ben jongbloed_funding higher education - a view from europe

7/29/2019 Ben Jongbloed_Funding Higher Education - A View From Europe

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Funding higher education: a view from Europe

Ben Jongbloed

Email:[email protected]

Paper prepared for the seminar

Funding Higher Education: A Comparative Overview

organised by the National Trade Confederation of Goods, Services and Tourism (CNC)

Brasilia, October 13, 2008

Center for Higher Education Policy Studies (CHEPS)

University of Twente

PO Box 217

7500 AE

Enschede

The Netherlands
mailto:[email protected]:[email protected]:[email protected]


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Contents

1. Introduction

2. Funding and governance: two sides of the same coin

3. How much funding?4. How are public funds made available?5. What are the trends in funding mechanisms across Europe?6. The composition of university resources in Europe7. Concluding remarks

ReferencesAppendix: Country Codes

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1. Introduction

Higher education in Europe is undergoing a substantial change. As the European nation statescollectively pursue policies to integrate their economies, political systems and social structuresunder a broader, more powerful European Union, it is becoming increasingly clear that highereducation is a critical component to fully realising Europes potential. This very idea has given

rise to a series of ambitious goals and objectives designed to ensure long term European pre-eminence as both a knowledge producer and transmitter. Since the late-1990s the rate of changein European higher education has accelerated to unprecedented levels, largely on the shoulders ofthree key developments: the Sorbonne and Bologna Declarations (1998, 1999), whose objectivesare to make study programmes more compatible across European systems, and the LisbonStrategy (2000), which seeks to reform the continents still fragmented systems into a morepowerful and more integrated, knowledge-based economy. The Modernisation Agenda (2007)highlights that education, research, innovation and the modernisation of higher educationinstitutions are main pillars of the Lisbon Strategy.

With around 4,000 institutions and 17 million students, the reality of higher education in Europeis necessarily diverse. Though the diversity within European higher education is regarded as one

of its major strengths, a common path towards transparency, quality, growth, efficiency andexcellence is regarded as an absolute prerequisite for making Europe one of the strongesteducation and economic leaders in the world. TheBologna Processaims to establish a Europeanhigher education area by 2010 and today 46 countries (extending from Europe to the formerSoviet states) have subscribed to this idea. The Bologna process structures higher education inthree cycles: Bachelor, Master and Doctorate (or PhD). The Bachelor degree is obtained at theend of the undergraduate level, whereas the Master and the Doctorate require graduate levelstudies. This process first focused on reforming study programmes into the two-cycle bachelor-master structure, but soon concerns about comparability pushed quality assurance, accreditationand degree recognition firmly into the policy mix.

In March 2000, the European Union committed itself in the Lisbon strategyto the ambitious

objective of becoming the most competitive and dynamic knowledge-based economy in theworld, capable of sustainable economic growth with more and better jobs and greater socialcohesion. European policymakers intentions took on a more concrete form in 2002 when themore recognizable goal of raising EU-countries investments in R&D to 3% of GDP was outlinedin Barcelona. Aggregate public investment in both education and research still lags behind that inthe United States and it seems that EU member states abilities to make further investments arelimited. The investments differ significantly across countries and even more so across subnationalregions (Dill and Van Vught 2008). Although state investments in research have grown, industrycontributions grew only marginally. As the mid-term evaluation report (EC, 2004) showed, thepolitical Lisbon summit goals are very difficult to reach, partly due to weak economic growth inthe larger member states and due to the fact that the design and the implementation of the policyactions rely on the member states and industry. Another mid-term review in 2006 on a similar

note reported a gap between the political rhetoric about the knowledge society and the realities ofpolitical financial priorities (Dill and Van Vught, 2008).

The Lisbon strategy got a restart with the New Lisbon Partnership for Growth and Jobs(European Commission, 2005) where knowledge and innovation for growth have beendetermined as one of the three main areas for action. Though it is widely recognised that securingalternative (i.e. private) revenue sources will be necessary in the years ahead to sustain the currentcapacity, the contemporary social view that higher education is primarily the responsibility of theState has made this a politically difficult option to pursue. For example, tuition increases may

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find justification on efficiency and equity grounds yet many European parliaments are stillreluctant to increase, let alone introduce, student fees (Jongbloed, 2004).

It is against this backdrop that we wish to look at higher education funding in Europe. For theEuropean states, funding is a major steering mechanism for their higher education systems.Funding mechanisms are closely linked to general policy choices concerning higher education

(Jongbloed, 2004; Barr, 2003). As on all continents, in Europe governments remain the primaryfunding source for higher education institutions. And EU leaders cast a wary eye toward figuresand trends showing that European investment in education and R&D, especially from privatesources, is not pushing Europe towards parity with places like the USA but instead are showingan ever-widening gap. This has prompted the European Commission to call on member states tonearly double aggregate R&D investment and increase the share of industry sponsored researchfrom 56% to 66% by 2010 (European Commission, 2002; 2005). This is easier said than done, ascontinued economic fluctuations have made it difficult for governments to provide incentives andsubsidies that are capable of encouraging private investment in research and development. In thearea of teaching, predominantly national policies towards cost sharing are sometimes met withskepticism due to fears of a decrease of access to higher education (Vossensteyn and Mateju,2008).

The Bologna Declaration, Lisbon Strategy and Modernisation Agenda have not been the onlyinfluences on European higher education institutions. In many Western European countries aseries of reforms were already underway in the 1980s and many current reform initiatives havetheir origin in this period. The changing role of the state vis--vis higher education institutions(i.e. in the form of enhancing institutional autonomy and stressing quality assurance andaccountability) are well-known themes in the last two decades (Neave, 1988; OECD, 2003;Eurydice, 2000; 2008). Globalisation, internationalisation and privatization have all done much toshape the current situation. Some examples are the growing importance of international profiling,international consortia, tuition fees, external research funds and the emergence of private highereducation institutions. If, however, one seeks a common thread that links these largerdevelopments to the current state of European higher education reforms, then few would disagree

that it is the growing recognition that higher education sectors are both remarkably complex andnot immune to the pull of the market.

Having sketched these developments, the remainder of this contribution is structured as follows.

