Int. J. Management in Education, Vol. 6, No.

3, 2012

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Improving Relevance and Quality of Undergraduate Education (IRQUE): public funding alternatives for Sri Lanka Pradeep Randiwela
Faculty of Management and Finance, Department of Commerce, University of Colombo, Colombo 03, Sri Lanka E-mail: pradeep@webmail.cmb.ac.lk

Siriyama Kanthi Herath*

School of Business Administration, Clark Atlanta University, James P. Brawley Drive at Fair Street, Atlanta, Georgia 30314, USA E-mail: sherath@cau.edu *Corresponding author
Abstract: The Sri Lankan Government has initiated reforms in a number of public management areas and introduced major reforms into the higher education sector to respond to national concerns that the higher education sector has failed to provide skills necessary for the national economic development. Reforming public funding strategy is a key task of the Improving Relevance and Quality of Undergraduate Education (IRQUE) project, which was initiated as an essential component of management in education in Sri Lanka. This paper discusses various funding mechanisms available for higher education funding and suggests a tentative model for public funding in Sri Lanka. Keywords: higher education reforms; management in education; public funding strategy; IRQUE project; Sri Lanka. Reference to this paper should be made as follows: Randiwela, P. and Herath, S.K. (2012) Improving Relevance and Quality of Undergraduate Education (IRQUE): public funding alternatives for Sri Lanka, Int. J. Management in Education, Vol. 6, No. 3, pp.191211. Biographical notes: Pradeep Randiwela is a Senior Lecturer (former Dean/Faculty of Management and Finance) at the University of Colombo, Sri Lanka. He earned his MCom (Marketing) from the University of Colombo and BCom (Hons) from the University of Peradeniya, Sri Lanka, and a Certificate in Modernising HRM RIPA International, UK. His research interests include e-marketing, entrepreneurship, outsourcing and strategic management in higher education.

Copyright 2012 Inderscience Enterprises Ltd.

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Siriyama Kanthi Herath is an Associate Professor in Accounting at Clark Atlanta University, USA. She has a PhD (Accounting) and an MCom (Hons) (ACCY) from the University of Wollongong, and an MBA and a BCom (Hons) from the University of Colombo, Sri Lanka. She has published 35 papers in refereed journals. She is a member of the editorial boards of International Journal of Electronic Finance, Open Business Journal and International Journal of Accounting and Finance.

Introduction

The higher education sub-sector in Sri Lanka is made up of both public and private universities and other technical institutions. The University Grants Commission (UGC) provides funds to public universities and institutions of higher education. In light of the major economic and social changes that are occurring both within the nation and the global community, students, parents, legislators, administrators and policy-makers alike consider a higher quality education a key component to obtaining employment in todays competitive job market (Noland et al., 2000, p.2). Both the Sri Lankan Government and the university authorities have recognised the increasing needs for reforming the higher education sector. As a result, the Government has initiated reforms in the higher education system and a World-Bank-assisted project has been launched in 2003 to address the issues related to higher education system. This paper discusses funding mechanisms available for higher education and suggests a tentative model for public funding in Sri Lanka.

Public sector reforms: reforming higher education in Sri Lanka

In recent years, Less Developed Counties (LDCs) have given much emphasis to reduce the role of the government and to reform public sector management by adopting market-driven business-like management practices. The motives of this tradition include the reduction in governments direct responsibility in managing economies and providing services to citizens, increased reliance on markets, communities and individuals to manage themselves, and the reform of government action to create new pressures and incentives for efficiency and effectiveness (Batley, 1999). Education is one of the key areas of the new public management reforms and the Sri Lankan Government also has initiated reforms in the higher education sector.

The need for reforms in higher education system in Sri Lanka

Many developing countries have made significant progress in providing better access to education, as evidenced by improved literacy and enrolment rates and higher quality and more equitable distribution of educational services. Sri Lankas comprehensive public education system is built on colonial foundations and it has produced one of the best-educated populations in Asia. However, it is believed that the quality and efficiency

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of the education system is deteriorating. Many educationists agree that there is an urgent need for reforming the higher education system in Sri Lanka. Unemployment among graduates in Sri Lanka is very high at present, except in the fields of medicine, engineering, information technology, commerce, agriculture and law. Many public university graduates are unemployed, as there is no demand for the studies they have taken. Traditionally, teaching and research had been the major mission of public universities in Sri Lanka and the mismatch between graduates skills and job requirements has created unemployment among graduates. Most Sri Lankan public universities have not changed their programmes of study although the universities in the rest of the world have adopted modern education systems according to the changing needs of the job market. Public universities in Sri Lanka have not been able to match their undergraduate courses with industry needs. This mismatch between the outputs of the higher education system and job market needs has led to significant unemployment of university graduates. Deficiency in English language skills is another challenge for most graduates. English is the global business language and many universities in Sri Lanka have to recognise the importance of improving graduates proficiency in English. Competency in English opens up job prospects in the global economy and many graduates in Sri Lanka are not proficient in English language skills and are unable to secure employment. Another problem with the university system in Sri Lanka is the absence of universityindustry linkages. This has led universities to be too academic and impractical. This has also prevented graduates gaining employable skills. Sri Lanka experienced a 25-year civil war until 2009. There are several universities in the war-ravaged areas and they too experienced the hardships of the war. Study programmes had to be moved to other universities for long periods of time. During the conflict period, universities were closed for prolonged periods throughout the country. The war created regional imbalances in terms of access, resource utilisation and networking. Many educationists believe that university students should be equipped with a sound education, to become intellectuals who would be able to contribute to the society when they graduate. The role of the universities should be changed according to the needs of todays knowledge-based economies. University graduate should be equipped with industry-relevant skills and knowledge. As a result of the increasing needs for reforms, the Government of Sri Lanka has, in recent years, initiated major reforms in the higher education system in Sri Lanka. A World-Bank-assisted project, IRQUE, was launched in 2003 to address the issues related to the higher education system in Sri Lanka (Randiwela and Herath, 2008). Authorities believe that the IRQUE Project will generate appropriate solutions to the challenges of University Education in Sri Lanka.

