Financial and Fiscal Commission on 2013/14 Division of Annual Revenue with special focus on higher education

Meeting report

2013/2014 Division of Revenue matters, with special focus on higher education: Financial and Fiscal Commission (FFC) briefing
Ms Tania Ajam and Ms Luci Abrahams, Commissioners, Financial and Fiscal Commission, briefed the Committee on the 2013/14 Division of Revenue, with a special focus on higher education.

Ms Ajam outlined the Constitutional and statutory mandates of the Financial and Fiscal Commission (FFC), and noted also that this Committee had requested that FFC expand on its 2012 recommendations on higher education financing. She noted that the theme of the 2013/14 Division of Revenue (DOR) was “moving people out of poverty” and supporting innovation in inter-governmental financing. Three drivers to support inclusive growth were identified, namely, environmental sustainability, institutional development, and inclusive growth and development. E-education and the budget review of public universities fell into the inclusive growth arena. She said that the context of the FFC submission must include an acknowledgment of the fact that South Africa was moving inexorably towards a knowledge economy, with or without government intervention, and in order for the country to be able to compete it would need low, medium and high levels of skills. A strong and adequately funded post-school educational system which comprised universities, colleges and vocational institutions was needed.

Ms Abrahams stated that the funding principles of the 1997 Higher Education White Paper still pertained in relation to higher education, but she did note that South Africa was currently in the process of drafting a new Green Paper, looking at possibilities for a new public policy framework for higher education. Some of the key principles of the 1997 White Paper were that there should be sharing of costs between government, students and their families. The principle of autonomy of public higher education institutions in determining student fees was accepted, whilst government funding was geared to service delivery and as a mechanism to steer the higher education system in accordance with broad social and economic development goals.

Ms Abrahams stated that the available statistics on the income of higher education institutions showed that direct government transfers for the period from 2000 to 2009 increased to R15.3 billion, student fees increased to R10.7 billion, and income from private sources increased to R11.6 billion. The total income for the period increased to R37.5 billion. In the same period, there had, however, been a steady decline of government grants (-1.1%) contributing to the income of higher education institutions and a steady incline in student fees (2.5%) contributing to their income, a well as an incline of 2.7% of private funding.  Other developing countries, such as India, showed unparallel indigenous national private funding of the higher education system. Although there had been an annual increase in government’s block (discretionary) transfers, this had not amounted to a real increase in the past decade. She explained that the block transfers were the foundational government grants to higher education institutions, and they related to both degree-related costs and research-related costs. There were also direct earmarked grants, which were used for projects such as major infrastructural developments in higher education institutions, and other earmarked transfers, which she described as “proportional funds”.

Between 2005 and 2009, input funding for enrolment was the largest of the direct government grants to higher education institutions. There was a lower proportion of output funding for post-graduate and research work. R61,2 million of direct government grants were made to higher education institutions from 2005 to 2009, and of this, R38 million was input funding. FFC noted that there was a problem  in the discrepancy between input funding and output funding, as well as the fact that research had been done into the numbers, and not the quality. She summarised that 62% of the funding, being input funding, was not based on performance, whereas only 22% was output funding, although it did amount to a reward for performance, and suggested that this approach was skewed. She attributed this as a factor contributing to the overall poor performance of higher education institutions in the country. She urged that the Committee and policy-makers must pay serious attention to this point.

Ms Abrahams noted that the available statistics grouped South African universities into three clusters based on academic core indicators (both input and output indicators). The clusters into which the universities were placed were not as significant as their real performance. In the first cluster, the percentage of input and output indicators for the period from 2008 to 2012 was relatively high across the board, or showed really good performance in one particular indicator. She used the University of KwaZulu Natal as an example of how the indicators worked. This university had 36% of enrolments for Science, Engineering and Technology (SET) related disciplines, which was a good percentage. 40% of the academics in the institution had doctorate degrees. The ratio of doctoral enrolments to permanent academics was 0.8%. Even though the percentage of business majors, master and doctoral enrolments was relatively small when compared to the ideals, the institution did not perform badly, although it was not operating at the target (which she said was a conceptual and not policy target) for a well operating and functioning higher education system.