The next section (section 2) will look at funding from the perspective of governance and steering:funding as one of the instruments to affect the behaviour of organizations and individuals and totry and make that behaviour work towards improving access, efficiency and quality in highereducation. The section will also present some of the key questions related to the funding of highereducation.Section 3 will present a discussion on the first key question: how much funding? In particular:how much public resources are made available and how much derives from private funding such

as tuition fees? The section also presents some information for a set of OECD countries.Section 4 includes a classification of funding methodologies and looks at how funds are madeavailable to the providers of higher education. Here the issues of marketisation and performance-based funding are discussed.Having set the stage, section 5 then includes a presentation of a great number of facts abouthigher education funding systems across Europe, as well as some trends.The relative sizes of the various public and private funding streams are presented in section 6 fora set of European higher education systems. The funding environment and revenue compositionof the European university has changed substantially over the recent decades and this has had an

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effect on the strategy of the universities. Section 6 points to some of the impacts of the changingfunding environment on university strategies.Section 7, finally, returns to the debate on university reform that is currently going on in Europe.As indicated already, the European Commission plays a large role in the reform debate. Thissection presents some conclusions that are based on our observations of the trends in fundingstreams and funding methods.

2. Funding and governance: two sides of the same coin

However, funding (or financing) is more than merely a mechanism to allocate financial resourcesto universities and students. It is part of the set of tools and other governance instruments thatenforce common goals set for higher education (e.g. access, efficiency), set incentives for certainbehaviour (e.g. competitive research grants), and attempt to maximize the desired output withlimited resources. Funding of higher education is not an end in itself. Rather, it is a means to anend; it is an instrument used by public authorities to affect the behaviour of an agent or anorganisation say a spending unit. The funder (or budget holder) is expecting the spendingunit to work on achieving particular outcomes. As a steering instrument, the funding mechanism

is part of the governments toolkit. This toolkit contains four tools (Jongbloed, 2004):

1. regulation (rules, laws);2. funding (subsidies, grants, taxes);3. public production (provision of goods by government-owned providers);4. communication (information, persuasion).

Funding is one of the key intervention instruments for government (ministries, fundingcouncils) as well as university decision-makers (Executive Boards, deans, department heads). Inhigher education, regulation is related to topics such as standards for the quality of degrees

(accreditation), the number of students admitted to public institutions and the freedom of highereducation institutions to charge tuition fees and engage in various kinds of other incomegenerating activities. Governance issues and funding systems are therefore often two sides of thesame coin.

Having mentioned the possibility of governments to step into the market and to issue all kinds ofregulation leads one immediately to the topic of deregulation. It is impossible for governments tomonitor and centrally steer the activities of the managers and students in higher educationinstitutions. It is no wonder then that many calls are heard to reduce the extent of governmentintervention and regulation. The growing complexity of our society strengthens the case forrelying on markets to make the decisions (Jongbloed, 2004). Indeed the notion of lessgovernment and more governance is strong and supported by several factors (De Boer et al.,2006).

However, as illustrated by the recent breakdown of financial markets, free markets are also not arealistic option for most sectors of economic activity. In terms of the industrial organisationliterature (Scherer & Ross, 1990) this means that only a third best option is available. Thisoption comes down to the leading principle of Competition where possible, regulation wherenecessary (Kay & Vickers, 1988). Such an approach takes into account that market failures mayoccur and that national interests may be at stake, calling for government regulation. This principlecomes down to a repositioning of government and striking a balance between competition and

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regulation. Such an approach may be interpreted as a step into the direction of a statesupervising system (Van Vught, 1989) where more room is established for market-type co-ordination. In a more market-type coordination system it is individual (i.e. decentralised)decision-making by providers and clients that is essential. The diagram below (Van Asseldonketal. 1999; Jongbloed, 2004) pictures the difference between a state control and a state supervisingsystem.

The left part of the diagram shows a traffic junction with traffic lights on all four cornersregulating the flow of traffic. Creating acceptable queuing times requires substantial effort interms of programming the traffic lights. One would have to first study the intensity of the trafficat that exact location, incorporate real time information on traffic flows in response to theduration of red and green signals, install traffic lights for pedestrian crossings, and prevent thelights from turning green all at the same time. This is our analogy of the state control model.

Figure 1: Co-ordination systems: the crossing versus the roundabout

Source: Jongbloed (2004)

The right side of the diagram pictures our analogy of the state supervision model: a roundabout.There are no traffic lights and only one simple rule regulating the traffic flows. That rule is: thetraffic on the roundabout has priority. This system of co-ordinating traffic flows does not requirean extensive information system. The flow of traffic is much smoother compared to theintersection / traffic lights system. But whats more important is that those participating in trafficfeel more in control and interact directly with other participants. This provides a different set ofincentives for behaviour.

In many European higher education systems one can observe market orientation, deregulation,liberalization, and performance agreements. The diagram below shows some important aspects ofautonomy as experienced by universities in 14 OECD member states. The table shows that for

this selection of countries there is lump sum funding, meaning that the institutions are free todecide on their internal resource allocation decisions. There is also quite a high degree ofautonomy on the area of staff recruitment, but in most countries government still sets the level ofthe salaries. How much autonomy and monitoring universities need in order to meet societalexpectations is an important funding issue when it comes to autonomy in internal resourceallocation, but it is a larger governance issue in terms of the balance of responsibilities of thehigher education institution and state. Funding is therefore not an isolated topic but needs to beseen in the context of a wider set of instruments to achieve the goals of higher education.

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The notion of autonomy also extends to the possibility for universities to generate external funds,from business and industry as well as from tuition fees collected from students participating incontinuous professional education. Autonomous universities may generate resources throughfund-raising or through measures to increase efficiency and will have the freedom to orient theirstrategy according to the available funds, for example focusing on specific research themes orshifting the balance between education and research. However, national systems can leave quite

different degrees of freedom to individual HEI in this respect; moreover, the composition offunds is likely to influence the internal governance of HEI, since some instruments, like mostgrants and contracts, are attributed directly to individual units and thus tend to strengthen theirautonomy and strategic capability in respect to HEI directions.

Table 1: Extent of autonomy experienced by universities

Source: OECD Education Policy Analysis (2003).

Some European countries increasingly treat their public service sector organizations as corporateenterprises with the goal to increase their efficiency and effectiveness by giving them moreautonomy and at the same time asking for more accountability. There are a range of variationsacross sectors and countries and higher education is no exception (Pollitt & Bouckaert, 2000).Empirical evidence suggests that the rise of New Public Management (NPM), an organizationalapproach that supports the notion of public services being run as private businesses, has beeninfluential in modernizing public services (de Boer et al., 2006). NPM is a generic tool for a setof instruments, rationales and changes that stress value for money, the introduction of (quasi)market conditions and, most importantly, the implementation of management by objectivesthrough the use of explicit contracts where organizational performance is linked to budgets. Theenhanced institutional autonomy for universities and the stressing of performance has meanthigher levels of accountability as well as more stringent and detailed procedures for qualityassurance at the state as well as institutional levels. This may be described as the rise of the

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evaluative state (Neave, 1988). NPM approaches therefore seek to emulate a market-likeenvironment for publicly-funded institutions but they come along with a different type ofaccountability.