The IRQUE project

The IRQUE, which is a US$40.3 million project, will be implemented over a period of six years. The priority areas identified by IRQUE include legislative and administrative reforms, a revised university funding formula, establishment of an autonomous board of quality assurance and accreditation, inclusion of social harmony within curricula, developing learning materials to teach competencies and skills needed in the labour market, improvement of the teaching skills of instructors, upgrading equipment and

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facilities including IT, strengthening labour market linkages and increasing university intake in priority disciplines with high demand in the labour market (Randiwela and Herath, 2008, p.2). Reforming public funding strategy is a key task of the IRQUE project.

Need for reforming funding strategy in higher education

During the British colonial era, a standard system of schools was begun and this was regarded the beginning of the modern schooling system in Ceylon (now Sri Lanka). Education ceased to be a commodity of the urban affluent society when the free education system was introduced in Ceylon in 1938. This system opened the doors to education at all levels without any restrictions on the grounds of caste, creed or social status. After independence, the literacy rate of the people increased substantially as a result of the increase in the number of schools. The origin of the modern university system in Sri Lanka dated back to 1921 when the University College Colombo was established. Admission to the university system in Sri Lanka is based on the highly competitive General Certificate of Education (Advanced Level). Undergraduate education in Public Universities is also free but extremely limited and as a result many qualified students are not granted access to university education. The majority of those who are not granted admission to public universities give up higher education due to the inability to fund their studies. The education system in Sri Lanka belongs to the Ministry of Education and both primary and higher education are being funded by the Ministrys Block Grants. Sri Lankas higher education system dominates the 17 public universities. They are required to submit a budget based on the directions given by the UGC on how they allocate these funds. Allocations are made based on the size of the institution, its current needs and its historical allotments. Thus, public universities hold accountable for the resources they receive from the government and they should offer programmes that provide students with the specific skills, knowledge and attitudes that employees look from them. According to the Coordinator of IRQUE project,
Public universities in Sri Lanka receive a direct grant from the government. Any organisation that depends so much on public funding has a responsibility for public accountability. The IRQUE projects main drive is to introduce a competitive mechanism to support universities to enhance the quality of their curricula and make them more relevant to the labour market.

It is important to make the public university system demand driven with quality and relevant study programmes. The IRQUE Final Report (2003, pp.6, 7) has revealed a number of weaknesses of higher education in Sri Lanka and it specifically recognised that:
The current funding arrangements do not appear to have a rational basis, or at least one based in some way on the activities and performance of institutions by all those involved and affected.

The current structure of funding has created a number of problems in the efficiency and effectiveness of the programmes provided by public universities in Sri Lanka. Nandy (2000) argued that the existing funding system could generate anomalies in the allocation of funds. Thus, it is time for state-run Sri Lankan universities to see alternative strategies for funding. The majority of the universities in the world are organised as

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fee levying non-profit entities. Rather than waiting for government grants, public universities should look for ways in earning their funds. It is important to note that, however, the challenges and limitations in the current funding arrangements may not be directly proportional to the volume of activities and performance of different universities. The university system needs altitudinal and structural adjustments to lay a fertile ground for the proposed alternative strategies to the funding of university education. Among other solutions, empowerment of universities, establishment of quality assurance programmes, facilitating networking of institutions, establishing linkages with the private sector employers and reducing regional imbalances will help improve the quality and relevance of the university education system in Sri Lanka. The next section will review some of the existing funding strategies for higher education.

Reforming higher education funding strategies

Over the past few decades, higher education institutions all over the world have been faced with increased demands for growth and widening access, reflecting the move from elite to mass and on to universal higher education (Trow, 1970). This trend has been progressively linked with the changing perceptions of the role of higher education, reducing public funding per student, increasing demands for greater transparency and accountability for efficiency, cost-effectiveness, relevance and quality. In many developing countries, the role of the state in funding higher education has been questioned and many governments have changed their funding systems. The new modes of funding include a variety of mixes, such as lump sum or block grant plus grant based on student enrolments, or block grant plus performance-related grant, or enrolment-related grant plus research grants, or block grant plus incentive grant, or block grant plus matching grant, matching grant to match, e.g., amount of resources generated by the universities through non-conventional measures (Tilak, 2005, p.2). Under these reforms, except for a few countries such as Sri Lanka and Brazil, a number of countries (e.g., China and Australia) have started to charge fees for higher education and major trends in funding higher education are: decline in public expenditure in higher education increased efforts on cost recovery through introduction or increase in tuition fees introduction of student loan programmes insisting on the public universities to generate resources from third parties such as corporate sector promoting the growth of private higher education institutions promoting avenues for searching finances such as recruiting foreign student (Tilak, 2005).