She further explained that the input and output indicators had to be related to the input and output funding, and questions must be asked as to the relationship between the huge gap in input and output funding, and the performance of higher education system. The performance of the individual institutions and performance of the system as a whole had to be considered . The indicators in the statistics might have been acceptable ten years ago, but were not currently good. She said that over the past eighteen years, universities should have changed, and the country’s universities were not currently in line with those in other BRICS countries. Although the higher education systems in other BRICS countries had systemic weakness, they had taken major steps over the past five years to address those weaknesses. Whilst there may still be some issues around apartheid systems that led to historically disadvantaged institutions, the clusters now were based on the performance level of institutions, judged by input and output indicators, so it did not follow that historically advantaged universities necessarily fell into cluster 1 whilst historically disadvantaged ones were in cluster 3. Some institutions were performing relatively well, whereas others were performing poorly against every imaginable indicator. Overall, the institutions were not meeting the set conceptual targets and this had to be addressed through the funding mechanism, to allow for a highly functioning higher education system.

In summary, she noted that performance analyses showed that the higher education system was moving towards, but was not fully meeting the national development goals. The main concern was the unsatisfactory output rates. Many universities showed high student failures and dropout rates, well above the national targets, whilst the graduate output rates in all but a few universities were well below national targets. The analyses also showed that the current funding mechanisms of the higher education system were too ‘blunt’ to build the higher education system in effective ways. These mechanisms were currently being examined and reviewed by a Ministerial Committee set up by the Department of Higher Education and Training (DHET), which was considering the Green Paper mentioned earlier.

The FFC recommended that a new funding framework must be considered. The Green Paper’s view of institutional differentiation would require consideration of more evolved funding principles and a differentiation in the approach to financing. She emphasised that “differentiation” did not mean racial differentiation, nor that historically disadvantaged institutions would suffer, but instead it could look to the focus and capacity of individual universities. The three major areas that required funding were higher education qualifications, further education qualifications and research for knowledge production. Consideration should be given to introducing a differentiated funding framework for a differentiated university system. This would move away from the current unitary system to one in which there were three different funding frameworks for the three clusters, taking into consideration the different types of desirable outputs. There should be a criteria-based funding mechanism, and institutions could move across the clusters depending on performance in knowledge production. She added that the review of the current funding framework would then also have to be supported by research on a future funding model that would best divide the revenue between higher education and research.

In order to have a better understanding, and be able to analyse the performance of the Further Education and Training (FET) sector, FFC said that the Higher Education Management Information System (HEMIS) should either be expanded to incorporate FET sector data, or a parallel system should be introduced to collect relevant data for analysis of that sector. It was clear that the requirements for student performance at Higher Education and Training (HET) and FET levels also required increased capacity in the school-leavers. It was important to focus on how e-education could enhance the knowledge base of students in public schools, to prepare them adequately for higher education. The FFC had made proposals on this in the past, some of which had been adopted already, whilst others were still being considered.

In summary, she noted that the FFC’s ongoing focus was on the impact of education funding on poverty and economic growth. This year, the FFC would conduct a budgetary review of the FET sector, similar to the one it had already done for the HET sector. FFC looked forward to future engagements with stakeholders on research into financial and fiscal matters, and to fostering continuous improvement and increased performance of the higher education system and its role in broader development.

Discussion
Mr S Makhubele (ANC) asked what factors contributed to the student fee percentage indicators shown in the presentation, and thought that there had not been significant changes over the last  five years.

Mr Makhubele thought that there was no way in which the clustering of the universities could be done without taking into consideration their historical position. He urged that a revised funding framework must overcome the past inequities but did not think the clustering would achieve this. Universities that were historically disadvantages must be given extra support to be able to offer the high levels of, say, the University of Cape Town and Stellenbosch University. He asked if the FFC had any projection of the period of time it would take to achieve a balance in the performances of the various universities. He also suggested that the Department of Higher Education and Training should be invited to address the Committee on these issues.

Mr F Mpontshane (IFP) asked whether the FFC was satisfied that government grant for infrastructure had helped to improve the image of previously disadvantaged universities, which had been seen in the past as ‘glorified high schools’.

Mr Mpontshane asked if the FFC supported the call by some people for free higher education.

