© 2018 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. Contents 5 Acknowledgments 6 Foreword 8 Preface 10 Report 1: HIGHER EDUCATION FINANCING IN LATVIA: ANALYSIS OF STRENGTHS AND WEAKNESSES 164 Report 2: ASSESSMENT OF CURRENT FUNDING MODEL’S ‘STRATEGIC FIT’ WITH HIGHER EDUCATION POLICY OBJECTIVES 228 Report 3: HIGHER EDUCATION FINANCING IN LATVIA: FINAL REPORT ACKNOWLEDGMENTS This publication consists of nine reports in three volumes that were prepared as part of the World Bank’s Reimbursable Advisory Services on higher education for Latvia. The team consisted of Nina Arnhold (Task Team Leader), Jussi Kivistö, Elias Pekkola, Vitus Püttmann, Andrée Sursock, Hans Vossensteyn, Jason Weaver, and Frank Ziegele, who contributed during different phases of the two engage- ments. The authors had the much-appreciated support of a group of technical experts and World Bank colleagues during institutional site visits. This group includes Sophie Amili, Jeremie Amoroso, Susanna Niinistö-Sivuranta, Dominic Orr, Melanie Rischke, Magnus Rüde, and Elif Yukseker. The authors are grateful for comments provided by peer reviewers Francisco Marmolejo, Harsha Aturupane, Javier Botero Alvarez, Roberta Malee Bassett, and Jamil Salmi. The reports were edited by Diane Stamm. Filip Kochan helped prepare the publication of the reports. Patrick Biribonwa provided administrative support. The work took place under the guidance of Alberto Rodriguez and Cristian Aedo, the two Managers at the Education Global Practice of the World Bank during the period 2013–2018. The team would further like to thank current and past management in the European Union Unit of the Europe and Central Asia region of the World Bank for guidance and direction, in particular, Arup Banerji, Mamta Murthi, Carlos Pinerua, Marina Wes, and Xavier Devictor, as well as Christian Bodewig. Throughout this work, the Ministry of Education and Science of Latvia provi- ded substantive inputs and comments for which the team is greatly indebted. The authors would like to thank, particularly, L ga Lejiòa and Agrita Kiopa, who oversaw this work, and Laura Treimane, Brigita Kukjalko, Dace Jansone, and Santa Šm î dlere, for their substantive contributions. Management and staff of the State Education Development Agency provided support during the first project. Finally, the team is grateful for the feedback received from Latvian university leaders and higher education stakeholders during consultations, site visits, and workshops throughout the two engagements. Without them, these reports could not have been realized in this form. FOREWORD This publication reflects an important phase of higher education reforms in Latvia. Since 2014, the Latvian Ministry of Education and Science has implemented significant changes in the field of higher education with the goal of ensuring quality and internationally competitive research-based higher education, offered by effectively managed higher education institutions (HEIs). The reforms have aimed at redefining the role of HEIs; as centers of knowledge, they must stimulate the country’s economic development. The Ministry has charged HEIs, therefore, with four tasks: •To ensure a diversified knowledge base in all areas of academic activity while promoting research in those areas that have the greatest potential for deve- lopment, are internationally competitive, have sufficient scientific capacity, and whose activities correspond to the goals and strategies defined in the Smart Specialization Strategy; •To facilitate the ability of enterprises to innovate by improving cooperation between HEIs and companies, promoting the commercialization of knowledge, and performing commissioned research; •To create locally embedded and globally connected human capital; •To develop as knowledge hubs or resource centers that accumulate knowledge, and to develop infrastructure that drives development of the Latvian economy and ensures its sustainability and the cohesiveness of society. Based on global experience, the reforms address four core elements of education quality: students, academic personnel, resources, and a corresponding legal framework and rules of conduct. A higher education system is fit for purpose if students acquire not only theoretical knowledge, practical skills, and competences, but also if they develop personal connections that embed them in local economic or societal activities and reach across borders globally. Students shall have access to scholarly work, and the opportunity to participate in research and creative projects that are national or international in scope. Besides technical knowledge and skills in their chosen field, students shall advance their transferable skills, enabling them to produc- tively contribute and continue their learning in a variety of contexts. Internationalization of higher education, competitive academic personnel, and a strong foundation in academic integrity are other key aspects of quality higher education. This kind of culture is shaped by a well-thought-through regulatory framework, balancing incentives and quality standards. However, it also requires HEIs with sound internal governance and financing processes, and suitable options for the advancement of academic careers. Latvia has made significant progress improving financing and governance of higher education. In 2013, the Ministry began a cooperation with the World Bank to create a new higher education financing model. The results of this cooperation were successfully incorporated in legislation, and the new higher education finan- cing model has been implemented since 2015. In 2016, we launched a second project focusing on results-based, effective models of internal financing, gover- nance, and human resources management. The success of both projects is rooted in the consultations and consensus building that was possible thanks to the substantial engagement of leading Latvian higher education institutions and core stakeholders. The close cooperation among the Ministry, HEIs, and the World Bank was remarkable in various respects. It has produced tangible results directly impacting sector policies and has facilitated a productive dialogue among the different parties involved in the sector. The results of the work will be an important source of information on Latvian higher education and will continue to inform legislative changes and steering processes in the future. On behalf of the Ministry of Education and Science, I would like to express my deep appreciation for the work of the World Bank experts who delved into the circumstances and problems of the Latvian higher education system and offered their vision and hands-on advice on how to increase its quality and inter- national competitiveness, based on international experience. We sincerely hope that the partnership between our two institutions in higher education will continue beyond these two