For the issue of higher education funding, the introduction of market or quasi market relationsmeant that competition for funding was increased in order to enhance efficiency and quality. In

light of this, many universities have started to concentrate their research activities, trying to buildup a strategic profile and reap the benefits thereof. These changes have been widely documented(Geuna, 1999; Kaiser et al., 2001; Jongbloed and Vossensteyn, 2001; Benninghoff et al., 2005)and are all considered to be part of a changing paradigm towards a different governance model ofhigher education (Teixeira et al., 2004). Universities have tried to enhance their competitiveposition and have sought to streamline their organization in order to cope with an increasinglycomplex environment. Developing institution-wide polices, always problematic because of highereducation institutions fragmented character, strategic planning, and identity-building are nowregarded as survival strategies. Higher education institutions are increasingly been made to act ascorporate actors that act strategically, not only within their own organizations, but alsoexternally in the sense of engaging in dialogue with their external environment and stakeholders.

Caveats have also been repeatedly expressed on the risks of this market-like approach since itmight favour short term applied research over long-term fundamental and strategic research.Other argue that there are no theoretical or empirical arguments that concentrating funds andresearch activities would lead to higher efficiency (Bonaccorsi and Daraio, 2007).

3. How much funding?

Another factor that clearly shows the move away from direct government steering described inthe previous section lies in the area of financing. The already high public expenditures can nolonger keep up with the financial demands of continuously expanding higher education systems.Therefore, new financial steering instruments and a diversification of resources are required. Wewill now look at the question of how much funds are spent on higher education in the EU.

But first of all let us ask the fundamental question of why should governments be willing to makepublic resources available to higher education institutions and their students? The answer is thatthe nations stock of knowledge and skills (its human capital) contributes to economic growth.Education in general also promotes important core values, attitudes and values in society.Moreover, a well-educated citizenry potentially strengthens the economic and cultural links that acountry can have with other countries. Higher education is directly relevant to meeting thesenational objectives, because producing highly trained individuals and performing academicresearch increases a countrys capacity to absorb and adopt state-of-the-art technologies. This isrelevant both economically and culturally to the broader regions development. Therefore,making funds available to higher education is a way of meeting these economic and cultural

goals.

How much of a nations productive capacity skilled labour, natural resources, foreign exchange,new construction can or should be devoted to higher education? How does the level ofpublicresources available to higher education compare to other sub-sectors of education, such as primaryand secondary education (Salmi, 1991)? What proportion of a nations youth should be expected topursue some form of post-secondary education? In which programmes and for what degrees, andfor how many years? How many universities should there be, and how many colleges, or other non-

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university institutions? What should be their target enrolments? Policy-makers who try to findanswers to these questions will inevitably be guided by their own ideas of what size and shape ahigher education sector should have and what types of programmes are best suited to meet thehuman capital requirements of the country. Ultimately, the answers to these questions will have tobe given by the Parliament.

A crucial question related to funding is the extent to which the higher education system should bedriven by manpower planning or whether the government can rely on student demand and studentchoice. This choice has important implications for the costs and design of the system and, clearly,different choices can and have been made here by different countries, depending on their economicwealth, ambitions and the state of development in their (higher) education sector. For instance, theScandinavian countries and the UK have a closed higher education system. The government limitsthe number of places available to students that wish to study in a university (known as a numerusclausus system). On the other hand, in Belgium, Italy and the Netherlands access is generallyunrestricted: all candidates that possess the right entry qualifications can get a place in a university.In the UK and in Germany there is a decentralised selection system, meaning that higher educationinstitutions themselves set their own limits on the number of places available and apply their ownprocedures for selecting students.

Decisions over the size of the higher education sector and the public resources invested in it may beinformed by comparisons with countries having similar levels of economic and social development.A frequently used source for such information is the OECD publicationEducation at a Glance(OECD, 2008).

Figure 2: Expenditure on Tertiary Education institutions (% GDP), 2005

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Figure 2 shows total expenditure on tertiary education institutions as a percentage of GDP andhow much of this share originates from public sources and private sources. The figure shows thatthose countries that have been able to channel more than 2 per cent of GDP into tertiary education the United States, Korea, Canada all raise a substantial share of funding from private sources.Japan and Australia also have a high proportion of private expenditure. The average for the EU19

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is 15%, with the UK, Portugal and Italy having the highest share (respectively 33%, 31% and30%). The latter is due to the existence of tuition fees.

In its policy documents and tertiary education reviews, the OECD has often suggested that thereis sufficient evidence for the private benefits to a degree and therefore a reason to implementincreased student contributions. In particular, in continental Europe often students pay only a

modest fee or no tuition fees at all (in the Scandinavian countries). This situation is shown in thetop-left corner of figure 3 below. There are also no fees in many German universities, althoughnowadays quite a few have fees of 1,000 following in the wake of a recent federal court rulingthat allowed the German states to introduce fees. In the other countries situated in this quadrant,average fees range around 750 (Belgium, Spain and Switzerland). Fees are much higher (around1,800) in the Netherlands, with Italy and Portugal having fees of up to about 1000. Fees arealso substantial in England, Australia, New Zealand, Canada and the United States. In some ofthese countries the level of the fee is set by the institutions themselves, often within bounds set bythe government.

Figure 3: Tuition policies

It is often stated that funding levels have stagnated or decreased in recent decades, especially ifcompared to the number of students. Figure 4 shows the expenditure per student in US dollars forthe year 2005. The funding gap between Europe and its main competitors (such as the US andJapan) has also received a lot of attention recently. The EU has urged its member states to raiseannual expenditure on higher education and thereby to increase the performance of the highereducation sector across Europe. The research performance of Europes universities still lags farbehind that of their US counterparts, particularly in the top 50 universities in the so-called

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Shanghai ranking. Increasing university funding and university autonomy are seen as mutuallyreinforcing factors in achieving this. Since public budgets are overstretched already in manycountries, the extra funding would have to come from private sources, including tuition fees andresearch contracts for industry. It has been argued by a Brussels think tank recently that feesshould be increased in particular for the masters level programmes (Aghion et al., 2008). Incontrast to the undergraduate level of education, where free access at entry can work well if

accompanied by suitable selection during the course of the BA programme, once students moveto graduate education, then selection at entry should become the norm and the introduction of feeswould be easier to justify, supported by scholarships, income-contingent loans, and teachingassistantships.

