19.1 In Chapters 17 and 18 we referred to a common theme in our discussions: the sharing of the costs of higher education between taxpayers in general (the state), individuals and their families, graduates in work and employers. We have also argued that institutions have an essential contribution to make in providing higher education in a cost-effective fashion. It will be clear that we see the state as having a continuing substantial involvement in the funding of higher education. In this chapter we consider the methods of delivery of public funds to institutions. At one level, the proposals put forward are independent of whether or not the graduate in work is to make a contribution towards the costs of higher education, but we examine how the public funding element and a contribution from graduates in work might in practice interact.

19.2 The current funding systems, developed originally to support an elite system, have been adapted to support a much more diverse range of institutions, much larger numbers of students, and a much higher expectation of what can be delivered from the research infrastructure. We have been conscious of the need to take account of this experience in devising funding arrangements which are capable of delivering the kind of higher education system which the UK will need over the next 20 years. In particular, we have sought to take account of the prospective need for further expansion of initial higher education, of the need to promote lifelong learning, and of how an approach in which student choices shape the system could support our long term vision of higher education. We also took the view that funding should promote the wider objectives of higher education rather than, as is currently the case, funding driving those objectives.

19.3 In this chapter we therefore:

  • review existing arrangements for distributing funds to institutions;
  • establish the principles which should govern such arrangements in the future;
  • examine the relative merits of a ‘block grant’ approach for funding tuition and a system in which public funding flows to institutions on the basis of student choice;
  • examine the administrative implications of our proposals;
  • consider the circumstances in which it would be acceptable for different levels of public support to be given to different programmes of higher education (‘differential pricing’);
  • consider the financing of capital investment.

Existing arrangements for distributing public funds to institutions

19.4 Public funding for tuition in higher education flows to institutions through two main routes:

  • block grants, covering all eligible higher education students (full-time, part-time, undergraduate and postgraduate) paid out through Funding Bodies, principally the Higher Education Funding Council for England, the Scottish Higher Education Funding Council, the Higher Education Funding Council for Wales, the Department of Education Northern Ireland and the Teacher Training Agency;
  • funding which, more directly, follows the student. This takes the form of tuition fees paid to the institution at which study is being undertaken as part of each eligible full-time undergraduate’s mandatory grant. The mandatory grant fee levels are determined annually by the Government which reimburses local education authorities for the fee payments they make. There are no publicly funded fees for part-time or postgraduate taught students other than those taking the Postgraduate Certificate of Education (PGCE).

19.5 Governments have, from time to time, adjusted the balance between block grants and tuition fees to achieve their policy objectives. For instance, by providing more money in the form of tuition fees, in the late 1980s and early 1990s, the Government encouraged institutions to admit more students, without any increase in block grants. The increased income from tuition fees provided the opportunity for institutions to increase their total income, so obtaining the growth in participation sought by the Government at a reduced unit cost. In contrast, channelling a greater proportion of funds through the block grants of the Funding Bodies gives greater central control over public expenditure, and over the distribution of funds between individual institutions. In the mid 1990s, when the Government sought to stop growth, it shifted the balance back towards the Funding Bodies’ grant, and imposed a system of capping full-time student numbers, leaving individual institutions very little room for manoeuvre in their recruitment of full-time students.

19.6 The methods which the Funding Bodies use to distribute their block grants can themselves have a substantial effect on the behaviour and financial stability of institutions. The Funding Bodies use student numbers as one of the main drivers in their allocation methods for funding tuition, and take account of the different costs of providing different subjects. Such approaches are usually described as formula funding. When the current Funding Bodies were set up, there were wide differences in the unit of funding enjoyed by different institutions which owed more to history than to any rational assessment of the relative costs or value of institutions’ offerings. The Funding Bodies have adopted different methods of allocating funds between institutions but all have sought, to differing extents, to bring about some convergence in funding levels for different institutions.

19.7 The Teacher Training Agency has created a direct link between funding decisions and assessments of quality. Although the other Funding Bodies have in reserve the power to remove funding from any activity which they assess as being of inadequate quality, they have not needed to use the power. Institutions have, in most cases, rectified shortcomings or, in a few cases, have chosen to close down a programme.

19.8 Although the majority of funding provided through block grants is distributed by a formula funding approach, each Funding Body holds back some of its grant – to support centrally determined priorities. In practice this has been done principally:

  • to provide a single national approach to key developments for example the development of SuperJANET, the higher education information superhighway;
  • to provide for historical differences in costs beyond the control of individual institutions, the extra costs of providing minority subjects or the costs of maintaining national museums and galleries;
  • to promote new developments in teaching and learning.

The Funding Bodies have also used their discretion to ameliorate the effects of major year on year funding changes on individual institutions. This has been particularly significant after each Research Assessment Exercise, the outcome of which can have a major impact on an individual institution’s research funding.