projects. We would also like to express our gratitude to all the HEIs that served as case study institutions, and to all stakeholders who supported these projects. We hope that as one sector we will continue to jointly address the challenges ahead. L ga Lejiòa State Secretary Latvian Ministry of Education and Science Riga, Latvia PREFACE Higher education receives considerable attention within the European Union. Governments, European institutions, and organizations like the World Bank understand that higher education fuels competitiveness and growth, and that it is an important instrument for social cohesion. However, many countries are searching for instruments that help them make available — and often scarce — funding more performance-oriented, universities more dynamic, and academic careers more attractive. This three-part publication addresses related questions in the Latvian context, while its insights are applicable more broadly. It impres- sively documents the outcomes of close cooperation between the Latvian Ministry of Education and Science and the World Bank, and we hope that it will become an important resource document for policy makers and practitioners around the world. Since 2013, the World Bank has supported the Latvian government through a succession of advisory work focusing on performance at different levels of the higher education sector. An important trigger of the World Bank’s advisory work in higher education were Country Specific Recommendations by the European Commission. The Latvian government was tasked with evaluating its higher education financing system and considering how funding could be used to promote better outcomes. The World Bank supported the Latvian authorities through two advisory projects, with three phases. The first project was implemented between December 2013 and August 2014, and focused on the development of a performance-based, system-level funding model for the higher education sector. In the summer of 2015, the new financing model was approved by the government and its introduc- tion accompanied by a much-welcomed increase in funding for the higher educa- tion sector. The second project comprised two phases: (1) on university-internal higher education funding and governance, which was implemented in 2016–17; and (2) on the doctorate and human resource policies in 2017–18. The first phase focused on improving funding mechanisms and governance within higher edu- cation institutions. The second phase, which is currently being implemented, focuses on improving academic careers. Together the two advisory projects comprehensively supported performance improvements from the system level to individual academic careers. Close cooperation with the Ministry of Education and Science, which was deeply engaged and provided substantive inputs into the work, as well as intensive exchanges with stakeholders, were cornerstones of the World Bank engagement in Latvia. During all phases, a wide range of higher education stakeholders were consulted and informed regularly. Several higher education institutions were closely involved and supported the project by providing comprehensive background information and engaging in discussions with the team’s experts during site visits. The Latvian government made outputs available to the public in Latvian and English. Results were directly integrated into higher education policy making and the plan- ning of EU-funded programs in the field of higher education. The frequent sector consultations and the open and proactive engagement of the ministry can be con- sidered key success factors of this cooperation. One of the World Bank’s objectives for advisory work in EU member states is to contribute to the global public good of knowledge on the how-to of public sector reform. This is why we are pleased to see how the joint work is having significant impact beyond Latvia’s borders. Insights and expertise generated from 2013 to 2018 in Latvia have been taken up in various other contexts in the Bank’s higher education work, including in the design of new projects in Europe and Northern Africa. Together with the World Bank team, represen- tatives of the Latvian government and of the higher education sector have shared their experience with colleagues abroad. The new funding model was also show- cased during EU peer-learning events. On behalf of the World Bank, I would like to express my gratitude to the Ministry of Education and Science and stakeholders of the Latvian higher education sector. I hope that the products of the joint work will be disseminated widely and inspire higher education reforms across Europe and beyond. Arup Banerji Regional Director for Operations in the European Union The World Bank Washington, DC Report 1 HIGHER EDUCATION FINANCING IN LATVIA: ANALYSIS OF STRENGTHS AND WEAKNESSES 18 March 2014 Contents 16 Abbreviations 17 Executive Summary 23 1 Introduction 23 1.1 Latvia and the World Bank Group 24 1.2 Project context and objectives 26 1.3 Project methodology 27 1.4 Clarifying the project scope 29 2 European Developments in Higher Education Financing 30 2.1 Recent European trends in higher education financing 30 Models of public funding 34 Resource diversification 37 Financial autonomy 41 Student funding 45 Overview of European trends and position of Latvia 49 2.2 What do these trends mean for the further analysis? 49 2.3 Higher education as public and private good 53 3 Methodology of analysis: Criteria for Good Funding Models 53 3.1 Methodology to assess strengths and weaknesses 54 3.2 Sources for the assessment criteria 55 3.3 Explanation of the assessment criteria 59 3.4 Overview on the assessment criteria applied 61 4 Strengths and Weaknesses of Latvia’s Current Funding Model 62 4.1 General assessment of the higher education funding system and its context 64 4.2 Political climate for change 65 Overall conclusions (political climate for change) 65 4.3 Instruments of state funding: funding of teaching – study place model 75 Overall conclusions (instruments of state funding) 77 4.4 Instruments of state funding: funding of research 83 Overall conclusions (funding of research) 84 4.5 Diversification of financial resources for HEIs 87 Overall conclusions (diversification of resources) 88 4.6 Financial autonomy of HEIs 90 Overall conclusions (financial autonomy) 90 4.7 Student financing (tuition fees; study costs, student loans and scholarships) 96 Overall conclusions (student financing) 97 Appendices 97 Appendix 1 Latvia’s Current Funding Model 97 1.A Relevant framework conditions in Latvia 99 1.B Description of the higher education sector in Latvia 112 1.C Funding levels of higher education and research in Latvia 115 1.D Financial autonomy of HEIs in Latvia 121 1.E Public state funding to higher education in Latvia 132 1.F Resource diversification in higher education in Latvia 137 1.G Student financial assistance 142 Appendix 2 