New models of tertiary education

New models of tertiary education - Final Report
01 Mar 2017
New models of tertiary education - Overview
01 Mar 2017
New models of tertiary education - Issues Paper
01 Feb 2016


The Government asked the Productivity Commission to carry out an inquiry into new models of tertiary education.

The terms of reference suggested that the tertiary education system has “considerable inertia”, with tertiary providers reluctant to be first movers or early adopters in shifting away from traditional models. At the outset of the inquiry, the Commission was mindful of the importance of this alleged problem. If providers in the tertiary education system are inflexible and slow to adapt to changing circumstances, then that carries with it considerable risks for New Zealand and missed opportunities for improvement. As this Overview explains, tertiary education does have considerable inertia, but this is an emergent property of the system rather than a characteristic of tertiary education providers.

Key Results

Chapter 3 – Student characteristics and choices
F3.1 Students choose tertiary study for a range of reasons, including improving their career prospects and pursuing their personal interests. Students are acutely concerned about whether their investment in tertiary education will lead to well-paid work.
F3.2 On average people from higher socioeconomic communities study longer, and at higher levels. They also receive more government funding towards tertiary education at above foundation level.
F3.3 Māori and Pasifika have relatively high rates of participation in tertiary education, but the high participation rates are entirely at subdegree-level study.
F3.4 The tertiary education system is increasingly oriented towards full-time study, towards younger students (under 25 years) and away from extramural study.
F3.5 Decisions about entering tertiary education and the influences on prospective students are complex. The arrangement and delivery of careers services, including in schools, and government provision of information to prospective tertiary students, is fragmented and operating poorly.
F3.6 Wage levels send important signals to prospective students about what type of tertiary education will be financially rewarding to them, and of value to employers.
F3.7 Differences in prior school achievement are the major drivers of lower Māori and Pasifika participation in Bachelor’s degree study. Improving school-level outcomes for Māori and Pasifika is important to improve their participation at higher levels of tertiary study. But Māori participate in Bachelor’s degree study at lower rates even after taking account of prior school achievement and socioeconomic status.

Chapter 4 – Employers, industry, training and labour market
F4.1 Compared with other OECD countries, workers in New Zealand are poorly matched with their positions (based on their qualifications, field of study, and literacy). Overseas studies show that poor matching has negative consequences for individuals, employers and the wider economy. However, the extent to which these consequences play out in New Zealand is unclear given some data limitations and a shortage of New Zealand specific evidence.
F4.2 Career guidance, information about the returns to different tertiary education programmes, opportunities to upskill and retrain, development of transferable skills, and an education system that is responsive to employer demand are all important for improving matching between graduates and employment.

F4.3 Employers can have input into the tertiary education system through a range of formal and informal avenues. The incentive for employers to engage with tertiary providers may be muted by the relative ease of access to skilled migrants. Tertiary providers lack incentives to respond to employer input as the majority of their revenue comes from
F4.4 Government has established numerous initiatives to improve coordination and links between tertiary education providers and employers. The need for such initiatives is symptomatic of longstanding coordination difficulties between the tertiary education system and employers.
F4.5 Tertiary education qualifications that equip graduates with transferable skills are desirable, as such skills retain their relevance in a changing job market. Several providers noted they are focusing on developing transferable skills; however, in some cases, these skills are not well integrated into assessment processes.
F4.6 Funding for industry training is predominantly restricted to provision at levels 1 to 4 on the New Zealand Qualifications Framework. This limits the ability of the industry training subsector to respond to demand for higher-level training, and inhibits the adoption of new models such as degree apprenticeships.
F4.7 The ability of different subsectors to deliver apprenticeships, and for employers to organise industry training through the direct training scheme, creates valuable competition and diversity in available training options.
F4.8 The government funding rate for apprenticeships differs markedly, depending on whether they are administered by an Industry Training Organisation or a polytechnic. The rationale for this difference is unclear.
F4.9 Barriers to mid-career retraining include current funding and regulatory settings for tertiary education that focus on younger, full-time learners completing full qualifications, the design of the student support system, and funding rules that make recognition of prior learning difficult.