The education reform policies clearly involved drastic cut in public expenditures, necessitating a search for alternative methods of funding higher education (Tilak, 2005). Funding strategies are classified in a number of ways. Michael (2002) discusses funding approaches under four categories:

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P. Randiwela and S.K. Herath political funding strategy formula funding strategy strategic funding approach adjustable formula funding strategy.

Political funding strategies are characterised by negotiation and responses to important stakeholders wishes. Formula funding attempts to reduce the political elements in decisions about appropriations by front-loading the inevitable political discussion, considerations and concerns (Michael, 2002, p.9). Formula funding considers the relationships among quantifiable factors for in allocating funds among different institutions. Strategic funding approach
is based on a long-term projection of the states needs and direction (economic, social, medical, political, etc.) and the determination and allocation of resources needs/direction, while institutions are free to align themselves with the states priorities the extent that they want states resources. (Michael, 2002, p.10)

The adjustable formula funding strategy is a diverse strategy that combines the three funding approaches discussed previously. A portion of the funding approach that is quantifiable is built into a formula, the portion that is political is handled politically, while the portion that is strategic is handled strategically (Michael, 2002, p.11). This strategy not only attempts to gather the advantages of all the three approaches, but also suffers from being unmanageable. A number of different categories of funding strategies are discussed in the next section.

6.1 Performance-Based Funding (PBF)

Performance-Based Funding (PBF) is the allocation of resources contingent on achieved rather than promised results. It links funding to results and departs from traditional considerations in Tertiary Education of line items expenditure and inflationary increase. Until recently, linking of public budgeting to campus performance has taken two different forms, based on the connection of resources to results either performance funding or performance budgeting (Burke, 2002). Burke (2002, pp.22, 23) constructs a distinction between the concepts of performance funding and performance budgeting. He expresses that
Performance funding ties tightly specific resources to institutional results on each of the designated indicators. The tie is automatic and formulaic. Alternatively, Performance budgeting allows governors and legislators, or coordinating or system boards to consider campus performance on the indicators collectively as merely one factor in determining the total allocation for public college or university. The link is loose and discretionary.

Performance funding for public colleges and universities has evolved since its inception over 20 ago in the state of Tennessee (Noland et al., 2000, p.5). Major characteristics of PBF (Burke, 2002) are: rewarding institutions for actual performance linking funding to the quantity or quality of outcomes rather than to inputs

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using Performance Indicators (PIs) that reflect public policy objectives rather than institutional needs designing incentives for institutional improvement, not just maintaining status quo.

Relative Disadvantages of PBF are: it tends to be more inflexible in its application it can lead to greater year-to-year variation in funding if performance results vary it may discourage institutional diversity if many institutions collectively pursue similar incentives often, it is linked to reduced institutional autonomy in the expenditure of public and private funds relative to other funding methods.

There are several types of PBFs. Performance set asides: A portion of public funding for HE is set aside to pay on the basis of various performance measures: A portion of funding for recurrent expenditure is set aside to be allocated on the basis of a number of performance measures % set aside varies from less than 5% to some cases nearly 100% of current funding number of indicators varies from single to multiple

performance measures are typically devised through negotiations between government and institutions allocation of funds is not done on a formula basis.

Performance contracts: Result-based funding based on performance contract is flexible design where evaluation criteria are negotiated between the supervising agency and each tertiary institution. Performance contracts are institution specific rather than system-wide in their content and application. They typically cover a period of 34 years. Governments enter into regulatory agreements with institutions to set mutual performance-based objectives: Performance contracts are typical regulatory agreements more than legally binding documents performance-based evaluation criteria are negotiated between government and institutions the agreement may be with entire system of institutions or individual institutions

A portion of overall funding may be based on whether institutions meet the requirements in the contracts the agreement can be prospectively funded or reviewed and acted upon retrospectively

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P. Randiwela and S.K. Herath The contracts are more often punitive than incentives failure to meet goals may result in reduced funding.

Payments for results: Results-based funding1 can be defined as the allocation of resources contingent on achieved rather than promised results. Tying funding to results departs from traditional considerations in tertiary education of line item expenditure and inflationary increases. Hence, output2 or outcome3 measures are used to determine all or a portion of funding formula, or institutions are paid for the number of students they graduate in certain fields of study or with specific skills: two ways in which countries pay for results use some set of performance measures to calculate institutional eligibility for all or part of their formula funding of recurrent expenses

6.1.1 Performance-based funding for research

The allocation of public funding for research projects on the basis of peer review is a well-established practice in many countries. It is well known that there is no best method for assessing the quality of research. Every approach has strengths and weaknesses. Nevertheless, the attempts that have been made, notably in the UK and Hong Kong, to assess research performance, and link the results directly to substantial portions of public funding for higher education, have proved largely effective in terms of both targeting the distribution of public funds and improving the quality as well as the quantity of research output. There are, however, disadvantages in this approach. Indeed, the very fact that both the UK Higher Education Funding Councils and the Hong Kong University Grants Committee have independently decided first to modify their approaches and then to review them with a view to changing the emphasis substantially give evidence for the problems, which include: negative impacts on collegiality and morale institutional game-playing mission creep difficulties in evaluating research and scholarship in certain practical and professional disciplines (e.g., performing arts, nursing, architecture, etc.) difficulties in evaluating co-authored and multi-authored outputs, especially where these involve interdisciplinary collaboration treatment of young or new researchers excessive bureaucracy.