List of Documents Reviewed — Development of Discussion on HE Funding Reform 149 Appendix 3 Note on Availability of Performance Data 155 Appendix 4 Stakeholder Consultations 161 References Figures 32 Figure 1 Relative importance of indicators 113 Figure 12 Public funding in 2012 compared used in funding formulae in European higher with 2008, adjusted for inflation education systems 114 Figure 13 Annual expenditure on public and private 35 Figure 2 Average income distribution in European educational institutions in 2001–2010 per student HEIs in 2008 (purchasing parity standard based on full-time equivalent students, ISCED 5-6) 98 Figure 3 Tertiary education students at risk of poverty or social exclusion 115 Figure 14 Expenditure for R&D in higher education sector as percentage of GDP 99 Figure 4 Evolution of total post-secondary school-age population in Latvia 2002–12 118 Figure 15 Remuneration of academic staff at public HEIs in 2011 100 Figure 5 Distribution of students by the level of studies (2010) 120 Figure 16 Distribution of expenditure at public HEIs, 2012 101 Figure 6 Outbound student mobility ratio 123 Figure 17 Components in the formula for 101 Figure 7 Inbound student mobility ratio state-budget allocation to cover the study 102 Figure 8 Number of peer-reviewed articles process at a HEI published 126 Figure 18 Process of annual planning 108 Figure 9 Students by mode, level and financing of in state-funded study places at HEIs their studies at public HEIs, 2013/2014 134 Figure 19 Revenues of public institutions of higher 111 Figure 10 EU-27 Tertiary Students (ISCED 5-6) by education in 2012 field of education (2010) 139 Figure 20 Financial aid to students, as percent of 113 Figure 11 Total public expenditure on higher total public expenditure on higher education education (ISCED 5-6), 2001–10 Tables 31 Table 1 Importance of input- versus 48 Table 8 Student funding — European trends output-related drivers of HEIs operational grants and Latvia 34 Table 2 Average proportion of public HEIs’ main 49 Table 9 European trends and position of Latvia income categories in 1995 and 2008 — overview 39 Table 3 Setting tuition fees in Europe 50 Table 10 Potential private and public benefits from higher education 44 Table 4 Proportion of first and second-cycle students paying fees and receiving grants 59 Table 11 Overview assessment criteria in academic year 2009/10 in 31 European HE 62 Table 12 Overview of strengths 46 Table 5 Models of public funding — European and weaknesses trends and Latvia 98 Table 13 Long-term net migration of population, 47 Table 6 Resource diversification — European by region (2012) trends and Latvia 102 Table 14 Breakdown of Invention Patent 47 Table 7 Financial autonomy — European trends Applications by Categories and Years, and Latvia 2007–2013 103 Table 15 European patent applications by country 118 Table 21 Minimum wage thresholds for of origin academic staff at institutions of higher education 105 Table 16 Supervision of ministries over public HEIs and colleges 119 Table 22 Expenditure of public institutions of higher education on wages in 2014 106 Table 17 Study Programs offered by HEIs in Latvia, 2013/2014 123 Table 23 Public funding coefficient values by subject area 109 Table 18 Tuition fees and other fees in European higher education systems in 2013–14 133 Table 24 HE funding in Latvia, 2012 110 Table 19 Students by subject area at public 135 Table 25 Revenues of public institutions of higher institutions of higher education in 2013/14 education in 2012 116 Table 20 Latvia’s position in the EUA financial 136 Table 26 EU structural funds for higher education autonomy scorecard and science, 2007–2013 16 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Abbreviations nd Weaknesses EU European Union ESF European Social Fund EUA European University Association HE Higher Education HEI Higher Education Institution MoES Ministry of Education and Science MoE Ministry of Economics RAS Reimbursable Advisory Services RTA Reimbursable Technical Assistance R&D Research and Development SEDA State Education Development Agency STEM Science, Technology, Engineering and Mathematics REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 17 Executive Summary s and Weaknesses The report at hand is the first in a series of three papers to be prepared by the World Bank Latvia Higher Education Financing Team between Decem- ber 2013 and September 2014. It sets out to shed light on the strengths and weaknesses of Latvia’s funding system i) in light of European developments, and ii) with a view to comparing against general criteria for good funding mo- dels. These general criteria derive from good practice: they can be considered as largely independent from the country context. The second paper will focus on the ‘fit’ of the current funding mechanisms in Latvian higher education with explicit strategic priorities of the government. The third paper will propose directions for a future higher education funding model for Latvia. The report at hand was developed with support by the Ministry of Education and Science as well as other government agencies and in close consultation with stakehol- ders. These consultations took place at workshops but also through a series of interviews. Higher education is an increasingly important topic on national policy agen- das for many countries. As a significant driver of national economic competi- tiveness in an increasingly knowledge-driven global economy, higher education policy issues have received increased attention. Alongside the increased policy importance of higher education, many systems also face serious challenges main- taining their quality and relevance and in increasing the efficiency and securing equity in the field of higher education. New higher education financing models are being developed in many European countries as policy responses to these challenges. The Latvian higher education system has been underfunded for years. Over- all funding levels are very low (and the lowest in all Baltic states); however, in terms of public funding for higher education, Latvia figures at the bottom across European comparisons, with an allocation of 0.8 percent of GDP as compared to 1.27 in Lithuania; 1.23 in Estonia and an EU27 average of 1.26 ( Eurostat data). Although the report at hand will largely focus on funding mecha- nisms as opposed to funding levels, it is important to keep this point in mind when the current Latvian funding system’s strengths and weaknesses are dis- cussed. The topic of higher education financing often spurns controversy, in Latvia as elsewhere, with the discussion focusing on the question of whether higher edu- cation is a public or a private good, whether it should be funded from public re- sources or students’ contributions — with related policy implications for public and private funding. The report argues that the outcomes of higher education have characteristics of both public and private goods, and that acknowledging economic arguments might help to avoid political reform blockades. 