Chapter 5 – Government’s many roles
F5.1 In some instances, government functions are poorly assigned among government agencies.
F5.2 The priorities of the current Tertiary Education Strategy (TES) encompass a very wide range of provider activity. The TES gives no sense of relative importance of these priorities, or how the inevitable trade-offs between priorities should be managed. Nor does the TES outline government’s plan for achieving the priorities. Its performance indicators are frequently vague and monitoring against the strategy is sporadic.
F5.3 Government typically recovers just 60 cents per dollar lent through the Student Loan Scheme – due in large part to the use of a zero nominal interest rate. This fiscal cost, along with the cost of other student support payments, creates a strong incentive for government to control student numbers and provider fees.
F5.4 Funding mechanisms tightly specify how funding is allocated, and what providers can deliver.

F5.5 The fiscal effect of Performance-Linked Funding is frequently overstated. Between 2013 and 2015, less than 0.2% of SAC 3+ funding was withheld under Performance-Linked Funding. However, Performance-Linked Funding does appear to strongly affect provider behaviour to the detriment of innovation and the development of new models.
F5.6 The Tertiary Education Commission’s regional delivery rules restrict the ability of Institutes of Technology and Polytechnics (ITPs) to deliver outside their own region. This dampens competition between ITPs and, in conjunction with enrolment caps, limits their ability to grow. Both effects reduce ITPs’ ability or incentives to introduce new models of tertiary education, increase efficiency, or improve their educational performance.
F5.7 The Tertiary Education Commission frequently delays confirmation of providers’ funding allocations.
F5.8 A very small share of funding allocated through the Investment Plan process shifts between tertiary providers, resulting in a very stable funding environment with little reward for successful innovation or high performance.
F5.9 Caps on the enrolment of domestic students mean tertiary providers are allocated a certain number of Equivalent Full-Time Students for whom they must deliver a mix of programmes on the New Zealand Qualifications Framework. Tertiary providers have little ability to expand or contract delivery in response to changes in student demand.
F5.10 Current tightly specified fee regulation:

  • inhibits differentiation in educational offerings within the tertiary education system;
  • has locked providers into historic fee relativities; and
  • works against provider experimentation with prices, as any fee decrease is immediately locked in.

F5.11 New providers must complete a multifaceted set of requirements before being eligible to deliver qualifications on the New Zealand Qualifications Framework or apply for Tertiary Education Commission funding.
F5.12 Some tertiary providers view New Zealand Qualifications Authority processes as time consuming, costly and a barrier to innovation in the development and delivery of programmes.
F5.13 There is scope for the New Zealand Qualifications Authority to adopt a more risk-based approach to External Evaluation and Review, and for reviews to concentrate more on providers’ value-add and student outcomes.
F5.14 The Committee on University Academic Programmes process is not conducive to innovation in the university subsector.
F5.15 Audits conducted by the Academic Quality Agency focus primarily on process rather than the quality of delivery or outcomes achieved. This is a missed opportunity to identify improvements that matter most for students.
F5.16 Government’s comprehensive financial guarantee for creditors and council members of tertiary education institutions compels it to undertake financial monitoring. However, government is not in the best position to fulfil this role as it has neither the most current or comprehensive information, nor is it best placed to intervene when financial issues first emerge.

F5.17 Government has a multitude of initiatives to provide information about careers and tertiary education to students and employers. Responsibility for these initiatives is spread across five government agencies.

Chapter 6 – Providers of tertiary education
F6.1 Traditionally, universities are non-hierarchical collectives with horizontally dispersed decision rights and weak central control. Such organisations face particular difficulties in adapting to external change or innovating at scale.
F6.2 Universities have significant incentives to invest in research to maximise their Performance-Based Research Fund revenue, and they are responding to these. Universities have no similarly strong external incentives to improve teaching quality.
F6.3 No single arrangement of tertiary-level research and teaching will always be the most successful or the best for students. The traditional model of the “teacher as researcher” may be a good fit for some students and some academics, but is not the only good model.
F6.4 Tertiary education sector staff hold a widespread, though not universal, view that “red tape” and excessive management increase costs and reduce their ability to do good and enjoyable work, without any compensating gains in the quality of that work.