Overall, however, the efforts appear to be worth it, provided that due account is given to the potential risks.

6.1.2 Performance-based funding for teaching

The use of output/performance criteria in the allocation of resources for teaching is much more controversial and problematic. Countries such as Denmark, Sweden, the

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Netherlands and some States in the USA use output criteria in their funding formulae. An interesting variant of this approach is Finlands model involving the assessment and identification of quality units. In this case, institutions can propose units for evaluation by the Finnish Higher Education Evaluation Council, and the assessment criteria and methods of evaluation adopted by the Council are predominantly quantitative, although some qualitative data are obtained via peer-review visits. An alternative approach that is increasingly favoured in developed countries (e.g., UK, Sweden, New Zealand and USA) is based on the audit of quality assurance processes or, as they are coming to be called, education quality processes (Massy, 2003). The emphasis is on ensuring that the institutions at all levels (i.e., department, faculty and university-wide) have in place effective processes for assuring the quality of the education they offer. A direct link between the results of such audits and funding is impractical, but an indirect link can be made where an independent authority takes the audit reports into account in making its funding allocation decisions or recommendations. Other areas where PBF methods are used include differentiation of role and mission, and widening access and participation in higher education.

6.1.3 Performance-based funding for mission

An apparently inevitable consequence of the increased use of PBF, for research in particular, is the tendency of all third-level education institutions to seek to develop their research activity, often at the expense of the quality of teaching. In response to this form of mission creep, governments in several countries and regions have developed mechanisms designed to encourage or require differentiation of role and mission with funding incentives and penalties. These mechanisms range from public statements of the expected roles and missions of different institutions or groups of institutions, which form the basis of funding decisions (Hong Kong) to various forms of performance contracts (Germany and Sweden).

6.1.4 Performance-based funding for access

As governments seek to increase levels of participation in third-level education, and move from elite to mass and universal systems of higher education, issues of access for economically and socially disadvantaged groups of students arise. Even in countries where no or minimal tuition fees are charged or where very generous systems of student aid are in place, participation in higher education is higher among economically and socially advantaged groups. Measures taken to counter this trend include positive discrimination by legislative means, special funding elements for access and participation and incorporation of social and ethnic diversity measures into quality assurance programmes.

6.2 Competitive Funding (CF)

The major objective of Competitive Funding (CF) strategy is to enhance higher education institutions access to CF streams to support teaching and research. Major features of CF are:

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P. Randiwela and S.K. Herath it is a flexible mechanism for allocating funds and it can target a variety of sector issues it is an output-oriented funding mechanism, which increases cost-effectiveness that can enhance quality and relevance institutions have to compete for funds on the basis of their own strategic planning CF strategy stimulates creative forces through the selection of best projects based on potential performance and track record.

6.3 Formula-Based Funding (FBF)

Formula-Based Funding (FBF) distributes funds to institutions, based on an agreed set of rules, which allocates value to different cost elements. FBF applies to all institutions in a systematic way. Michael (2002) recognised some objective measures for assessing and funding institutions. These measures can be either input-based or output-based. Input measures are: full-time enrolment headcounts number of course credits levels of course credits nature and type of course credits mission of institution scale of operation and productivity number and type of faculty impact on academic fields capital assets (square footage, buildings, rooms, etc.) library holdings, laboratories, etc (Michael, 2002, p.6).

Several output measures are: retention rate graduation rate employers rating of graduates post-graduation quality of life Publication impact analysis spin-off companies class sizes (Michael, 2002, p.6).

In recent years, many institutions of higher education have adopted some form of FBF in allocating resources.

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6.4 Enrolment-Based Funding

Under the enrolment-based funding model, funds are allocated to institutions of higher education according to the number of students enrolled. The funding amount per resident student is different from the amount per non-resident student. Enrolment-based funding is very popular in a number of developed countries and the models used by the UK and Australia seem to be very comprehensive.

6.5 Funding of Lifelong Learning

With the increasing significance attributed to lifelong education in the developed world, the distinction is breaking down between part-time higher and higher vocational education courses leading to formal qualifications and those regarded as part of adult education, continuing education, distance education or associated with out-reach centres. As a result, many of these lifelong learning courses are now treated as part of mainstream learning and publicly funded. Even when a political decision is taken to provide support from public funds for a wide range of part-time provision, traditional funding mechanisms, whether input-based or output-based, are challenged to accommodate them all because of the difficulty of defining the basic unit of provision. As a result, alternative approaches are being considered and among them are vouchers and Individual Learning Accounts (ILAs).