18 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Student funding — that is, student contributions (mainly tuition fees or other fees paid by the students) and student financial support systems (mainly grants and loans) — is clearly among the most controversial issues in the sphere of financing higher education. Approaches that place fees and loans at the center tend to meet criticism all across Europe on the grounds of their expec- ted negative effects on equity. However, tuition fees — combined with adequate and well-targeted student support schemes — generate additional revenues for HEIs, thus enabling increases in participation rates. They are also regarded as more equitable by some, since they transfer part of the instruction costs to those who will directly (and disproportionately) benefit from higher education. Latvia’s Funding System in the Light of European Developments Compared to other European countries, Latvia scores high in the area of finan- cial autonomy. It is ranked 4th among the 28 European higher education systems in EUA’s “University Autonomy Scorecard”. Providing a higher level of institutional autonomy is often expected to improve the performance of higher education institu- tions (HEIs) and higher education systems as a whole. It is assumed that the more autonomous HEIs are, the better equipped they are to generate additional resour- ces through fund-raising or efficiency measures, with the freedom to orient their strategy towards available funds, focusing potentially on their specific research strengths or shifting the balance between education and research. Based on this assumption, many governmental authorities among European countries have gran- ted HEIs more freedom to manage their resources and develop new income-gene- ration policies. Contrary to many other European systems, the current funding model in Latvia does not offer significant incentives for greater performance- and output-orien- tation. The main purpose of performance-based funding is to create financial incen- tives for higher education institutions to produce outcomes in certain areas of their activities which want to be encouraged by the funder. There are different ways in which to cluster allocation models in the funding of higher education institutions. Three typical pillars of funding models concern basic funding, performance funding, and innovation-/profile-oriented funding. The innovation-/profile-oriented funding component in Latvia is currently composed of a number of different types of smaller and larger third-party funding streams (including EU Structural Funds) but not inclu- ded in the system of state funding. In contrast to the tendency of many European higher education systems to adopt more performance-based elements in their fun- ding mechanisms, the Latvian model has remained predominantly input-related and formula-based. The elements that are said to be performance-oriented, such as the European structural funds as well as the national competitive research programs, are not perceived by the authors to use transparent competitive criteria. This implies the system does not fully exploit its competitive capacity and strife for excellence. Latvia has a dual-track tuition fee system with — in some cases — relatively high fees and relatively many fee-paying students. The Latvian higher educa- tion system offers mainly merit-based support in the form of state funded study places, and relies more on government-subsidized, mortgage-style loans offered by commercial banks, rather than grants. While there are concerns amongst stakeholders that ‘the best students migrate to countries where students do not pay fees’, this causal chain appears in fact unlikely, given that these students study for free in Latvia. To the extent that such migration of particularly gifted stu- REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 19 dents takes place at the tertiary level — and more research would certainly need to be done on this issue — it would most likely be fueled by quality concerns and more general economic considerations as opposed to the current fee structure in Latvia. There is no general European trend in this area: some European coun- tries that have previously introduced tuition fees later decided to abolish them either entirely or partly. At the same time, other European countries have decided to increase the share of private investment by allowing public HEIs to introduce fees or charge higher fees while at the same time promoting equity of access by restructuring their student support systems. Need-based grants are the most frequently used modes of student support across European higher education systems. Strengths and Weaknesses of the Latvian Funding Model Derived from European trends and international practice, there are criteria for good funding models which are suitable to guide a discussion on strengths and weaknesses of the current approach to higher education financing in Latvia. These criteria are (the degree of) strategic orientation, incentive orientation, sustainability, legitimization, autonomy and freedom, and practical feasibility. These criteria can be further defined as follows: Strategic orientation Incentive orientation • Promote national strategies • Provide clear, non-fragmented incentives • Promote institutional profiles • Avoid undesired effects • Create performance rewards and sanctions • Balance ex post and ex ante performance • Create a competitive environment orientation Sustainability Legitimization • Stability • Provide unambiguous and balanced funding • Guarantee continuity in funding mechanisms structures • Allow long-term planning • Make funding transparent • Take into account cost differences • Support the perception of fairness • Promote risk-spreading and management • Allocate lump sums • Guarantee academic freedom Autonomy and freedom Practical feasibility • Implement an adequate level of regulation • Use available data • Guarantee autonomy of internal resource • Ensure administrative efficiency allocation • Respect methodological standards • Promote accessibility of diverse income sources • Ensure coherence with funding levels and steering approaches The following table provides an overview of the strengths and weaknesses of the Latvian higher education and research funding system according to the aforemen- tioned categories of criteria. It distinguishes between the context of the funding system and the features of the funding system itself. Many of these issues relate to more than one criteria dimension. 