Countries with better performing universities in terms of the Shanghai ranking (or more preciselythe Shanghai Jiao Tong University Academic Ranking of World Universities) devote a higherfraction of their GDP to higher education. Similarly, better performing universities have higherbudgets per student. The EU19 spends on average $10,474 per student versus $24,370 in the US.And within Europe, Switzerland, Sweden, Denmark, the Netherlands and the UK are countrieswith well-funded universities, whereas southern Europe has particularly large but poorly fundeduniversities.

Figure 4: Expenditure per student in 2005 (equivalent USD converted using PPPs)

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Source: OECD, Education at a Glance 2008

While it is often assumed that funding per student in Europe went down, the quantitative evidence

for such a trend is rather weak (Salerno et al, 2005). Even if one considers the change in studentnumbers, more than two-thirds of the institutions in a sample of European universities studied bySalerno et al witnessed a real increase in total per-student revenues over the time period 1995-2003.

The issue of the level of spending per student is principally one of faculty salaries, teaching loads,class sizes, equipment, and library expenditures for education. This immediately leads to theproblem of what the real cost of a degree should be. Unfortunately, nobody will know the realcost of a degree, simply because pedagogies will differ across different educational institutions;

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there is no uniform production technology in higher education. This means that there often will bea large variation in expenditure per student, even if different institutions receive the same level offunding to teach a student in a particular disciplinary field. Funding then can only be informed bya cost analysis but never be fully based on it. This conclusion is strengthened even by the fact thatan analysis of the cost per student in different higher education institutions will be affected (ordistorted) because of particular historical reasons (such as past decisions to open specialized

study lines or study methods) and more importantly because of inefficiencies. Some (maybeeven all) universities may simply waste resources and incur an unduly high cost. Otheruniversities may argue that their costs are high because of the high quality education that theyprovide.

This leads to the question of what is done to ensure that the maximum output is produced fromthe resources dedicated to higher education. This is an issue of productivity, efficiency and alsolifestyle and ambitions. Should the latest, state-of-the-art techniques and equipment be used?Each nation (that is: Parliament) will somehow have to decide to which class the nation wants tobelong within the boundaries set by its national resources and the tax levels it can afford. It maytry to belong to the world class or it may choose to set more realistic aspiration levels for itself.In other words, the issue is very much a political issue, but one that needs to be informed by

economic analysis of labour market needs and shortages, of externalities resulting from highereducation and an understanding of the comparative performance of the higher education sector.

Many nations have sought to reduce their public higher education spending per unit (in teachingand research) by encouraging higher education institutions to work more efficiently therebyincreasing value for money. Institutions are, for instance, encouraged to take on more studentsthrough financial incentives and regulatory instruments or simply forced to contend with fiscalsqueezing policies. Other measures include restructuring the higher education system throughmergers and creating new types of institutions, such as universities of applied sciences dedicatedto higher professional education.

Reducing public spending per student has been carried out under the belief that institutions are

able to find ways of working more efficiently and procuring supplementary, private funding tooffset declines in public resources. Frequently government policies also express the belief thatother areas and aspects of society (like health care, infrastructure and social security) have ahigher priority than universities and require more resources. Any extra funds then will have tocome from private sources. Therefore, the justification for fees is found in the private rates ofreturn to higher education. In the end the issue of funding per student s very much a question ofwhat are we (as a society) prepared to pay?

4. How are public funds made available?

While the previous section argued that more private revenues are needed for (European) higher

education, this paper would is also meant to put forward the argument that one cannot neglect themechanisms through which public subsidies are being allocated to the universities. One cannotexpect the solution for higher educations problems to come only from increased student (orgraduate) contributions. The mechanisms for public funding contain important incentives toachieve higher educations three main goals, viz. quality, efficiency and equity. Bringing theseincentives more closely in line with incentives to generate increased private resources for highereducation would seem to be the goal to be achieved.

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We therefore turn to the public funding of higher education providers and the mechanisms (thefunding models) that are used for determining the budgets that are distributed by the publicauthorities to the universities and colleges in the higher education system. Funding modes andfunding models not only serve to allocate resources for given ends, they are increasingly beingused as governance or management tools in situations where institutions operate in anenvironment characterized by an absence of competitive elements. Changes in funding

mechanisms constitute a central package of measures related to public management reforms. Atthis point we stress that changes in funding mechanisms will often go hand in hand with changesin the other steering instruments. However, for this paper we limit ourselves to the instrument offunding.

For the classification of funding mechanisms two questions may be used (Jongbloed andKoelman, 2000):

1. What is funded by the government?2. How is it funded?

The first question concerns the funding base for the government allocations to higher educationinstitutions: Are the funds tied to educational outputs and performance, or rather to inputs? The

second question relates to the issue of the degree of market orientation in the fundingarrangements. Whose decisions actually underlie the observed flow of government funds tohigher education institutions, or: what drives the system? The answer may be found by payingattention to issues such as: to what extent are funded numbers or funded (research and degree)programs regulated (or planned) by central authorities? And: do higher education institutionscompete for funds (i.e. students, research programs)? Do they have the right to determine thelevel of tuition fees by themselves? Can they select their students?

Question 1 can be rephrased as follows: What is the degree of output orientation in the publicfunding? When financial means are made available to institutions to cover distinct costs such asstaff salaries, material means, building maintenance costs, investment, or so-called costs tocontinue, this is called input funding. If the budgets are driven by measures of activity such as

the number of students enrolled in an institution, we also speak of input funding, because studentnumbers will largely determine the level of inputs spent in the instruction process. In contrast, infunding arrangements where institutional budgets are tied to specific teaching and researchoutcomes of the institutions activities we speak of output funding. Funding on the basis of outputis believed to contain more incentives for efficient behaviour than input funding. If budgetsdepend on performance measures, there is reason to believe that those who receive the budgetswill pay increased attention to their performance.

Question 2 relates to the issue of market orientation in the funding arrangements. One of thecharacteristics of market orientation is the degree of competition implied by the fundingdecisions. Stated differently: Are funded student numbers or funded (research, degree) programsregulated (or planned) by central authorities or are the funding flows driven by the decisions of

the clients (students, private firms, research councils/foundations)? The answer to this questionmay be translated into a measure for the degree of centralisation, distinguishing a situation ofintensive government oversight and regulation from a situation in which consumer and producersovereignty is large. At the extreme end of regulation the government determines the institutionsresources centrally, for instance by prescribing the exact numbers of students in differentprograms. In the deregulated case, individual decisions made by students and education providersdrive the system. Here, institutions have considerable latitude to operate as they see fit andinstitutions have a large autonomy over how funding is procured and spent. In practical situationsthe degree of centralisation (or market orientation) will lie somewhere between the two extremes.