6.6 Vouchers
In voucher schemes, the student receives an entitlement from the regional or national government to a certain amount of money to be spent on education. The value of this entitlement is related to some notion of the average per capita cost of education. When a student chooses to enrol at a specific higher education institution, the institution redeems the value of the voucher(s). This entitlement can be open-ended in terms of the age of the recipient (although not the total amount of education to be supported) and hence facilitates access for non-traditional and adult learners. Vouchers are a form of demand-side financing, which provides incentives for student choice and greater institutional responsiveness to student needs in a market system more generally. Only to this extent can such a scheme be described as performance-based.

6.7 Individual learning accounts

ILAs are a variant of the voucher system. In 1998, the UK Department for Education and Employment proposed a version of this scheme for the adoption in conjunction with the development of the University for Industry project. With the deferral of that project,4 the British Government has decided to make any new scheme an integral part of a new National Skills Strategy currently under consideration. However, reservations have been expressed about the feasibility of ILAs achieving their stated objectives, at least as they have so far been implemented in the UK. As Thursfield et al. (2002) conclude: ILAs do not, and cannot, remove the structural and cultural barriers to lifelong learning.

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6.8 Student loan schemes

Student loans are used in a wide range of developed and developing countries including New Zealand, Australia, Canada, USA, UK, Sweden, Hungary, Sri Lanka, Ghana, The Philippines and China. There are two major types of Student Loan Schemes in operation around the world: Mortgage-type loan schemes: Loan is for a defined period of time, with a fixed schedule of repayments. Repayment is unrelated to individuals income. Income-contingent loan scheme: Repayment amount is linked to borrowers income. Hence, loan repayment period varies with income and size of loan.

Student loan scheme designs may vary in a number of other ways, including eligibility criteria, loan entitlements, interest rate setting mechanisms and repayment rates. Student loan schemes can operate national wide or institutional-based.

Principalagent relationship and redesigning higher education funding

The relationship between the government and the public Tertiary Education Institutions (TEIs) can be described within the context of principalagent model. The institutions of higher education have more information about education processes than the government. The government (the principal) therefore delegates part of the decision authority to the institution (the agent). However, the information asymmetries between the government and the institution can create an agency problem; the institution can exploit their information advantages to pursue other goals. The agency problem typically arises when funding is based on inputs or historical patterns. As the government cannot observe the effort of university staff, the system may preserve inefficiencies and ineffective programmes. A way to overcome such agency problems is to redesign funding systems, so that incentives of the principal and the agents converge. This is the essence behind the idea of results-based funding. The government should be tight on setting goals for TEIs and assessing results and provide flexibility on the methods used to achieve these ends. Thus, decision makers would assume a stimulative role centred on incentive-induced change rather than control and prescribe action at the decentralised level (Windham and Peng, 1997). Higher education systems are complex and they cater to multiple objectives. Hence, building a funding system without perverse incentives or unintended consequences requires careful consideration of design options. Perfection is unlikely to be ensured in the design phase and progress is often based on trial and error during the implementation phase. The impact of incentive-driven institutional change is contingent on the tailoring of components to fit national and systematic characteristics. Even when an administrative culture has become obsolete or dysfunctional, it remains necessary to understand its institutional roots to secure durable improvements. Also, administrative capacity limitations and other institutional constraints must be considered when designing a funding system (Schiavo-Campo, 1999).

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Incremental funding worked well enough in countries or periods when systems were expanding with increasing resources. However, difficulties have arisen in most places in periods of stagnation or consolidation when funding was restricted or reducing. This led to moves to formula funding based on inputs (e.g., intake numbers) or outputs (e.g., graduate numbers). Funding on the basis of inputs involves the allocation of resources for specific costs (e.g., staff costs) or measures of activity (e.g., student numbers). Funding on the basis of outputs, on the other hand, involves the allocation of resources in response to specific teaching and research outcomes (e.g., graduates, publications). Each type of indicator5 reflects a trade-off between accountability and measurability. Focusing exclusively on inputs and processes facilitates the monitoring of what and how means are used but neglects the purpose for which resources are obtained. Output indicators are relatively simple to observe and quantify but many be only vaguely associated with societal impact. Outcome indicators are generally more relevant, but also less useful for assigning responsibilities. For most purposes, it is preferable to rely on a combination of indicators rather than focusing on any single measures. Yet, an abundance of data adds complexity, and risks making the performance system unwieldy and difficult to understand. Hence, most result-based funding systems attempt to strike a balance between manageability and comprehensiveness. According to Thorn et al. (2004), an indicator should preferably meet the following requirements: easy to calculate difficult to manipulate give a reliable estimate of the institutions value added not be subject to noise.