20 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Strengths Weaknesses Context: Strategic orientation • Diverse system of HE (many institutions, niche • Apparently low political priority given to HE and players, different profiles, public-private) science (regarding low spending on HE and R&D) • Substantial number of private HEIs • Inconsistent policy measures and political reform • Start-up of quality assurance for study programs blockade because of polarized discussions and research institutes (public vs. private good) • Research institutes with more mass and focus • Many relatively small study programs • High percentage of young people who qualify • Tendency to study abroad for HE • Opaque HR structures in HE, with opportunities • High employment rate and high rate of return on HE to have more than one job • A functioning data monitoring system • High teaching loads for staff; little time for (including performance and financial data) research • High adaptability of system and HEIs • Quality assurance for teaching and research only demonstrated in times of economic crisis in start-up phase • MoES and line ministries are multiple voices for • Many graduates seeking employment abroad the interests of HEIs • No clear way to consolidation vs. competition yet Financing: Incentive orientation • Study places allow national planning according to • One-pillar model of state funding instead of labor market needs several pillars with balanced functions • Study places offered on basis of merit including • No real performance orientation in state funding rotation possibilities stimulate competition (hence also weak links to national or institutional • EU structural funds for research allocated strategies) with some form of competition • No funding for innovative initiatives • Attract many fee paying students (willingness • No clear approach to the role of state money for to pay/additional resources for HEIs) private HEIs • Existence of performance contracts between • No funding options for research-related HEIs and ministry developments such as post-docs, knowledge transfer activities, etc. Financing: Sustainability • Study places funding provides cost-oriented • Underfunding of the HE and research system stability in the system, but with a “money follows compared to most other European countries student” element and to own governmental objectives • Availability of substantial EU structural funds • Promised funding increase not yet effectuated for HE and R&D (reason for survival in economic • Lower funding tariffs for HE students compared to crisis) primary and secondary education • Cost basis for subsidized study places outdated Financing: Legitimization • Availability of student loans for many students • Many competing needs in case of budget with attractive repayment conditions increases (more quality in teaching, PhD schools, • Full-fee paying option creates access post-doc careers, triple helix, etc.) opportunities • Opaqueness and subjectivity in allocation of subsidized study places, planning problems through yearly interventions • Subsidized study places particularly benefit students from better socio-economic backgrounds • No subsidized study places for part-time students • Student loans not attractive to some groups, e.g., the “guarantor requirement” forms a big hurdle • Hardly any need-based support nor means-testing mechanism for students from low-income families REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 21 Strengths Weaknesses Financing: Autonomy and freedom • Large degree of (financial) autonomy for HEIs • Heavy reliance on EU structural funds for R&D, • Financial autonomy allows entrepreneurial which may not be a sustainable long-term freedom situation (plus co-funding problem in case of • Substantial level and good framework conditions matching funds) of resource diversification • Relatively low funding from industry/ companies Financing: Practical feasibility • Substantial outward international student • Decentralized system for student loans mobility (many systems have problems to send and scholarships (efficiency risks and problems students abroad). This means other countries for HEI with needs assessment) pay for the instruction costs. • Debt cancellation mechanisms too generous • Mismatch between academic year and fiscal year To summarize: Latvia has a diversified higher education sector including capital, regional, public and private higher education institutions. Universities enjoy a significant amount of financial autonomy which allows for resource diversification. The funding model based on study-places provides some basic stability for the sector and is related to sector-level planning geared towards labor market needs. In addition, Latvia has a high number of full cost-covering fee paying students and a significant share of research funding coming from EU funds. However, as mentioned above, the system is significantly underfunded in com- ` -vis parison to not only other European countries but, importantly, also vis-a the government objectives and legally-set targets per study-place. While, in principle, public funds are allocated according to study places, i.e., educational needs, this is de-facto nearly the only public funding instrument, and thus has to accommodate many competing needs (partially related to re- search and wider institutional missions) of universities. The small performance- oriented elements, such as small competitive research funds, use criteria which are not transparent to the stakeholders and thus miss the desired effects. In prac- tice, the system is partially opaque and leaves room to subjectivity, both with rela- tion to the allocation of study places and research funds. Also, there are planning problems due to annual interventions (while MoES has a different fiscal year from higher education institutions). The cost basis for the study places in legislation is outdated while universities only receive 80 percent of the defined minimum costs. The current strong merit-based approach to budget places and grants raises questions about equity, as subsidized study places and scholarships are available to the “best students” and thus are most likely to particularly benefit students from better socio-economic backgrounds. It can be questioned if this really stimulates academic excellence within the whole system. The decentralized loan system appears to be generous, but in reality creates practical problems and appears not to be attractive to those who might need it most. There is very little needs-based support or means-testing mechanisms for students from low-income families. 