Chapter 7 – Tertiary education markets
F7.1 An EFTS is the main unit purchased by the Tertiary Education Commission and delivered by tertiary providers. It necessarily commodifies a complex, co-produced service into a quantifiable product, which is supplied and purchased in a “market for EFTS”.
F7.2 Government constrains the market for EFTS. Government purchases a limited range of products, sets quotas for each provider, and controls price. EFTS prices are not sensitive to important drivers of costs, such as economies of scale, differences in student characteristics, and differences in location and mode of delivery.
F7.3 The agencies operating the tertiary education funding system observe student demand imperfectly. The funding system observes enrolments, but is largely blind to two types of demand:

  • demand partly served, where students enrol in a course or with a provider that is not their first preference; and
  • unserved (or latent) demand, where students would enrol if the right opportunity at the right price were available to them.

The funding system misclassifies the former as demand satisfied, and ignores the latter. Such a funding system effectively defines student demand in terms of education delivered, so demand cannot exceed supply.
F7.4 A provider’s under- and over-delivery of EFTS has relatively little effect on its future EFTS allocations. Policy and provider-specific factors are more important.

F7.5 Tertiary education Budget allocations ultimately determine provider revenues. However, Budget allocations are not directly responsive to fluctuations in student demand. Rather they are influenced by political priorities, and competing demands on public finances.
F7.6 The balance of evidence supports the view that demand exceeds supply in the tertiary education system. The system rations education, by price, by quantity and by product.

Chapter 8 – Implications of the incentives in tertiary education system settings
F8.1 Tertiary education institutions (TEIs) perform a delicate balancing act between making calls for more funding while at the same time demonstrating efficiency and innovative activity. Observable success in reducing costs and being more efficient with their resources undermines TEIs’ lobbying attempts to maintain or increase price and quantity.
F8.2 The incentives facing tertiary education institutions (TEIs) encourage them to over-invest in reputation and physical assets, and to take on more debt than might otherwise be prudent. In (partial) response, government directly regulates the amount of debt TEIs can take on.
F8.3 The funding and regulatory system does not materially distinguish between a provider who is just “satisfactory” and a provider who is “exceptional” at teaching. No robust information is currently available to help prospective students make this distinction either.
F8.4 Student choices have limited impact on provider revenue, as long as providers can fill their allocated EFTS quotas. Student choices may lead to a reallocation of revenue within (rather than between) providers.
F8.5 The EFTS quota system leads to the over-subscription of some courses and providers, while others are under-subscribed, with supply unable to readjust to demand. Instead, demand has to adjust to supply – and some students are inevitably left with their second (or lower order) preferences. This means less efficient matching of students to
tertiary education.
F8.6 The funding system pushes tertiary education institutions towards homogeneity in what and how they deliver. This risks mediocrity and discriminates against some students.
F8.7 The funding and quality assurance systems do not reflect stated government commitments to improving educational outcomes for priority student groups, including Māori and Pasifika.
F8.8 Providers with market power are able to impose high switching costs on students – and have financial and reputational incentives to do so.
F8.9 The New Zealand tertiary education system is not well suited to lifelong learning.
F8.10 The market power of providers gives them weak incentives to control costs. Higher production costs do not necessarily result in better outcomes for students.

F8.11 To manage its financial and political risks, government requires every public provider to make a financial surplus. Government sets EFTS prices at a level that enables this. This means that, over time, the highest-cost public provider (that does not have other substantial sources of revenue) can effectively set EFTS prices.
F8.12 Quota mechanisms, and barriers to entry and exit, in the tertiary education system mean minimal reallocation of EFTS. This reduces opportunities for improved system-level productivity and quality.
F8.13 There is significant dispersion in labour productivity across TEIs, and even larger dispersion in capital productivity. Such dispersions generally indicate weak pressure to improve and, on the other hand, significant improvement opportunities for the worst performing institutions.
F8.14 Cross-subsidisation can be problematic where it undermines funders’ intentions, is absent where government’s funding approach assumes it is present, or puts competitors on an uneven playing field.
F8.15 Features of the tertiary education system combine to limit innovation and reduce responsiveness to student demand. Competition – where it exists in the system – is not on the dimensions of education-enhancing, cost-reducing innovation or responsiveness to student demand.
F8.16 There is “considerable inertia” in the New Zealand tertiary education system. This inertia is an emergent property of the system, rather than a characteristic specific to providers.