First, it should be transparent for institutions and their employees how their performance is evaluated. If people do not know how to influence their performance, result-based funding is unlikely to work. Second, the indicator must be difficult to manipulate. For instance, test score can be manipulated in several ways, such as teaching-to-the-exam and keeping marginal students out of the pool of tested students. Third, students learn inside and outside tertiary education, correcting for external influences. Finally, random factors should not have a major impact on selection indicators. As discussed in an earlier section, a mix of input elements and output elements normally characterises funding arrangements. Whether the emphasis lies on output or input depends on the magnitudes of the parameters (funding rates) included in the conditions (formulae) that determine the budget. The degree of output-orientation can be described by means of a continuum running from the extreme case of input orientation to the other extreme case of output orientation (Jongbloed and Vossensteyn, 2001). This continuum is shown as the horizontal axis in Figure 1. Among the systems described earlier, the majority is predominantly input-oriented with regard to the allocation of resources for teaching. There is a wide range of practices with regard to the degree of output orientation in the allocation of resources for research. There is a very practical reason for this. The use of output or performance measures or indicators as a direct or indirect factor to determine higher education funding at the system level is easier for research than for teaching and the other scholarly activities normally undertaken by universities and other third-level institutions. However, performance management rests on the assumption that effective

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governance cannot be achieved within a classic bureaucratic framework of tight regulatory control of sources and methods of production.
Figure 1 A classification scheme for funding systems

Source: Jongbloed and Koelman (2000)

How to make regulatory changes

It is advisable to pay much attention to the following factors and issues in changing the public funding strategy in Sri Lanka.

8.1 The appropriate balance between input-based and output- or performance-based funding
Because of the high level of fixed costs, notably staff-related costs, in the budgets of higher education institutions, a considerable level of funding stability is essential. This is normally provided by the allocation of the bulk of recurrent funding for higher education institutions based on historical calculations of the basic costs of teaching and research. The use of output- or performance-based criteria is, therefore, usually confined to the allocation of a relatively small proportion of total funding. Exceptions to this are the funding for teaching in Denmark using the taximeter model and the funding for research in the UK, New Zealand and Hong Kong.

8.2 Best practice in the application of output- or performance-based funding

It is important to make a distinction between output- or performance-based funding systems, which are based on quantitative outcomes, e.g., completed credits or graduate numbers, research publications, etc., and those that are based, in whole or in part, on an assessment of the quality of those outcomes. As previously noted, the use of output- or performance-based criteria for determining the allocation of resources for teaching in higher education is already less prevalent than the use of such criteria for the allocation of research funding. The association of qualitative assessments with these allocation models for teaching is rare and is currently practised systematically only in the UK.

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8.3 Major pitfalls in the application of output- or performance-based funding systems

The major pitfalls in public funding appear to be: Excessive bureaucracy: Time and resources spent on compliance outweigh the benefits Loss of trust: A problem not peculiar to higher education institutions among public sector institutions in present times Unforeseen and unintended consequences: Outweighing the benefits Game-playing: The development of a compliance culture Mission creep: Decline in diversity of institutional mission.

8.4 Observe the use of performance indicators as a basis for funding third-level education
As indicated in an earlier section, there are several examples of the successful use of PIs in the assessment and allocation of some portion of the public funding for higher and higher vocational education. Where such PIs are qualitative (e.g., assessments of teaching or research performance), they are often intensely contested and can be counter-productive. Quantitative PIs (credits passed, degrees awarded, research publications, etc.) are less open to argument, but have the inevitable failing of being rather blunt instruments given the complexities of the higher education enterprise. A more effective system, in terms of achieving actual quality improvements, appears to be the adoption of a policy of encouraging institutions themselves to take a more conscious approach to performance assessment in the whole range of their activities, and then auditing the institutions own processes for doing so.

8.5 What sort of incentives can be built into public funding systems to encourage institutions to diversify and increase their income from non-public sources, and are there any particular risks associated with such incentives?
Fundamental to encouraging institutions to diversify their sources of income is to ensure that they are not penalised for their success in doing so. Many countries and regions provide public funding support for higher education on a deficiency grant basis and this gives rise to the danger that when institutions receive less public subsidy the more money they receive from other sources (donors, fees,6 endowments, commercial contracts, etc.). To avoid this pitfall, it is desirable to draw up clear guidelines in consultation with the institutions regarding a definition of private funding and the terms for its exclusion from funding calculations. Active support for institutions efforts to raise funds from alternative (i.e., non-government) funding sources can be provided by offering matching public grants.

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The risks associated with providing incentives for institutions to diversify their sources of funding and hence reduce their dependence on public funding are both political and practical. Politically, the reduction of dependence on public funding increases the (fiscal) autonomy of the institutions. This may result in the institutions being less willing to respond to government policy priorities, unless these are enshrined in legislation or some form of performance contract. Issues of quality assurance and mission creep may also arise and require alternative means of government oversight. Practically, institutions may find their own academic and strategic objectives compromised by the pressures of fund-raising and the demands of other stakeholders. Nandy6 revealed the following features about higher educational management in Sri Lanka and its responsibilities:
The treasury, the UGC and the HEIs manage the Higher Education Sector between them. so many mixed up lines of responsibility. The treasury and the UGC are both involved in discussing funding with individual universities sometimes, even the UGC is not fully aware what exactly is happening with the funding. The UGC appears not to have sufficient control on the release of money to individual institutions.

The UGC, in its turn, also carries out a number of duties that should be the business of academic administrators in the institutions. For instance, the UGC deals with admissions, makes rules and often is involved in the appointment of staff at all levels, and has a major say in the transfer of staff.