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In figure 5 the vertical axis depicts the degree of (de-) centralisation and a horizontal axisexpresses the degree to which governments are paying for the results (outcomes) instead of theefforts (inputs). We distinguish four quadrants (Q1, Q2, Q3, and Q4) to classify fundingarrangements.

Figure 5: Classifying funding mechanisms

We now provide a number of examples that relate to the four types of funding mechanisms.

Q1: planned, input-based funding through providersThe top-left-hand portion of the diagram represents a centralised system of funding. It shows amore traditional type of budgeting, where allocations are based on requests (activity plans, budgetproposals) submitted to budgetary authorities. This is known as negotiated funding. In thismechanism, the budget allocation is often based on the previous years allocation of specificbudget items. Separate budget items are then negotiated between representatives of educationalinstitutions and the funding authorities (i.e., the ministry, or funding council). Annual changes(usually increases) in each budget item are treated individually, with discussion taking place onthe basis of cost projections. In this case, budget items are likely to include categories such asstaff salaries, material requirements, building maintenance costs, and investment. Funding is lineitem based, and shows the different expenditure items as separate lines of the budget. These lineitems are determined by referring to norms with respect to indicators such as unit costs (or unit

cost rises) or capacity (e.g., funded number of students). The German and French funding systemsstill retain much of these characteristics.

Q2: performance-based funding of providersQuadrant two (top right) is still a centralised system but now criteria on which funding isallocated refer to outputs rather than inputs. For example, in such a performance-based fundingsystem a formula generates funds for institutions that are successful in terms of their studentspassing exams. Depending on the number of credits (i.e., weighted number of passed courses)accumulated by their students and the subject categories concerned, a budget is flowing to the

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higher education institution. This type of model operates in Denmark (taximetermodel), while inSweden a mix of enrolment numbers and credits determines the funds allocated to highereducation institutions. In the Netherlands, a mix of the number of first-year students (freshmen)and the number of Bachelor- and Masters degrees conferred determines the funds allocated to theuniversities (see Jongbloed and Vossensteyn, 2001). Other examples can be found in the UK,where academic research is funded in proportion to a measure of research quality. Research

quality is assessed and rated every five years (in Research Assessment Exercises).

Q3: purpose-specific purchasing from providersA funding system located in quadrant 3 (lower right) is a market-oriented system. For example,higher education institutions are invited to submit tenders for a given supply of graduates orresearch activities. The tenders selected by the funding agency are the most price-competitive. Inthis tendering process, higher education institutions are encouraged to compete with one anotherto provide education, training, and research to meet national needs. Another example is researchfunds awarded by research councils. This system makes use of contracts signed between thefunding agency and higher education institutions, with the latter agreeing to deliver graduates fortargeted labour market needs, or research outputs targeted at strengthening the innovativecapacity of the country. When entering into a contract, the funding agency will make sure it

obtains the services it wants for a reasonable price. In this way the cost-effectiveness of thedelivery is stressed. In the contract, both parties express that they will obey certain criteria. Onlyif these criteria are fulfilled, will the higher education institution receive core funding. Thecriteria may concern the types and qualifications of students admitted to the higher educationinstitution, the (maximum) level of tuition fees (if any) charged by the institution, and thecommitment made by the higher education institution towards its students in the instruction andteaching processes.

Q4: demand-driven, input-based funding through clientsIn the last quadrant (lower left) the funding system makes use of vouchers. The core funds ofhigher education institutions are supplied through the clients of higher education institutions.Students obtain vouchers, which can be traded for educational services (i.e., educational

consumption), at the higher education institution of their own choice. For the higher educationinstitution the vouchers represent a certain value; they can be cashed at the Ministry of Education.Each (prospective) student is given a limited number of vouchers, representing a value, which canbe used in a flexible way (during a certain period of time and for programs supplied by a givennumber of accredited or recognised education providers). In this funding system it is theconsumer that drives the system; the system is demand-driven. The client (student) decides whatinstitution to attend and what programs to enrol in. The higher education institutions must lookafter the quality of their teaching and their supply of courses, because unattractive programs willnot receive sufficient funding. The voucher system can be combined - like many other fundingvariants - with a system of differentiated course fees. The higher education institutions thencharge the students a certain percentage of the course costs. Tuition fees may be regulated tosome extent by the government, but flexible pricing is expected to make students pay attention to

the quality of the service they get from the higher education institution. Combining vouchers andfees may result in a system that is responsive to individual students demands. A research fundingmodel situated in diagram Q4 would be similar to the research council example given forquadrant three, but in this case there would be more attention paid to basic research instead ofresearch for which the outcomes are easier to specify.

5. What are the trends in funding mechanisms across Europe?

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Having made a general classification of funding mechanisms, it is now time to take a look at whathas been happening in Europe in recent years when it comes to the actual funding mechanisms inplace. Observing the national higher education systems in Western Europe, we will present somefacts that underline our view that there has been a gradual clockwise movement from the north-eastern quadrant (Q1) of Figure 6 towards the south-eastern quadrant (Q3). This movecoincides with a trend towards steering from a distance or more self steering (as in the

roundabout metaphor presented earlier see Figure 1). The result being increased reliance onmarket-type co-ordination mechanisms in the HE sector. In terms of Figure 6, decision-making isleft more to individual agents (students, institutions) who choose on the basis of incentivesinstead of directives issued from above.

Figure 6: Trends in funding mechanisms

centralised

(regulated)

approaches

Q1 Q2

input outcome

orientation orientation

Q4 Q3

decentralised

(market)

approaches

This marketisation trend affects both the established government-HE relationships as well as thetraditional mode of operation within HE institutions. It is manifested, amongst other things,through increased competition for (both public and private) funds, the introduction of usercharges, and a strengthening of consumer (i.e. student) interests. The aims of marketisation are toencourage institutions to operate more efficiently, to ensure they delivervalue for money andraise the quality of their services, and to stimulate them into generating revenues fromentrepreneurial activities.

In the sector of higher education, governance and management traditionally has resorted to asystem where the funding of the providers of higher education and research takes place mainly byindirect, formula-driven directives that are tied to inputs like student enrolments or staff positions(Q1 in the above graph). In recent years, we may witness the introduction of competition, userfees, and the stressing of performance-based funding (PBF; see Jongbloed & Vossensteyn, 2001).Rewarding performance through PBF changes the universities focus from inputs to outputs.

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In terms of figure 1, we observe a change where universities government appropriations (theircore funding) are increasingly based on measures of institutional performance, using two options,or a combination of the two:

1. budgets are based on actual results,2. budgets are based on projected results.

