between operating grants ("basic portion," "competitive portion," "total amount") and the number of teaching staff and students. The correlation is particularly strong for the "basic portion" of operating grants. Furthermore, in relative terms the number of teaching staff has greater explanatory power than the number of students.
    • "Special grants to enhance education and research" comprise the "competitive portion" of operating grants. The results show a negative correlation between "special grants to enhance education and research" in the current and preceding terms, indicating that the government may be prioritizing the allocation of these funds to universities that received smaller amounts of such funds in the preceding term. This has resulted in equitable allocation. In the future, greater transparency should be established in the selection process and methodologies. Also, the effectiveness of fund allocation methods should be verified.
    • Steps should be taken toward allocating operating grants on the basis of performance. This requires the development of appropriate performance indicators (research indicators, educational indicators, and social contribution indicators) and the accumulation of necessary data.

Questions and Answers

The following questions were received from the floor.

Q: Major reforms were made in the medical service fee system in fiscal 2006. Did you make adjustments for this fact when analyzing operating grants for university hospitals?

A: No adjustments were made because my purpose here was to identify differences among university hospitals. While the reforms to the medical service fee system were applied nationwide, regional differences have emerged. To understand the impact of regional differences, one would have to look into the details of the medical services provided by each university hospital. In this context, it would be important to differentiate between successful and unsuccessful efforts to curtail costs. However, these matters cannot be determined in the present analysis. I believe regional differences point to the existence of disparities that do not depend on fees for medical services provided.

Q: From the fiscal perspective, what approaches remain to be explored in research on operating grants?

A: Adopting a historical perspective is one approach taken in the field of public finance. In economics, the mainstream approach is to collect data and conduct empirical analysis. However, very little progress has been made in the analysis of education. Greater effort should be made to collect data and analyze education-related issues. The operating grant system is similar to the local tax grant system in the field of local public finance. In both cases, the key issues are: How far should we go in ensuring availability of funds? How far should we go in making fiscal adjustments? And what level of efficiency should be targeted?

As in the case of local tax grants, it is difficult to allocate funds in a manner capable of creating incentives for greater efficiency in university management due to the availability of indicators. There are various questions that have to be answered. For example, what level of availability of funds should be ensured and what educational services should be expected in return? Should there be one uniform standard applicable nationwide, or should allocations be prioritized? These are questions that are intertwined with the issue of balanced national development. Operating grants to national universities should be examined together with other grant systems that exist in different fields.

Hideaki Tanaka Report

The report approached the operating grant system from the perspective of the financing of higher education and covered the following issues: problems in the current system of operating grants; problems in current systems for the assessment of education and research; case studies on the reform of university funding systems in foreign countries; and simulation results assuming new funding rules.

  1. The Current State and Problems of the Operating Grant System and Systems for the Assessment of Education and Research
    • Under the current funding rules, operating grants are allocated on the basis of past allocations. The equity and rationality of this allocation system cannot be verified, and it lacks transparency.
    • The following problems exist in the current systems used for assessing education and research: volume of paperwork required is extremely burdensome; assessments are based on indicators that are determined near the end of the assessment process; almost no indicators exist for assessments across universities; and a basic evaluation standard ("logic model") has not been developed.
  2. Reform of University Funding Systems in Foreign Countries
    • In situations where annual budgets are affected by political and economic conditions, and where the structure of educational costs differ among universities, Australia's Commonwealth Grant Scheme (CGS) and other similar schemes provide a certain level of rationality and transparency by basing the allocation of funds on the relative cost differentials across departments and enrollment levels.
    • Under Australia's Learning and Teaching Performance Fund (LTPF) launched in fiscal 2006, funds are allocated based on seven different performance indicators covering four academic fields. To enable comparison, performance indicators are adjusted to control for external factors such as local unemployment rates.�
    • Several countries have adopted performance-based funding. However, such systems remain in the development phase and have been hampered by various technical problems and side effects.
  3. Simulations Based on New Funding Rules
    • Allocation simulations based on total teaching expenditure and numbers of students yielded the following results. Under the new rules, allocations to the former imperial universities would decrease while allocations to certain teacher-training universities and integrated universities would increase. This finding is consistent with findings from earlier studies.
    • Simulations based on a number of different funding rules yielded results that differ very significantly from current allocations. This finding indicates that current allocations may not necessarily take into account the different characteristics of universities.
  4. The following issues must be addressed in the course of reforming the operating grants system: establishing verifiable and highly transparent computational rules for funding, and accumulating performance-related data. Due to the absence of data, the introduction of performance-based funding is not immediately possible. Further investigation and research is needed in this regard.

Questions and Answers

The following questions were received from the floor.