Mr S Mayathula (ANC) noted that the FFC, in its recommendation, had stated that consideration should be given to introducing a differentiated funding framework for a differentiated public university system. However, he too emphasised that the historically disadvantaged institutions (HDIs) were not found in cluster one. The FFC hoped to achieve this, through a revised funding framework, but that funding framework would have to bear in mind that the HDIs were not at this level already, and he hoped that the Ministerial Committee was taking this issue into account. He wanted to know how the HDIs could best be assisted to reach cluster 1. He also wondered if the time was right to consider the FFC’s proposals if the Ministerial Committee was still addressing the issue of the funding framework, and suggested that the Ministerial Committee Report be awaited, before deciding the way forward.

Mr B Bhanga (COPE) asked if the FFC’s statistics as presented meant that a greater part of the burden of higher education fees had been shifted to students. He would not like this to lead to protests.

Mr Bhanga also asked for clarity on what ‘clustering’ actually meant and hoped that clustering was not only based on output performance.

Mr L Bosman (DA) commended the presentation. He stated that training and skills development was an important aspect of the National Development Programme, and it must receive major focus, else the economy would not grow. The statistics presented raised several concerns, which had to be addressed. He asked whether training in South Africa was being looked at in a holistic manner and urged that there should be a greater focus on primary education, which was the main feeder of the whole education system. He also urged that there should be increased emphasis on vocational and skills training. This should be introduced at high school level, so that students could decide what career they wanted and acquire skills in time. The new financing model should address these points.  

Ms N Gina (ANC) noted that a huge amount of the national budget was given to the funding of higher education. However, she was not sure how much support was given to students, and asked for clarity on this point

Ms Ajam answered that one of the factors leading to the huge disparity in performance of historically advantaged and historically disadvantages institutions was the divergence in infrastructure. Infrastructure was important, but it was a small component of what constituted overall quality, as good management and governance and good human capacity were needed to maintain that infrastructure.

Ms Ajam agreed that basic education had a huge role to play as the foundation for the education system, and this was the reason for the introduction of annual assessments, which were independently administered and monitored tests done at grades 3, 6 and 9, which gave an indicator of the future matriculation results. The results had been quite shocking, as they showed that even at grades 6 and 9 the levels of literacy were very low, and this would affect human capital development in the future. There should be better co-ordination between the Department of Basic Education (DBE) and the Department of Higher Education and Training (DHET) to ensure that proactive steps were taken on the issue.

Ms Abrahams clarified the clusters, by stating that the clusters shown in the statistics were not the same as the FFC was referring to. The statistics showed data derived from the current system. FFC was not proposing any criteria for clusters, but was saying that the DHET and Ministerial Committee had to think again about the criteria. However, the criteria set out in the FFC’s presentation were very important as the current targets were too low to allow South Africa to compete in a knowledge-based economy. Most of the BRICS countries were moving ahead of South Africa towards a knowledge-based economy, and the standard of science, engineering and technology (SET) was a factor. The framework cited did have indicators that could not be ignored, although they may not be comprehensive and others may be added.  One of the indicators might be based on history, but FFC cautioned care in ascribing too much to history as this was looking backward and could undermine the future. The policy makers should consider a number of indicators, including those cited by FFC, when deciding on a new funding approach. Changes in the system could be checked against the funding framework.

Ms Abrahams reiterated that the indicators in the FFC’s presentation could not be argued. She noted that the institutions currently listed in Cluster 3 were in that cluster not because they were historically disadvantaged, but because they currently had a low percentage of academics with doctorates, or a low percentage of enrolled masters and doctoral students. Four of the universities in Cluster 3 had also been under administration, because they had misused their resources, and this was nothing to do with them being historically disadvantaged. The clusters in the FFC’s recommendations were intended for the future. FFC also felt there should be four or five clusters, and reiterated that the old three-cluster system was not working. Some principles may be worth retaining from that system, but more criteria should be added when designing a new system. FFC could not suggest what the future clusters should be, as this was not its mandate, but it was pointing to the need to restructure them, and giving some guidelines on what indicators should be considered. The main issue was not which institutions fell into which cluster, but what the criteria for the clusters should ideally be. It would take a year or two after the new framework had been established to determine into which cluster each university would fall. The issue of inequality and historically disadvantaged needed to be set aside, and more specifics, such as the percentage of academics with doctorates, should be considered. Historical disadvantage could not be changed, but qualifications of academics could be changed. It was also necessary to look at performance in a global context, and see how South African universities were performing in relation to similar universities globally. In the national context, no university should have excuses for poor performance. She reiterated that while it was important to acknowledge the past, there should not be attempts to trade on the past to manufacture excuses for inequality.