22 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding The current public funding model appears as a largely input based ‘one-pillar’ model which, overall, does not represent a balance between stabi- lity, performance, and innovation orientation. This also means weaker links between public funding and national and institutional strategies. In addition, the system relies heavily on EU funds, in particular for research and development which might not be a long-term solution to stable research funding while also funding from industry and other private sources appears to be underdeveloped. More detail and context are provided for all of these points in the full report. Following an introduction, there are three main sections of the report. The first section discusses recent European developments in higher education financing. This is followed by a section on criteria for good funding models, which discusses general criteria for good funding models deriving from international practice. Utilizing the current European developments and general criteria for good funding models, the last section provides an overview of the strengths and weaknesses of Latvia’s current approach. Notably, Appendix 1 serves as a key resource for the current status of higher education funding in Latvia. REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 23 1 Introduction The report at hand is the first in a series of three papers produced under the World Bank Reimbursable Advisory Service on Higher Education Financing in Latvia between December 2013 and September 20141. The introductory section of this report provides background information on the World Bank’s activities in Latvia and, in particular, on the genesis of the engagement concerning higher education financing. The past decade has witnessed a significant amount of dis- cussion on the topic of higher education financing in Latvia, further fueled by the country-specific recommendations by the European Commission, in which the Commission urged Latvia to reform its approach to higher education financing. Higher education financing was also amongst the topics discussed between representatives of the Ministry of Education and Science (MoES), State Education Development Agency (SEDA), and the World Bank, within the framework of its regular policy dialogue. Going forward, the World Bank has been invited, as an external partner, to develop a proposal for a new higher education financing model in Latvia. The timeline for the development of this proposal is ambitious: nine months. It was also agreed that the proposal itself would be preceded by two papers: (i) an analysis of the strengths and weaknesses of the current approach to higher education financing in Latvia based on European and international good practice (including a description of the status quo of higher education financing); and (ii) a paper ‘zooming in’ on the ‘strategic fit’ of the current funding model with expressed priorities for the sector. This paper is the first output of this exercise (item i). The Bank team2 would like to express its gratitude to MoES and SEDA as well as to several stakeholders (see Appendix 3) who provided valuable input and thereby supported the preparation of this report. 1.1 Latvia and the World Bank Group Latvia joined the World Bank in August 1992. In the following years, the Bank sup- ported Latvia’s transition and preparation for the upcoming EU integration through lending, policy dialogue, and analytical and advisory services. Latvia ‘graduated’ from the Bank in 2007: the last active Bank-financed investment project closed 1 The term ‘higher education’ is used in this report in a comprehensive and inclusive manner; i.e., it is used to describe any form of tertiary education at the post-secondary level, if not specified other- wise. 2 Members of the Bank team are Dr. Nina Arnhold, Senior Education Specialist and Task Team Leader, World Bank; Adjunct Professor Jussi Kivistö, University of Tampere, Finland; Professor Hans Vossensteyn, Director of the Center for Higher Education Policy (CHEPS), the Netherlands; Jason Weaver, Senior Education Specialist, World Bank; and Professor Frank Ziegele, Director of the Centre for Higher Education (CHE), Germany. 24 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding in June 2007. However, Latvia continued to work with the Bank through analytical and advisory services in several areas, including public finance management, inter- national emissions trading, public-private partnerships, and regional development. The relationship between Latvia and the Bank changed again in the context of the economic crisis. Indeed, Latvia was one of the European countries that suffered most from the crisis with GDP contracting by 25 percent, and a rise in unemploy- ment by more than 20 percent (Aslund and Dombrovskis, 2011, p. ix). In Decem- ber 2008, the Bank committed EUR 400 million in loans to help stabilize Latvia’s economy. The Bank’s contribution was part of a EUR 7.5 billion package, which included contributions from the International Monetary Fund, the European Union, and Nordic countries. The first EUR 200 million loan, approved by the World Bank Board in September 2009, supported the Government of Latvia in its efforts to strengthen the banking sector and maintain long-term financial stability. The se- cond EUR 200 million programmatic loan aimed to protect vulnerable groups in two phases, by: (i) supplementing the government’s social safety net programs during the economic contraction; and (ii) laying the foundation for structural re- forms in the social sectors over the medium term. To assist with its post-crisis recovery and further its reform agenda, the Latvian government subsequently expressed interest in continuing its work with the Bank, especially through knowledge services. The Bank has been, either recently or cur- rently, engaged in several reimbursable advisory services (RAS) activities with the Latvian government, including the following: Latvian Social Protection System: Under this activity, the Bank developed a number of analytical products aimed at informing Latvia’s social protection reforms — in parti- cular, measures aimed at helping the long-term unemployed and inactive parts of the population reintegrate into the labor force. Four analytical products were deli- vered and a workshop was arranged to discuss the initial findings. The report was launched in June 2013 in Brussels with the European Commission. Enhanced Competitiveness of Latvia: The Bank provided reimbursable advisory services for the Latvian Ministry of Economics (MoE) on industrial policies aimed at enhancing the country’s competitiveness. The objective of the engagement was to support the Latvian MoE in its efforts to design and implement modern industrial policies to increase the competitiveness and productivity of the Latvian industry. The Bank provided methodological advice and examples of international good practice. Higher Education Finance Reform: In the autumn of 2013, an agreement was reached that the Bank would provide recommendations for a reformed higher education financing model through reimbursable advisory services. The RAS agreement was signed on December 2, 2013. The report at hand is provided as one output under this latter engagement, whose details are provided hereafter. 