Q: Is it correct that personnel expenses were not included in the simulations of funding for education and research?

A: Personnel expenses were included. Where personnel expenses appearing in the settlement of accounts could be divided between education and research, this was done. Where it was not possible to distinguish between the two, personnel expenses were proportionately allocated to education and research.

Q: What kind of incentives should be contained in basic funding? What kind of schemes should be devised to make such incentives more effective?

A: Given the current situation, the Australian and U.S. schemes cannot be immediately introduced in Japan. This is true for both research and education, but particularly so for education. As a first step, the number of students enrolled should be used as a base. Indicators based solely on the number of students will not generate incentives, but it would at least be an improvement over the current situation. Unit costs can be determined based on the number of students, and this data can be used in determining how much each university spends in terms of costs and the size of any shortages in expenditures. While the total budget amount is determined through a political process, the allocation of funds should be determined on the basis of highly transparent rules. If the quality of education cannot be maintained, the matter should be debated based on concrete data. Alternatively, if quality cannot be assured, one option would be to discuss reductions in the number of students.

Quentin Thompson Report

The United Kingdom launched a series of university management reforms in the 1980s with an aim to increase accountability, efficiency, and responsiveness to social needs. The report outlined these reforms and identified possible lessons for Japan.

  1. Lessons from Reforms at the National Level
    • Funding rules were established under three separate systems for education, research, and social contribution. Funding for education is based on simple performance indicators, such as the number of students. Funding for research is based on external evaluation. Funding for social contribution was initially based on competitive funding, but was recently changed to be determined according to performance indicators. Regarding the quality of education, evaluation methods were established. However, these are not being used as performance indicators for the allocation of funds. Suppose the quality of education at a certain university is shown to be inferior. Should funding to this university be reduced, or should funding be increased to raise the quality of education? This is not a simple question to answer.
    • Major budget cuts were implemented in the early 1980s, but the response of universities was far from adequate and the Jarratt recommendations on good management were issued in 1985.
    • As a result of reforms, systems were developed for government monitoring of university management based on data obtained from the universities.
    • Public funds were used to assist the "early retirement" of older professors. This was effective in accelerating the pace of university reform.
    • One of the weak points in the reforms was the failure to adequately explain the need for reform. This gave rise to ill-informed resistance, which created various problems.
    • Another weak point was the lack of progress in the diversification of universities, and failure to develop regional roles.
  2. Lessons from Reforms at the University Level
    • Strategic thinking tends to be lacking at universities. There is a very strong "academic drift" in determining research and educational content. Universities are too driven by rankings contained in the published league tables. It is important for individual universities to think about their own specific missions and strategies.
    • Internal planning and financial processes are of vital importance. In the UK, the devolution of authority to faculties and departments was done too quickly in many cases. As a result, about 10 universities became technically bankrupt.
    • The planning process must include both top-down and bottom-up elements. Management information systems should be designed with an awareness of the types of information needed for management.
    • Regarding resource management, rationalization of courses and streamlining of administrative processes were necessary. Also, it was necessary to develop an awareness of the importance of financial matters and to clarify the assignment of authority.
    • It is important to clearly define the functions of the university president. Lack of management expertise on the part of administrators is the primary cause of university bankruptcy.
    • The importance of central administration has increased since the implementation of reforms. Outstanding management professionals became necessary. In particular, there is a very strong need for outside professionals in the financial field.

In addition to the above, the following points were emphasized in the conclusions.

  • Reform based on excessive top-down approaches is not good. The government should set the general direction and monitor the management of universities. Considerable room should be left to the discretion of individual universities.
  • Performance-based funding should be limited in size. When numerous indicators are established, universities become drawn into a game of scoring higher on the established indicators.
  • The road to university reform is long and sometimes difficult. There are no shortcuts. Therefore, gradual reforms should be attempted in stages.

Questions and Answers

The following questions were received from the floor.

Q: In the UK, the Transparent Approach to Costing (TRAC) system for computing total economic costs is used to investigate, in detail, spending by universities on education, research, and other activities. Is there some consensus on who should defray these costs?

A: No consensus has been formed. There is no consensus on student tuitions either, and this matter is still being debated in the UK.

Q: You have advocated a bottom-up framework in which discretionary powers are assigned to individual educational institutions while the government focuses on monitoring. This epitomizes the thinking in new public management, which argues that this combination produces the best results. However, doesn't the cost of monitoring constitute a major issue?

A: Not necessarily. Monitoring costs do not need to increase if the number of items to be monitored is held in check. In the UK, monitoring is restricted to a narrow range of important data. Overall, there are about 40 people working on monitoring universities.