An example of option 1 is where funding takes place according to a formula that is driven by thenumber of degrees or credits accumulated by students. An example that falls under the secondoption is the allocation of grants and contracts in a competitive process, such as through aresearch council that selectively awards project funds to proposals submitted by research groups.Yet another example that also is part of option #2 is the allocation of public funding inaccordance with a performance contract. Performance contractsbetween individual universitiesand the relevant Ministry or Funding Council, define institution-specific (hence mission-based)objectives in line with national strategic priorities. Different performance-related measures existto evaluate progress.

Figure 7: Options for the public funding of higher education institutions (HEIs)

Contracts

Mission-based

(negotiations

with indiv HEI)

Project

funding

(competing

proposals)

Demand

(student)

driven:

money

follows

student

Supply

driven:

risk lies

with HEI

Public budget

Discretionary

Incremental

(previous

years budget)

Detailed

agreements

Framework

agreements

Cost

based

indicator

driven

Performance

oriented

indicator

driven

Formula

funding

These examples are also part of Figure 7 that shows different options for the mix of public funds:the traditional, discretionary approach on the top left side, the more transparent and uniformapproach that makes use of formulas (shown on the right) and the options shown in the middle,that make use of funding contracts either with an institution as a whole (contract funding) or withindividual researcher and research groups (project funding). Contracts with institutions as a wholecan be either very broad, based on framework agreements, but can also be more detailed. In the

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latter case they may become more similar to the traditional approach to funding where specificbudget lines are negotiated with the public authorities in a system of line item funding.

To give examples of funding criteria, table 2 contains some information for nine European highereducation systems. One may see that there are quite a few countries that use output measures(credits, diplomas) as the basis for determining the size of the budget for the institution. A lot of

countries make use of funding formulas to calculate the size of public grants for teaching and/orongoing operational activity and, in certain cases, research. Parameters in the formula includeinput criteria and/or performance indicators.

Table 2: Funding of teaching in some European higher education systems

Public funding based on:

Sweden Students; credits(within agreed upon capacity limits)

Denmark Credits accumulated by students (taximeter principle)

Flanders New entrants (no selection); credits; diplomas

Germany Previous years budget; number of students (loosely based on numberof chairs awarded by state to each individual institution)

England Number of students (agreed upon with university)

Netherlands New entrants (no selection of students); diplomas

Finland Number of diplomas (agreed upon with institution)

France Input criteria (staff, m2, students but: staff on contract with

ministry)Spain Students and (in Valencia region) a contract-based part driven by

selected indicators chosen by institution

Where table 2 is mainly devoted to Western Europe, the table below also shows information forthe other European higher education systems. One may observe that higher education institutionsin many (Central and Eastern European) countries previously driven by central planning haverapidly reshaped their funding mechanisms that were characterized by an extreme politicisation offunding decisions. These countries have moved away from central planning and control and manynow use funding formulas instead of negotiations-based approaches.

Table 3 is from a recent study by Eurydice (Eurydice, 2008). It shows for 30 European countrieshow the direct public funding of public higher education and the government-dependent privatehigher education takes place. The Appendix to this paper shows the explanation of theabbreviations used for the countries.

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Table 3: Main mechanisms for direct public funding of higher education in Europe, 2006/07

Additional notes to table 3:

Belgium (BE de): As of 2009/10, a new system for awarding operational resources will be introduced based on abudget proposal from the existing higher education institution, including all revenue and expenditure from the previousyear.

Belgium (BE nl): The means allocated in the past are considered in the funding formula to a certain extent.Czech Republic: Performance contracts and related negotiations concern only public HEIs at ISCED level 5A. Forpublic institutions at ISCED level 5B, funding formulas are established at regional level. For public and government-dependent private institutions at ISCED level 5B, it is possible to receive funding from the Ministry of Education todevelop national objectives.Denmark: In 2006/07, performance contracts concerned universities only. In 2008, the 22 non-university HEIs, whichmerged into 8 institutions, will also be governed by performance contracts.Germany: EachLanddefines the allocation method of direct public funding to HEIs.Ireland: The funding formula concerns universities, whereas the institutes of technology operate on the basis of budgetnegotiations. Funds are also granted to universities on a competitive basis for activities related to strategic national

priorities.Greece: The introduction of performance contracts for universities was recently adopted by parliament but has not yettaken effect.Spain: Each Autonomous Community determines its own method of awarding direct public funding to HEIs.Luxembourg: Information not verified at national level.

Austria: Performance contracts do not concern Universities of Applied Science (Fachhochschulen).Slovenia: Negotiations apply only to the investment part of the budget. Expenditure met by HEIs in the previous year isconsidered to a large extent in the funding formula.United Kingdom (ENG): Although most of the teaching grant is allocated by formula, with performance- relatedinput, it is also subject to a funding agreement (or contract) specifying the volume of teaching activity to be delivered.The volume of teaching activity is defined in broad terms, except for quota-controlled subjects such as medicine andteaching, and in the case of funding for additional student places. The funding agreement specifies a target number ofstudents in these cases.Iceland: Funding formula and performance contracts do not apply to the two HEIs under the auspices of the Ministryof Agriculture.Liechtenstein: The information about research funding relates solely to the Hochschule Liechtenstein.

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When it comes to tendencies that point in the direction of performance-based funding, we observethe following:

For the Danish system, the teaching allocation, which on average makes up one third ofthe revenues of universities, is directly linked to the number of students who pass theirexams.

In the Dutch funding system, the universities teaching allocation is 50% based onnumbers of degrees, and for its universities of applied sciences, graduation rates affectfunding. In the research budget, performance elements such as Masters diplomas andPhD degrees are partly driving the funds per institution.

While the funding of teaching activities in the Czech Republic is mostly input oriented(number of students, etc), output criteria such as the number of graduates have recentlybeen introduced.

In the German states funding is a mixture of historical, input and output-orientedallocation mechanisms (Gbbels-Dreyling, 2003; Leszczensky & Orr, 2004).

Based historically on an input system (number of students), the Italian funding systemnowadays is also partially based on output criteria related to research performance(through the introduction of a Research evaluation exercise).

The Norwegian funding system allocates funds according to a formula based on acombination of a fixed component (60%) and components driven by results in education(25% - based on students credits and graduates) and research (15% - based on thenumber of publications).

The universities in the UK receive a research budget that is based on quality evaluationsestablished in periodic research assessment exercises (RAE).