Policy implications of funding in Sri Lanka

The policy implications of funding can be presented at three levels: a b c university level the government level the public level.

9.1 University level

Universities need to be open to innovations in the area of sourcing for non-government funds. In this respect, universities should learn from one another and possibly study the success stories in sister universities. Need to have a periodic review of the activities of the income-generating centres in various universities, which were established for this purpose. If these units are no longer fulfilling the functions they were meant to fulfil, they should not constitute another financial problem. Value-for Money-Audits should be conducted for each programme. The teaching staff who are currently involved in commercial ventures need close monitoring that teaching and research duties are not neglected, or taken as secondary.

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The university system in Sri Lanka needs to show more pragmatic ways in handling financial problems. A way of reducing administrative costs needs to be devised, so as to try to win more money into teaching and research. The problem of autonomy is a major issue confronting the Sri Lankan university system. If universities become truly autonomous, it may be easy to separate university policies from political agitation and propaganda. The university system needs to intensify creating a friendly environment for learning. For instance, students accommodation deserves an urgent attention. Universities need to heighten the universityindustry partnerships. Promote contract/assignment basis tenure, instead of 100% permanent teaching staff, while paying attractive/competitive remuneration.

9.2 The public

It is important to enlighten the public about the various modes of financing higher education. The public includes parents, guardians and alumni of these universities. Some of the public could even be industrialists who may be willing to donate or provide funds for applied research, which will benefit their industries and economically enhance the universities. If the public is to provide necessary support in financing the universities, then they should be well informed as to the conditions of the universities and about alternative modes of financing higher education. They should know the types of expertise available in universities so that they can be explored and utilised in the industries.

9.3 The government

There is an urgent need to make upward reviews of salaries paid to university teachers, so as to stop brain drain and profiteering tendency among staff and students in the Sri Lankan universities. The government needs to give universities deserving autonomy, so that in a conducive atmosphere, they can do what they know how to do best teaching, research-training and research. The government may need to introduce an accreditation system to the degrees awarded by all HEIs in Sri Lanka so as to ensure the interest of all higher education learning partners concerned. Implementing a funding system goes beyond its technicalities. Even a carefully tailored design may fail if it does not rest on some degrees of support from key stakeholders. Tertiary institutions are generally populated with well-articulated individuals, some of which stand to lose from changes in funding structures. Therefore, developing an implementation strategy with explicit assumptions and contingency plans increases the likelihood of success.7 There is no one, all-purpose answer to how best to implement a university-level funding system. Different approaches work in different countries and regions, but may not be applicable in other circumstances. However, there appear to be some general design principles, shared explicitly or implicitly by many systems.

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A funding mechanism is most likely to be successful if accepted as reasonable by all parties concerned. In this connection, the Finnish approach of drawing up and agreeing with the institutions concerned, individual performance agreements as the basis for funding has apparently been very successful. Similar approaches are being adopted by Sweden and Germany. The success of the Missouri Funding for Results programme is likewise built on consultation. With regard to the design principles for the funding mechanism per se, the New Zealand Tertiary Education Advisory Commission used the following to guide to review its funding framework:8 promote the desired steering of the tertiary education system be transparent have low transaction costs assign financial risk where it is most appropriate ensure equitable access to lifelong learning promote allocative, dynamic and productive efficiency recognise and respect academic freedom and provider autonomy accord with the principles of the Treaty of Waitangi.

The above-mentioned considerations would appear to be a sound basis for the design of a funding system for Sri Lankan universities, although the emphasis may differ in view of Sri Lankan cultural, political and socio-economic circumstances. Some effective ways of generating additional income, increasing access or cutting down costs are as follows: Introducing additional sessions (it is possible to introduce evening sessions) and part-time study on a large scale. For this, increase the number of students (expanding opportunities) and the average unit cost would be somewhat decreased. Introducing distance learning and open learning models to enhance student learning at an affordable cost. This could be coupled/compatible with the e-Sri Lanka Programme as well. Promoting inter-university cooperation (especially among those that are in proximity to one another) along the lines of sharing the services of staff and even offering joint degree and diploma programmes to cut down costs and promote (social) harmony. Generating income from research, innovation and consultancy services that will benefit both the institutions and the industry. Conducting value for money audits.

On the basis of the above-mentioned discussion, a basic model9 is suggested as shown in Figure 2 for reforming public funding in Sri Lanka. The proposed funding system recognises importance of a variety of funding arrangements and it consists of several different types of grants. Rather than giving block grants to universities, this proposal encourages universities to maintain their teaching and research programmes at high-quality levels.

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Figure 2 A model for reforming public funding in Sri Lanka (see online version for colours)

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This funding proposal will increase the competitive intensity among various fields of study resulting in better-quality teaching and research programmes. This will help the attitudes of universities in raising funds, and in the future, public universities in Sri Lanka will achieve funding excellence by using alternative funding strategies such as private funding. They will launch fund raising drives with alumni.