Funding principles

19.9 In advising on funding arrangements over the next 20 years we have, within the general framework of promoting equity of access amongst individuals irrespective of social background, taken the following factors into consideration;

  • promoting responsiveness to informed student demand by institutions and other providers;
  • aligning, as far as possible, the funding arrangements for part-time and full-time undergraduates;
  • promoting a reasonable degree of stability in the system and reducing its vulnerability to fluctuations in the economic cycle or to changes in Government policy;
  • helping to sustain standards, so that UK institutions continue to measure up to their international competitors;
  • maximising the return on public investment in higher education for the nation’s economic development, and incentivising improved cost-effectiveness among providers;
  • supporting institutional collaboration, on a regional, national and international basis, where appropriate.

19.10 No single approach to funding can meet all these concerns, and our recommendations have turned on the relative weight attached to them, and the broader desirability that proposals on funding should promote the wider purposes of higher education and of society as a whole.

19.11 It is essential within any approach to funding to define what programmes of study are eligible for funding and which providers of eligible programmes should be included.

What is eligible for public funding for higher education?
19.12 The current legal framework on the eligibility of programmes for funding (and consequent funding arrangements) varies across the UK. There are particular differences in where the responsibility for funding higher education sub-degree work lies. In Scotland, for example, the Scottish Office Education and Industry Department funds all higher education provided in further education colleges. In England, the Higher Education Funding Council for England funds ‘prescribed’ sub-degree higher education (principally full-time HNDs) in further education colleges but the Further Education Funding Council funds ‘non-prescribed’ higher education (mainly HNCs and other part-time study). Across the United Kingdom as a whole, there is currently no common practice in many part-time or postgraduate areas as to whether institutions charge students the full cost or whether they use Funding Body grant to subsidise the fees they charge. This is particularly the case for some postgraduate professional courses.

19.13 Chapter 22 considers the arguments for determining and clarifying funding responsibilities along either institutional lines or on the basis of level of provision, and the case for adopting different approaches in the different national regions of the UK.

19.14 We have not been able in the time available to us to investigate properly the issues surrounding public support for professional courses, especially those at postgraduate level. In general, though, we believe that programmes of study leading to a professional qualification which is a requirement of employment should be funded by employers and individuals, and that the government should discourage tendencies for the length of publicly funded programmes to be extended to meet professional requirements. Such extensions should raise the question of employer contributions.

Which institutions and other providers are in the group which receives public funds?
19.15 Currently, there is a recognised group of institutions eligible to receive public funds from the higher education Funding Bodies. A number of private institutions outside this group would like to be eligible to receive such funding. While we believe that there must be scope for admitting new institutions to the publicly funded group, and for extending the coverage of existing institutions, the availability of funding as well as need will always be relevant criteria to such enlargement. There are also other important conditions that should be satisfied before an institution becomes eligible for public funding from the Funding Bodies. These include openness of access by students, compliance with requirements on standards and quality assurance, and conformity with the conditions for public funding that apply to existing institutions. Institutions seeking public funding would need to show that there was a good prospect of their being able to satisfy these conditions on a continuing basis.

19.16 It has been put to us, however, that individuals who wish to study some subjects such as drama, dance and stage management are disadvantaged because the majority of the provision for these subjects is in institutions that are not currently in receipt of public funds. We believe that the appropriate approach in this case would be to provide public support to the students themselves rather than to the institutions that make the provision. This is considered further in Chapter 20.

Proposals for funding tuition

19.17 We have examined the relative merits of the two main available systems of delivering public funding for tuition to institutions:

  • a ‘block grant’ system;
  • a system in which funds follow the student
    to see how well they met the principles in 19.9. The alternatives are examined in more detail in Report 14, ‘Methods for funding tuition’, but their main features are summarised below.

19.18 In a ‘block grant’ model an institution contracts with a Funding Body to provide a specified quantity of higher education. The contract can specify to varying degrees the precise nature and mix of provision which is to be made. The level of funding in the block grant can vary accordingly to the type of student, the programme of study, and the length and intensity of study. Providing an institution meets the terms of its contract and if the Funding Body does not prevent it from doing so, it can be free to recruit above its student number target but it does not receive any additional public funding through block grants for doing so.

19.19 A system in which funds follow the student can be based on private funding or public funding or a mix of the two. Its essence is that an institution’s income is directly related to its success in recruiting students. If public funding is the basis for such a system, the student might carry proxy funds, such as a credit or voucher. The real money value which the institution received when it cashed the proxy could vary according to the nature of the programme chosen by the student.

19.20 As we noted in 19.4, the current UK system for funding higher education tuition combines the two approaches: for full-time undergraduates block grant, and publicly funded fees which follow the student; and for most other students block grant, and private fees at a level set by the institution. The way in which the block grant element is determined varies somewhat across the countries of the United Kingdom.

19.21 It is a feature of the present system that all public funding for the vast majority of part-time and postgraduate students is provided through block grants, and the publicly-funded fee supports only full-time undergraduates.