Turning to the line in table 3 that is dedicated to Funding for specific research projects, awardedin the framework of competitive bidding procedures, we note that all countries use instrumentsto allocate project funds to universities. Many countries have a research council that awardscompetitive project grants to academic research projects in universities. Often a dual mode forthe funding of research is used by governments. This means that next to the core funding ofacademic research (the institutional, or direct funds) there is a second, competitive funding streamawarded by a research council on the basis of research proposals sent in by research teams. As faras the funding of research is concerned we also observe a trend of attaching new (additional)research funds to specific priorities selected by the funding authorities. In other words, whilecompetitive research council funds still may be for original, curiosity driven projects, manygovernments are tying specific conditions and goals to new competitive funds. An example of thelatter is the emergence of new schemes and research programmes for carrying out strategicresearch, such as centres of excellence. As we will see in the next section, the proportion of fundsdistributed through competitive grants schemes (e.g. research councils) is increasing relative tothe funding allocated to formulas and other direct (core) funding schemes.

Located in quadrant Q3 of figures 5 and 6, another trend that we observe is the use of contractssigned between public authorities and institutions. This is also a way of the government `buying

a particular performance from the university. By way of example we make some comments onfive countries:

Czech Republic: Part of the universitys budget is distributed by contracts according tostate plans and programs.

Denmark: Since 1999 university development contracts have been established as aninstrument in describing the tasks of the institution as defined by each university inconsultation with the Ministry of Science.

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France: The university budget derives from a four year contract between the Ministry ofEducation and the governing board of the university.

Switzerland: Most cantonal governments have introduced a contract with their university,even if the level is mostly based on historical considerations and some input criteria.

Germany: Most states (Lnder) use contracts (Zielvereinbahrungen) similar to the Danishcase to allocate certain parts of the budget.

Overlooking the funding mechanisms for the European higher education systems, we observe alarge variety. While we observe a growing use of performance measures, there is as yet nouniformity in the choice of indicators. Use is made of the following performance indicators:number of (BA and MA) degrees, credits, graduation rates, success in winning competitiveresearch grants, academic publications, and research evaluation outcomes. Little consensus seemsto exist on the way to weigh the different measures. Maybe as a consequence of this, as well as toallow for some flexibility, we see an increased prominence of contracts and the allocation ofproject funds to encourage universities to work on particular types of performance. A related trend is the use of measurable performance indicators and output-based assessments to evaluatethe way universities spend their public funds.

6. The composition of university resources in Europe

In this next to last section we look at the composition of the revenues of European universitieswhere some interesting changes may be observed. First of all we make some general observationon the revenues of the universities for a small sample of 8 countries. The sample was studied inthe context of a European Commission-funded research project, called CHINC (Changes inUniversity Incomes and their Impact on university-based research and innovation). This projectwas unique in the sense that funding data was collected directly from a set of 89 researchuniversities and universities of applied sciences (Slipersaeter et al., 2006; Salerno et al., 2005).

Building on institutional-level data from the CHINC project, some funding trends on the national

level also become visible. These data must be considered with care, since the CHINC databasecovers only a sample of institutions, which in large countries Germany, Italy, Spain, UK is farfrom being representative.

We focus on three revenue categories: government appropriations (say: core funding), tuition fees(student funding) and grants & contracts (competitive funding; project funding).

1. Government appropriations are still the dominant source of revenues in all countriesexcept the UK. Their share exceeds two-thirds in all countries, except for the UK, that in

2002/03 displays a share of 37%.

2. Tuition fees are an important source of revenues in only three countries, i.e. Italy, Spainand the UK, while in the other countries fees account for a relatively small share of

revenues.

3. The aggregate share of grants & contracts shows some variation between countries thelowest value being 10% in Spain, the highest 25% in the UK -, but most of the countries

considered show a range of between 10 and 20%.

4. Over the period 1995-2003 we note a slight decrease in the share of governmentappropriations, no change at all in the share of tuition fees, and a general increase in the

share of competitive grants & contracts.

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The set of graphs in figure 8 below illustrates these developments over the period 1995-2003 inthe funding situation for our sample of 89 European higher education institutions.

Figure 8: Evolution of main revenue categories by country in four years

% Government allocations

0 10 20 30 40 50 60 70 80 90 100

CZECH REPUBLIC

GERMANY

ITALY

NETHERLANDS

NORWAY

SPAIN

SWITZERLAND

UNITED KINGDOM

2003

2002

1999

1995

% Grants and Contracts

0 5 10 15 20 25 30

CZECH REPUBLIC

GERMANY

NETHERLANDS

NORWAY

SPAIN

SWITZERLAND

UNITED KINGDOM

2003

2002

1999

1995

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% Tuition fees

0 5 10 15 20 25

CZECH REPUBLIC

GERMANY

ITALY

NETHERLANDS

NORWAY

SPAIN

SWITZERLAND

UNITED KINGDOM

2003

2002

1999

1995

Note: National aggregates are based on the CHINC sample. Government allocations for Spain are

overestimated since they contain also grants and contracts. For Italy no data on grants & contracts are

available.

Source: CHINC project (Lepori et al., 2005)

Table 4, taken from a study by the Bruegel think tank (Aghion et al., 2008), presents some morerecent revenue information. The data is based on information from 66 European universities thatare in the Top 500 of the 2006 Shanghai ranking. This means that the sample is biased towardsthe more research intensive universities in Europe.

Table 4: Shares (%) of revenues for a sample of European universities, 2006

UK ES DE IT NL SE DK BE IE SWI

Tuition and fees 23 16 1 12 7 0 0 5 32 3

Government corefunding

35 62 73 63 68 60 70 65 38 72

Competitiveresearch grants

21 10 22 12 15 34 19 21 18 18

Other sources 20 13 4 9 10 6 2 9 12 7

Total 100 100 100 100 100 100 100 100 100 100

Source: Aghion et al., 2008.

The table contains several interesting facts (see Aghion et al., p. 31):

All countries have a share of public core funding of 60-70 percent, except for the UK andIreland (IE).

This fact is explained in particular by the high proportion of the budget coming fromtuition fees in these latter two countries, even if southern European countries also have asizeable proportion of their (relatively low) budgets coming from fees. By contrast,

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The share of the budget coming from competitive research grants is typically 15-22percent, with outliers being Spain (ES; 10 percent) and Italy (IT; 12 percent), and Sweden(SE; 34 percent).

These facts are very much in line with the conclusions from the CHINC study.

What is somewhat hidden in the data (because it is included in the competitive research grantsand other sources lines in the above table) is the fact that business funding of public research isclearly increasing in Europe, giving rise to new relationships between funding sources andresearch performers.