Ms Abraham then dealt with funding issues, stating that the quantum of funding would depend on what criteria were selected. However, the only form of reward to universities should be output funding, which would be based on individual performances. Input funding must be designed to achieve specific input goals and standards. Until now, the input grant was a weak instrument, and was not achieving anything in certain institutions. That required change.

Ms Abrahams noted that the FFC did not support the call for free higher education. There was no reason to believe, from the figures, that the contribution by students to their higher education fees was overly onerous, although the decrease in real government grants was a problem. The time was right to embrace the proposals made by FFC. There was no real shortage of funding, although the system might get less than would like, but there was a shortage of ideas.

Some stakeholders present at the meeting also commented on the FFC’s presentation.

Mr Feizal Toefy, Chief Director, DHET, stated that four major areas cited in the presentation had an impact on the DHET. In relation to the clustering of institutions, he noted that the issues of infrastructure and historical backlogs should be addressed as a matter of urgency. He thought the whole research document should be referred to the funding review committee, so the recommendations could be considered. The second issue, of a management information system for the FET sector, was already being attended to by DHET. In relation to waste management, DHET would engage with the Department of Environmental Affairs. DHET had also written to the FFC on the issue of equitable sharing of funds, as a result of the function shift around FET and adult education and training, and he asked that the FFC should look into this.

Mr Sai Makgoba, Chief Director, University Financial Planning, DHET, stated that the DHET had attended a workshop organised by the FFC. He asked whether the universities were consulted on the ideas now put forward, because it was previously the experience of DHET that no vice chancellors of universities or finance executives were aware of the recommendations made by the FFC. He was a member of a funding review committee, to which a number of universities had made recommendations, yet those differed fundamentally from what the FFC had recommended. Though there were a few exceptions from labour and student associations, the majority of the submissions indicated that although there was some unhappiness with some aspects of the current funding system, it did not need a major overhaul. Universities felt that one major issue was that they could not be expected to operate at an equal footing, without understanding their histories.

Dr Max Price, Vice Chancellor, University of Cape Town, agreed that the universities had not had any discussions with the FFC on the funding framework. He said that input from the universities could help to improve the recommendations. Dr Price asked for clarity whether the FFC’s presentation was a work in progress, and noted that detailed comments could be made on the statistics, which he did not believe had been presented in a helpful manner. For instance, he wanted to comment on percentage of student fees compared to government grants. He also thought some of the conclusions warranted further debate, but other comments and recommendations could be agreed upon, although they perhaps deserved more emphasis. He fully agreed with the need for good management, stating that without this, any amount of money spent was effectively being wasted. The main criticism on the 2003 funding formula was that stakeholders believed it had produced unintended consequences, such as inequality.

He agreed that there should be, as stated by FFC, a balance between input and output, and he explained again that input essentially meant the number of students enrolled, whilst output referred to the number of students who graduated. There were not sufficient incentives, but this had more serious consequences than anticipated. For example, a university might not get enough students because too few students matriculated in the previous year, and it would then be in financial difficulty, and might end up by admitting those who would not, ordinarily speaking, qualify for admission, for, once input funding was given, it was not withdrawn if the student then failed. It made more financial sense for the universities, at present, to rely on input funding for running universities and paying salaries, because such a small proportion of funding was given for the students who graduated. Most universities had three times as many first year students as they did graduates, so there was a “revolving door”. It was very important to think about the incentives created, as this might in turn ensure that the universities admitted students whom they believed had a good chance of graduating, whilst steering others into other structures. This should filter down to the school system, which had to improve, meaning that there would be more students who would be able to cope properly with higher education. A change to the current funding would also mean that universities would have more money per student.

Dr Price cautioned that the FFC’s statistics were confusing as the FFC did not take inflation into consideration. The figures should be shown as real figures, discounted for inflation, and showing the numbers of students that each of the universities had. The presentation showed that government grants dropped by 1%, but did not state that the drop was actually 1% per annum, so that at present, universities were receiving 10% less, per student than they had in 2000.

Ms Abrahams said again that the FFC was open to engagement with stakeholders, in order to achieve a suitable funding framework for higher education in the country.

The meeting was adjourned.