10 Conclusion
The critical importance of higher education in the modern knowledge-based society suggests a necessity for strengthening links between funding institutions of higher education and achieving expected results, especially supporting the economy and reducing unemployment among graduates in Sri Lanka. For each of the dimensions of the proposed model, multiple-criteria should be used to drive the implementation of reforms rather than a single taximeter design. For Teaching Grant category, a combination of PBF, CF and FBF can be used. In reforming public funding, it is important to consider variations between institutions of higher education in Sri Lankan in terms of size, nature of courses offered, cost structure and the need for funds. For example, a relatively new university may need funds for purposes different from an old university.

Acknowledgements
This paper is part of the results of a study commissioned by the Improving Relevance and Quality of Undergraduate Education (IRQUE) Project (Funded by the World Bank), under the Ministry of Education Sri Lanka, as an input to a review of its funding mechanism and funding systems for developing a funding model to the universities in Sri Lanka under its patronage.

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References
Batley, R. (1999) The new public management in developing countries: introduction, Journal of International Development, Chichester, Vol. 11, No. 5, pp.755760. Burke, J.C.A. (2002) Funding Public Colleges and Universities for Performance: Popularity, Problems and Prospects, Rockefeller Institute Press, New York, NY. IRQUE Final Report (2003) Melbourne University Private and Resources Development Consultant Limited, RDC Set 1, Vol. 1, pp.67. Jongbloed, B. and Koelman, J. (2000) Vouchers for higher education? A survey of the literature (Report commissioned by the Hong Kong University Grants Committee), Center for Higher Education Policy Studies, University of Twente, Enschede, Netherlands. Jongbloed, B.W.A. and Vossensteyn, J.J. (2001) Keeping up performances: an international survey of performance-based funding in higher education, Journal of Higher Education Policy and Management, Vol. 23, pp.127145. Massy, W.F. (2003) Honoring the Trust; Quality and Cost Containment in Higher Education, Anker Publishing Co., Bolton, MA. Michael, S.O. (2002) Higher Education Finance: Formula Funding Issues For Ohio, http://www.regents.state.oh.us/hefc/Steven_Michael_4.8.02.pdf Nandy, S. (2000) A New Method for the Allocation of Funds to the Universities and Institutions of Higher Education in Sri Lanka, A Report Submitted to the UGC, Sri Lanka. Noland, B., Davis, H. and McClendon, S. (2000) Improving Institutional Accountability Through Performance Funding: The Tennessee Experience, http://www.statepublic.tn.us/thec/ 2004web/division_pages/ppr_pages/Research/Papers/2000.11.16 (Retrieved on 10 April, 2006). Randiwela, P. and Herath, S.K. (2008) Improving Relevance and Quality of Undergraduate Education (IRQUE) in Sri Lanka: the need for a change in public funding strategy, International Journal of Innovation and Learning, Vol. 5, No. 3, pp.300316. Schiavo-Camp, S. (1999) Performance in the public sector, Asian Journal of Political Science, Vol. 7, No. 2, pp.7587. Thorn, K., Nielsen, L.H. and Jeppersen, J.S. (2004) Approaches to Results-Based in Tertiary Education Identifying Finance Reform Options for Chile, World Bank Policy Research Working Paper 3436, October, http://siteresources.worldbank.org/INTAFRREGTOPTEIA/ Resources/Approaches_to_Results_Based_Funding.pdf Thursfield, D., Smith, V., Holden, R. and Hamblett, J. (2002) Individual learning accounts: honourable intentions, ignoble utility?, Research in Post-compulsory Education, Vol. 7, pp.133146. Tilak, J.B.G. (2005) Global trends in the funding of higher education, IAU Horizons World Higher Education News, Vol. 11, No. 1, March, http://www.unesco.org/iau/newsletters/ iaunew11-1-en.pdf Trow, M. (1970) Reflections of the transition from mass to universal higher education, Daedalus, Vol. 99, pp.142. Windham, D.M. and Peng, W. (1997) Incentive concepts and macro-economic planning, in Kemmerer, F.N. and Windham, D.M. (Eds.): Incentive Analysis and Individual Decision Making in the Planning of Education, IIEP, Paris, pp.116.

Notes
1

Government should be tight on setting goals for universities/tertiary institutions and assessing results and provide flexibility on the methods used to achieve these ends. 2 Reflects the quantity of products produced such as the number of graduates or the number of research papers published. The performance criterion corresponding to output is efficiency, i.e., maximising the quantity of output in relation to a given total amount of inputs.

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3

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Covers the quality and societal impact of the product produced. Outcome indicators include learning results, job placements and user satisfaction. The performance criterion corresponding to outcomes is efficiency, i.e., maximum outcomes in relation to the outputs produced. 4 It has been replaced by a publicprivate partnership called Learndirect. 5 The process of identifying indicators goes to the heart of designing a result-based funding system. Indicators are more effective when they mirror governments strategy in the higher education sector. Indicators come in four types namely: Inputs, processes, Output and Outcomes. 6 Other than tuition fees that are formally taken into account in the funding assessment process. 7 Thorn et al. (2004). 8 NZ Tertiary Education Advisory Commission (2001). 9 This has to be coupled with Capital Funding. The suggestions given by Nandy (pages 1314) are recommended in this regard. The percentage values given in this model are tentative. These could be determined after consulting the stakeholders of the HE.