1.2 Project context and objectives In recent years, many countries have evaluated how different approaches to finan- cing higher education can help achieve or enforce strategic policy objectives. Both the International Monetary Fund and the European Commission have encouraged REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 25 Latvia to assess how its financing approach could provide better alignment with incentives and thereby support policy objectives, which may cover, for example, issues of access, quality, and efficiency (see e.g., IMF, 2013). The European Com- mission attributed particular importance to financing reform in one of its 2012 Coun- try Specific Recommendations for Latvia, encouraging the country to: “[…] continue reforms in higher education, inter alia, by implementing a new financing model that rewards quality, strengthens links with market needs and research institutions, and avoids fragmentation of budget resources” (European Commission, 2012, p. 7). …followed by the 2013 Country Specific Recommendations for Latvia with a strong emphasis on the need to: “[…] implement the planned reforms of higher education concerning, in par- ticular, the establishment of a quality-rewarding financing model, reform of the accreditation system, consolidation of the institutions and promotion of internationalization” (European Commission, 2013). To help address these concerns, the Ministry of Education and Science conside- red involving the World Bank as a long-standing external partner. An Expression of Interest was sent to the Bank on April 16, 2013. Both parties continued refining the objectives and terms of reference of the engagement until December 2, 2013, when a legal agreement was signed by three parties — MoES, SEDA and the World Bank — that focused on two main project objectives: 1. Identify the strengths and weaknesses of Latvia’s current approach to financing higher education. 2. Recommend a reformed financing model that takes into account the criteria developed by MoES and good international practice while [also] taking into account stakeholder consultations. Latvia seeks a new financing model that rewards quality, strengthens alignment of market needs and higher education outputs, avoids fragmentation of budget resources, and furthers other policy objectives to achieve a modernization of its higher education system. For the purposes of this engagement, the higher educa- tion funding system consists of four major dimensions: 1. Financial autonomy of higher education institutions (lump sums, freedom to spend money flexibly and to build financial reserves, financial regulations, discretion to set salaries, etc.). 2. Diversification of financial sources for higher education institutions (EU funding, tuition fees, market revenues, external research income, transfer activities, etc.) and the rules and regulations related to these. 3. Instruments of public funding of higher education (allocation from state budget, research funding, etc.). 4. Student funding and support (in particular with regard to tuition fees, loans, scholarships, etc.). 26 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding 1.3 Project methodology The engagement began in December of 2013 and is tentatively scheduled to con- clude in the autumn of 20143. To accomplish its objectives, the project has been planned for three stages, each with a corresponding deliverable. The first stage in the project’s methodology is an assessment of Latvia’s current approach to financing higher education. Findings and observations are based primarily on existing data, a document review and stakeholder interviews (see Appendix 1 and 3 for a list of documents reviewed and stakeholders interviewed). The deliverable at this stage — this report — is an overview of the state of higher education financing in Latvia, as well as an assessment of its perceived strengths and weaknesses in light of European developments, good international practice, and input from stakeholder consultations. These stakeholder consultations played an important role in the preparation of the report at hand and will also consti- tute a very important input for subsequent steps. The stakeholder roundtable on December 3 helped the team to gain a better initial understanding of higher edu- cation financing in Latvia, also in light of ongoing European developments. Exten- sive stakeholder interviews in early February provided an opportunity to discuss criteria for good funding models and explore strengths and weaknesses of the current Latvian funding system with respect to these criteria; thus, they served as a key input into Chapter 4 and other sections of this report. Finally, the main findings of the report are going to be discussed during a workshop with stake- holders scheduled for March 12, 2014. The second stage of the project focuses on how well the current financing approach aligns with the policy objectives specified by MoES. Whereas the first stage provides a broad analysis of the strengths and weaknesses of the current funding approaches, the second ‘zooms in’ on the ‘strategic fit’ of the current financing system, taking into account the specific strategic objectives which the government has defined for higher education. Findings and observations at this stage will rely on the analysis of data and documents, interviews with key stake- holders, and prior team experience with various international practices. The deli- verable will identify to what extent the existing approach does or does not align with policy objectives, as well as begin to surface potential alternatives in order to improve the linkages between higher education funding and strategy. In the third stage, the focus is on proposing reforms for Latvia’s higher education financing system, specifically those that can be accomplished in the medium 3 On December 2, 2013, immediately after the signing of the Legal Agreement, the Bank team con- ducted a workshop with MoES staff. This was followed by a first stakeholder roundtable on Decem- ber 3, 2013. The Bank’s Latvia Higher Education Financing team consists of World Bank staff as well as international and local experts bringing together expertise from a range of countries (Finland, Germany, the Netherlands, Latvia, the wider European area, and the United States) and contexts. The Legal Agreement foresees 36 weeks, or roughly nine months, for the execution of the task (leading to August 2014). However, it might be recommended to conduct a dissemination event after the academic break, i.e., in autumn 2014. REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 27 term, i.e., the next three-to-five years. The recommendations will take into account the policy and strategic objectives discussed in the project’s second stage. The deliverable of this third phase will actually take the form of two complemen- tary documents: (i) a proposal for a medium-term higher education financing system that takes into account the previous strengths and weaknesses analysis and clearly identifies next steps, and (ii) an information note for the government. The implementation of recommended reforms, though a critical step, is not inclu- ded within the scope of the existing agreement. Implementation activities which, for example, would focus on (i) structural aspects of the model proposed, (ii) procedural aspects of introducing the new financing model, and (iii) capacity building, are currently the sole responsibility of the Government of Latvia. In any case, the nature of the World Bank team’s task is the preparation of a proposal. The decision to accept and implement the proposal will, however, lie with the Government of Latvia and the sector. 