An important issue is whether the changes in resourcing and resource composition have had aneffect on the level of the individual university. What has come out clearly from studies like theabove-mentioned CHINC project is that developments in the national funding environment aremirrored by developments inside the universities (Salerno et al., 2005). We now will reflectshortly on the implications of the funding reforms for higher education institutions, since, after

all, it is in the individual universities and colleges that the core activities (teaching, research,community services) are carried out. From the CHINC study we highlight some of the strategiesthat were implemented in recent years by individual universities.Universities are:

creating centers of excellence on selected strategic areas, to achieve critical mass and tobuild a profile for their institution

making use of financial and budgetary instruments to reward performance strengthening their universitys centres steering capacity start to systematically collect information on research/teaching performance in order to

have a better insight into their organisation

have support facilities in place to help researchers in generating competitive researchrevenues and engaging in research commercialisation

increasingly are devolving responsibilities for financial and personnel matters to thedepartments in their organisation

putting in place more modern human resources management systems, such as a tenuretrack system

engaging in linkages with the outside world (regional partners, local industry, small andmedium sized enterprises).

building alliances with other universities (at home and abroad) to work on joint researchand joint degree programmes.

These internal policies adopted in the sample of European universities studied in the CHINCproject may be characterised as efforts of universities to behave as strategic actors (Bonaccorsiet al., 2007). Universities are trying to more clearly position themselves in the European researchlandscape. Some have developed a strategy of improving research performance through moreinterventionist research management practices, performance-based funding and selecting priorityareas for research. Others are creating large (often multidisciplinary) research units where the bestresearchers co-operate and produce high quality output that has the potential to reap economicrewards as well. This is particularly relevant in a situation where unconditional governmentfunding is on its way down. Introducing a performance-oriented internal resource allocation oftenwill be complementary to income-generation strategies. Four types of institutional policies wereexplicitly mentioned in the CHINC study:

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Providing premiums or matching funds for departments that are successful in bringing inexternal funding/competitive research contracts.

Allowing departments that generate research income to keep a substantial part of theearnings.

Introducing a form of performance-based funding that rewardsunits/faculties/departments on the basis of research outputs.

Giving greater visibility to institutes/individuals performance.

7. Concluding remarks

The issue of higher education funding has multiple aspects: who pays for higher education(including the topics of cost-sharing in higher education and external funding to universities),how public funding is allocated to universities, what incentives the allocation mechanism creates,and how much autonomy universities have in decision-making over financial and humanresources.

Several funding models were presented in this paper. First they were considered abstractly andplaced into a general categorisation, stressing the dimensions of performance orientation andindividual (decentralised) decision-making. The higher education funding mechanism is animportant ingredient in the wider spectrum of governance arrangements. Trends and practices inEurope increasingly point towards more market-based, or performance-oriented and decentralisedtypes of funding mechanisms. European governments have shown a tendency to augment thedirect funding of higher education institutions with competitive funding mechanisms andperformance-based funding mechanisms. Alongside this, they have started to grant moreautonomy to the institutions, allowing them to make their own decisions about the use ofresources and the generation of new often external resources. The introduction or the increaseof tuition fees has been one of the most widely debated issues in higher education funding(Teixeira et. al. 2006), but empirical work shows that, with the exception of UK, undergraduatefees do not yet cover a substantial share of educational costs in European countries (Lepori et al.

2007).

Surveying the funding mechanisms in place across European higher education systems, we haveshown that in most countries the allocation of direct appropriations occurs through a formula thatuses a mix of input and to a lesser extent output criteria. Often student numbers are the mostimportant criterion in the funding formula. Overall, we find that institutional budgets dependmore on student choice and less on central planning, while for research budgets we observed thatcompetitive funding has become a key allocation mechanism and accounts already for asubstantial share of the universities revenues. Some governments have, next to the abovedevelopments, started to work with contracts.

The extent to which such moves towards autonomy, performance contracts and performance-

based funding have taken place naturally varies enormously across countries. In the first part ofthis paper we already mentioned the Modernisation Agenda of the European Commission, thatcalls for more autonomy, less fragmentation and stronger ties between universities and privatepartners. The Commission in one of its earlier communications on The role of the universities inthe Europe of knowledge has stated that:

The European university world is not trouble-free, and the European universities are notat present globally competitive with those of our major partners, even though theyproduce high quality scientific publications.

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And:European universities have for long modelled themselves along the lines of some majormodels, particularly the ideal model of university envisaged nearly two centuries ago byWilhelm von Humboldt in his reform of the German university, which sets research at theheart of university activity and indeed makes it the basis of teaching. Today the trend isaway from these models, and towards greater differentiation. This results in the

emergence of more specialised institutions concentrating on a core of specificcompetences when it comes to research and teaching and/or on certain dimensions oftheir activities. (European Commission, 2003)

The problems identified by the European Commission are the tendency of uniformity andegalitarianism in many national higher education systems; too much emphasis onmonodisciplinarity and traditional learning and learners; and too little world-class excellence(Dill and Van Vught, 2008). The Commission notes a number of areas where action is needed,and raises a series of questions such as:

how to achieve adequate and sustainable incomes for universities, and to ensure thatfunds are spent most efficiently;

how to ensure autonomy and professionalism in academic as well as managerial affairs; how to concentrate enough resources on excellence, and create the conditions within

which universities can attain and develop excellence;

how to make universities contribute better to local and regional needs and strategies; how to establish closer co-operation between universities and enterprises to ensure better

dissemination and exploitation of new knowledge in the economy and society at large

how to foster, through all of these areas, the coherent, compatible and competitiveEuropean higher education area called for by the Bologna Declaration, as well as theEuropean research area set out as an objective for the Union by the Lisbon EuropeanCouncil, in March 2000.

A clear recommendation, also expressed in other EC communications, is the need for Europeangovernments to increase the autonomy of their national universities and revise their governancestructures. However, this increased autonomy does not rule out a continuing important role forgovernment. As always, this role lies in providing subsidies, promoting access, organising studentsupport and ensuring quality assurance. On top of that, through introducing performance-basedfunding mechanisms and more competition will the government set different incentives that mayhelp to achieve more differentiation in quality, funding and pricing in higher education. A masshigher education system requires a greater reliance on markets and their decentralised decision-making by individuals and institutions. Compared to many other fields in the economy, the sectorof higher education and its students and universities can indeed be trusted to be capable ofmaking good decisions. In the words of Nicholas Barr: The days of central planning are gone!(Barr, 2003). If we believe the European Commission to be right then competition and greaterinstitutional autonomy will drive higher education institutions to become more sensitive to theirvaried consumers demands for relevance. It remains to be seen whether more countries in

Europe will indeed take further steps along the marketisation route to modernise theiruniversities.

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Appendix

ben jongbloed_funding higher education - a view from europe

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