Chapter 9 – Outcomes of the system
F9.1 Course and qualification completion rates as currently published by government are not a reliably good indicator of a provider’s performance in educating students, because they are not adjusted for differences in the student intake.
F9.2 International assessments show that New Zealand 15-year-olds have high average skills in literacy and numeracy, but with a lot of variation between 15-year-olds, and a long tail of low-skilled teenagers. The same pattern applies to New Zealand adults in their 20s. The tertiary education system does not appear to influence these patterns in skill variation.
F9.3 Lower course pass rates are the major driver of lower retention and completion of Māori and Pasifika students in Bachelor’s level study. But Māori students had lower retention rates, and Māori and Pasifika lower completion rates, even after taking account of differences in pass rates, socioeconomic status and other measured variables.
F9.4 The tertiary education system underperforms for Māori and Pasifika students. These groups experience persistently worse tertiary education outcomes than other students.

Chapter 10 – Trends
F10.1 University tuition fees have increased significantly in real terms over the past 10 years. Average tuition fees in the institute of technology and polytechnic and wānanga subsectors have fallen.
F10.2 At the aggregate level, government tuition subsidies per EFTS have increased faster than the rate of inflation over the past 15 years. This increase is driven primarily by increases in the Student Achievement Component funding rate for universities and institutes of technology and polytechnics. Funding rates for wānanga are largely unchanged, while rates for Private Training Establishments declined between 2001 and 2009, before rising again.

Chapter 11 – Innovative activity
F11.1 Students who choose distance and online study differ from on-campus students, particularly in terms of age and employment status. Online delivery models have the potential to expand access to tertiary education for older people, those in employment, and those with difficulty accessing traditional campus-based education.
F11.2 There is considerable scope for tertiary providers to do more to research their own policy and practice.
F11.3 The internal culture and management capability of a tertiary education provider is a major influence on its ability and wish to innovate. This culture and capability is also shaped by a system that does not reward innovation.
F11.4 Providers in New Zealand tend to adopt sustaining innovations that improve the value of their existing way of delivering education. Often, this means technology is grafted on to old ways of doing things.
F11.5 Regulatory settings make it hard for innovative new models of tertiary education to emerge from existing government-funded providers. New models either arise outside of the government-funded system, or are enabled by legislative change on a case-by-case basis.
F11.6 Some frontline educators adopt technology to aid their teaching in innovative ways, but there is little institutional capability to scale this activity.

Chapter 13 – Information to support new models
F13.1 By itself, a national framework for credit transfer is unlikely to lead to widespread good practice in credit transfer. The incentives faced by individual providers are still the dominant considerations.
F13.2 Market regulation typically includes measures to inform and protect consumers, limit the accumulation of market power, control over-pricing, and sanction the abuse of market power. Yet in tertiary education, government regulations grant local monopolies and create cartel-like structures.

Chapter 14 – Regulation that permits new models
F14.1 Good regulation recognises that different people can reasonably hold different views about what constitutes “high quality” tertiary education. Regulation should focus on enforcing acceptable standards that matter for quality regardless of students’ needs and preferences.
F14.2 Self-accreditation for high performing providers would raise the stakes associated with quality assurance and place a premium on processes that are robust, credible and based on accurate information.
F14.3 Self-assessment in External Evaluation and Review processes is an important part of the quality assurance framework. It provides a mechanism by which providers can focus on improving performance in the context in which they operate.

Chapter 15 – Purchasing to reward new models
F15.1 A student education account model would place students at the centre of the tertiary education system. However, the prerequisite conditions needed for such a model to be successful are not yet present in New Zealand.

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