19.22 The main advantage of a block grant approach, at least in the short term, is the certainty it offers on the level of public expenditure on higher education which will be incurred each year. The Government can make a decision about the level of funding it wishes to devote to supporting higher education tuition before the start of the financial year in the knowledge that it is unlikely to be exceeded. The Funding Bodies can set their contracts with institutions to match the available level of funding. As this approach gives the Funding Bodies the power of being monopoly purchasers – ‘monopsonists’ – it puts them in a powerful position to push down the cost of higher education, which they can do more effectively than individual student purchasers could. A block grant approach, depending on how it is operated, can offer institutions a degree of stability in their funding. It also gives the Funding Bodies a strong lever to use for the maintenance of quality and standards. It empowers the Funding Bodies to promote particular types of study differentially.

19.23 The main disadvantages of the block grant approach are its inflexibility and insensitivity to student demand. The Funding Body determines to a large extent what subjects students can study, and at what institution. It can, of course, endeavour to adjust its contracts in the light of perceived student demand, but central approaches can never be as sensitive and flexible as individual decisions of students and institutions.

19.24 By contrast, in a model in which public funding follows the students’ choices, those choices determine the shape of the system and institutions are encouraged to respond in order to maintain or increase recruitment and income. As responsiveness to students’ changing needs is a key aspect of the Committee’s vision, this approach is very attractive for the long term. It recognises that students are individuals with a wide range of needs. In the longer term, in a learning society, we expect that students will want to move in and out of the system much more frequently, and a funding system which mirrors student decisions can reflect this more easily than a block grant system.

19.25 The full realisation of this potential requires that an appropriate share of the block grant which currently provides for students on part-time and postgraduate courses is converted into funding that follows student choice as well as the share that supports full-time undergraduate students: otherwise part-time and postgraduate students will be yet more disadvantaged compared to full-time undergraduate students.

19.26 The main potential disadvantages of an approach in which funding follows the student are that:

  • the Government has no ready means of controlling public expenditure on higher education within a financial year;
  • the individual student will not be as powerful a purchaser as a central funding body, which may reduce the pressure on institutions to be as cost-effective as possible;
  • the individual student may not be well-informed enough to make good decisions, and in particular may be unable to avoid poor quality or low standard offerings.

19.27 We believe that our proposals in Chapters 8, 9 and 10, for better information and guidance for potential students, for clearer specifications of programmes of study, and arrangements for the tighter assurance of quality and standards will help to minimise the last of these problems.

19.28 General pressure on institutions to reduce costs will continue to be applied through a squeeze on the total of public funds. However, the impact of continued severe pressure across the board coupled with common funding levels for particular kinds of provision could lead to some institutions seeking a higher per capita payment on the ground that their higher costs are justified. We consider this issue of differential prices for programmes in more detail in paragraphs 19.41 to 19.47.

19.29 This leaves the issue of the control of public expenditure. Experience in the early 1990s showed that when an increasing proportion of public funding flowed with full-time undergraduate students there were substantial increases in demand, and in spending on fees and student living cost support, beyond that allowed for in public expenditure plans. This, in turn, led to the Government’s decision from 1994/95 to introduce a consolidation of numbers through the use of individual institutional caps on full-time undergraduate numbers. The Treasury’s concern about open-ended payments related to demand will have been exacerbated by recent experience in the further education sector.

19.30 There are several ways of approaching this problem. Public expenditure could be controlled by limiting the number of credits or vouchers an institution could cash in any one year, but this would be tantamount to keeping a student number cap. Alternatively, the value at which the voucher or credit was cashed could be determined once the full number of units to be cashed was known. This would, however, present institutions with great uncertainty, and would enable those who wanted to expand at a low unit cost to drive down unit funding across all institutions, including those which were unable or unwilling to expand.

19.31 We believe that the best way forward would be through gradual but steady progress towards more public funding flowing with the student. Over the long term, we believe that a gradual shift would allow a much better understanding, on the part of the government and the Funding Bodies, of the year to year changes in demand for higher education, and of the propensity of institutions to respond to those changes. Reasonable year on year fluctuations should be accepted by the government but it would be desirable to retain a reduced element of block grant to allow intervention by the government to influence the level of demand if, for example, participation in higher education was falling behind that in competitor countries. In practice, the balance can only be struck on the basis of experience during the transition.

Recommendation 72
We recommend to the Government that it shifts the balance of funding, in a planned way, away from block grant towards a system in which funding follows the student, assessing the impact of each successive shift on institutional behaviour and the control of public expenditure, with a target of distributing at least 60 per cent of total public funding to institutions according to student choice by 2003.

Contributions from individuals
19.32 This recommendation must, however, be seen in the context of the option we consider in Chapter 20 for seeking an increased contribution from individuals, on full-time undergraduate courses, towards the cost of higher education. Most of the options involve a contribution to the cost of tuition from individuals either in the form of loan repayments (or contributions) once they have entered employment or from them or their families at the time of study. If one of these proposals is accepted, the individual contribution would flow to the institution immediately and the individual would enter into a loan agreement with the agency making the loans. Within the total of funding for tuition it would be necessary to determine a new balance of block grant, the element of public funding flowing to the institution on the basis of student choice, alongside the loan-backed student contribution. We would favour the student contribution leading to a reduction in the block grant element as a step in the direction outlined in our recommendation above.

Rest of chapter