Edition 171 - July 2015

Third DEFINE Thematic Report: Performance-based funding under the microscope

Over the past years, budget cuts in the public sector across Europe have made a dent on public funding for universities. In this context, policy-makers have been looking to performance-based funding as a way of a) increasing the transparency of spending, and b) icentivising and rewarding the achievement of certain policy goals. The third DEFINE Thematic Report provides an overview of the allocation mechanisms of public funding to universities across Europe, and assesses the impact of performance-based funding at both the system and institutional levels. The DEFINE project as a whole provides evidence-based recommendations to support the development of strategies to increase the efficiency of university funding in Europe. 

This report highlights a number of both positive and negative impacts performance-based funding may have on different aspects of higher education, summarised below:

  • Effects on enrolment, teaching quality and completion: Performance-based funding may encourage universities to focus on increasing in student enrolment, speeding up graduation rates and reducing dropouts. On the other hand, a focus on numbers may hurt smaller institutions, and come at the cost of teaching educational quality.
  • Effects on research: Performance-based funding may incentivise the dissemination of research results and encourage cooperation with business. On the other hand, it may incur the “Matthew effect,” i.e. rewarding institutions with an already-high output while ignoring those with a smaller research capacity or a different focus.
  • Effects on university governance: Performance contracts between ministries and universities may prove a powerful governance tool, aligning policy and implementation. However, this tight link might impinge on institutional autonomy, and lead to a dangerous homogenization of higher education institutions.
  • Effects on funding allocation and financial management: Performance-based funding, by virtue of being transparent, allows universities to better allocate and prioritise resources. However, when public budgets are pre-fixed, further efforts past a certain threshold are discouraged. Moreover, cooperation with other institutions may be discouraged. 

Building on these lessons, the report provides six recommendations:

  1. Ensuring the transparency of the funding system to create a level playing field for the beneficiary institutions.
  2. Keeping the share of performance-based funding limited to render funding less volatile.
  3. Taking account of the costs of universities’ activities to foster financial sustainability.
  4. Catering to the needs of different institutional profiles to avoid the uniformisation of the system
  5. Accounting for the differences among disciplines to counterbalance the deficiencies of the bibliometric system
  6. Strengthening quality assurance to prevent a decrease in teaching and research quality. 
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