NEW PUBLIC FINANCIAL MANAGENMENT REFORMS IN FINNISH HIGHER EDUCATION Controversial outcomes and consequences 26.8.2005 University of Tarto

The most important NPFM-reforms in the Finnish central government (i) The competitive external funding system (ii) The results-based management and steering model (funding model) (iii) Transfer of university premises to an independent accounting entity/profit centre (iv) The new salary system

(i) The competitive external funding system of the universities Until the beginning of the 1990s: Universities were directly funded by central government (in 1991, 4/5 of the overall funding was direct budget funding) Line-item budgeting and cameral bookkeeping were control mechanisms to follow the execution of the budget

All the prominent individuals Today Research funding comes mostly from different external sources and nearly 40 % of the overall university funding in average is so-called external funding. All the prominent individuals are responsible for earning money for the university & accountable for legal, appropriate and productive use of money.

Universities use a huge amount of their academic and administrative resources for applying for money. In the case of the Academy of Finland 1 or 2 out of 10 applications get funding, i.e. the time used for 8 or 9 applications out of 10 is more or less a waste of time.

=>Competition in business life usually adds efficiency =>Competition in business life usually adds efficiency. Excessively tough competition in university life means waste of resources and at least in the long run very obviously demoralizes academics.

=> The current and potential financiers of higher education are primary stakeholders of the universities – often at the cost of all other stakeholders, including students. => Different financial and operational accountabilities related to the use of external funding add pressure to develop the universities’ accounting and reporting systems. More people are needed for administration – at the cost of the universities core functions.

(ii) The results-based management and steering system Implemented in the 1990s Every university agrees annually on a performance-based funding contract with the Ministry of Education. The most important elements in the Ministry’s funding model are the numbers of the Master’s and Doctor’s degrees (objectives and actuals).

The current funding model (agreed in 2002) also includes scale-based process and input elements, such as the number of students, new students and the cost of university premises. Back-pedalling from the original ideal of output-based funding model.

As a consequence of the results-based steering and funding model higher education in Finland grew dramatically during the 1990s. Number of students by 41 % Number of Master’s degrees by 52 % and post graduate degrees by 68 % Number of teachers only by 4 %! Share of the teaching staff has decreased from 36 % in 1991 to 28 % in 2001.

=> The output/results-based steering and funding model of the universities lead to a rapid growth. The results-based model increase the output measures and thus productivity – partly due to more efficient use of resources, but partly perhaps at the cost of output quality.

=> The output-based funding model of the universities has increased competition between the universities and decreased the unit cost of output.

(iii) Transfer of university premises to an independent accounting entity In the middle of the 1990s the central government of Finland established a profit centre to administrate its real estates. The ideal was to produce a return on all the money invested by the government; return was understood as a monetary return, not as good education, for example.

The real estate profit centre collects market rents from its tenants, including universities, invests at least a big share of that money in new university buildings, collects market rents of a bigger mass of real estates … Universities had in 2001 50 % more space than in 1991, and the rent costs were in 2001 fivefold (in nominal value/fourfold in real value) compared with costs in 1991.

=> As a consequence of the establishment of a profit centre to administrate the governmental buildings the Finnish universities have an additional task – to earn a computed return on the investments in governmental premises. => Only money is considered to be a return on investments – not education results per se.

(iv) The new salary system The old system was Governmental Service (GS) level –based. The new reward-based salary system (UPJ) will be coming this Fall 2005. Two components: The qualification requirement level of the office or position Personal performance

=> The new salary system extends result-based management to personal level; individual employees are more explicitly made responsible for the results and efficiency of the universities and their responsibility units. => Aggregate university and responsibility unit level productivity measures are supplemented by the performance reports and evaluations of individuals.

Controversial … Competition --- too intensified competition and demoralization ? Increased productivity --- and academic unemployment Increased productivity ---- need for quality control and evaluations New management control systems --- more administration: academic people use more time for administration, and the share of administrative staff increases.

Basic Funding (estimate 980 MEUR)*) Scale-based elements Teaching Research Services to society function (20 %) (43 %) (32 %) (5 %) * Core funding * # of Master’s * Graduate schools * Open university (13 MEUR) based on # of students degrees (36.5 MEUR) * Other services to 0.8 – 9 MEUR/university (416 MEUR) * # of doctoral society (39 MEUR) (51 MEUR) degrees (277 MEUR) * New students 4500 Euros/student (104 MEUR) * Cost of premises (43 MEUR)   *) The total budget funding for universities is estimated to be about 1.123 MEUR in 2004-2006 Figure 1. Funding model of the Finnish universities 2004-2006    

Development of students and degrees 1991/2001   1991 % 2001 change +/- change % Students -          Undergraduate students -          doctoral students -          other 115 573 100 870 11 839 2 864 162 785 138 256 21 008 3 521 47 212 37 386 9 169 657 41% 37% 77% 23% Degrees -          basic degrees -          postgraduate degrees 11 356 9 253 1 128 975 16 674 14 042 1 898 734 5 318 4 789 770 -241 47% 52% 68% -25% Development of students and degrees 1991/2001

Development of person-years, buildings, and building costs Staff in person-years -          teaching staff -          research staff -          other 21 407 7 812 2 047 11 548   36% 10% 54% 28 473 8 096 6 676 13 701 28% 24% 48% 7 066 284 4 629 2 153 33% 4% 226% 19% Buildings in square metres -          state-owned -          other 1 245 386 1 052 937 192 449   85% 15% 1 864 581 1 399 109 465 472 75% 25% 619 195 346 172 273 023 50% 33% 142% Cost of buildings and building sites -          million euros (nominal value) -          million euros (real value in 2001) 39,7 47,1 212,4 172,7 165,3 435% 351% Development of person-years, buildings, and building costs

Development of total and budget funding Total funding million euros (nominal value) -          government budget funding -          off-budget (“external”) funding 893,4 685,2 208,2   77% 23% 1650,4 1046,6 603,8 63% 37% 757,0 361,4 395,6 85% 53% 190% Total funding million euros (real value in 2001) 1 058,1 811,5 246,6 1 650,4 592,3 235,1 357,2 56% 29% 145% Government’s budget funding/student (real value in 2001) 7 021,5 6 429,3  - 592,2 - 8% Development of total and budget funding

»»»»» * Results-based steering and Management system Results, output and money counts Stiff competition for funding Business principles applied * Results-based steering and Management system * Rewarding salary system Need for cost accounting emphasized * Performance measurements * Evaluations * Input - Output databases & reports MBO MR-planning 2000-l »»»»» 1960-l 1990-l 1917 1980-l Cost accounting Work-hour reporting Line-item budgeting, cameral accounting and reporting system Lump-sum budgeting; Accrual based financial accounting and reporting plus budgetary accounting