1.4 Clarifying the project scope Throughout the cooperation, including the Bank’s current engagement on higher education financing in Latvia, it is important that all parties revisit and refine expectations in accordance with the nature of the agreement. Since this engage- ment is focused on potential ways in which financing higher education can further policy objectives, it is important to clarify what is feasible in order to manage expectations for what the financing approach can, and cannot, do. Thus, the second stage of this project, in which critical policy and strategic objectives of MoES are in focus, is a necessary step to the resulting recommendations put forth in phase three. It is also important to recognize in advance that some policy objectives may only be impacted to a certain degree by the funding approach, and that alternative actions might be considered more advantageous or suitable in achieving spe- cific objectives. For example, if a government seeks to encourage degree comple- tion, then it may consider tying a portion of its funding allocation to the number or share of graduates produced by each institution, provided that such a model is accompanied by suitable quality assurance arrangements. Certainly, though there are many other initiatives outside the realm of funding that could also help ensure more and better graduates (e.g., better secondary school preparation for higher education), it might be the case that they come at a different “cost” (e.g., longer time frame or additional political capital). The same would apply to the goal of consolidating programs or institutions. Financing can be one means of suppor- ting and providing incentives for consolidation; however, it is not the only policy instrument in this context. Finally, it will be important to consider higher education financing reform as one aspect of systemic reform for which sufficient support needs to be mobilized in order to ensure success. While exhaustive lists of demands and ‘maximum positions’ might indeed go some way in satisfying a certain political clientele, their chances of implementation in practice will be limited. Higher education reform, in general, and higher education financing reform, in particular, has an impor- tant political economy dimension, i.e., considerations of what might be politically feasible in a given country. Such considerations — while not being the major 28 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding driver of technical recommendations — should not be completely alien to a finan- cing proposal. While certain steps might be desirable under ideal circumstances, they might not help improve the current situation. The World Bank team’s inten- tion is to use a pragmatic approach, which considers such constraints. Following this introduction, there will be four main sections of the report. The first section discusses recent European developments in higher education financing, in particular with regards to the financial autonomy of higher education institutions (HEIs), their resource diversification, and models of public funding and student funding4. This is followed by a section on criteria for good funding models, which discusses general criteria for good funding models deriving from international practice — as mentioned above, in contrast to criteria for a suitable funding model deriving from specific strategic objectives as established by the Latvian govern- ment. The latter topic will be subject to a separate paper under Component 2. Taking into account current European developments and general criteria for good funding models, the last section provides an overview of the strengths and weaknesses of the current approach that the authors have observed. Notably, Appendix 1 provides a broad description of the current status of higher education funding in Latvia which, similar to the chapter on European developments and in addition to some general system features, discusses the financial autonomy of Latvian HEIs, their resource diversification, and models of public funding and student funding. 4 The term higher education institution (HEI) is used throughout this document in an inclusive man- ner, referring to all post-secondary institutions of the higher education sector (universities and non- universities), if not specified otherwise. REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 29 2 European Developments in Higher Education Financing As stated above, higher education is an increasingly important topic on national policy agendas for many countries. The widespread assumption that higher education is a significant driver of national economic competitiveness in an in- creasingly knowledge-driven global economy has promoted the importance of higher education (cf. Santiago et al., 2008, p. 13). Alongside the increased poli- cy importance of higher education, many systems also face serious challenges maintaining their quality and relevance, increasing the efficiency and securing equity in the field of higher education. New higher education financing models are being developed in many European countries as policy responses to these challenges. Financing higher education has also been one of the key policy issues in Euro- pean higher education policy. The European Commission’s “Delivering on the Modernisation Agenda for Universities: Education, Research and Innovation” (European Commission, 2006) report identified several areas of European higher education requiring special attention. One of these areas is the funding of higher education. The Commission expressed the need to “reduce the funding gap and make funding work more effectively in education and research”, and proposed that national governments spend at least 2 percent of GDP — including both private and public funding — on higher education (in 2011 Latvia spent a total of 1 percent of GDP on higher education (Eurostat data)). The Commission also recommended more output-oriented funding and called upon universities to take more responsibility for their financial sustainability. Furthermore, the Commission recommended that member states “critically examine their current mix of stu- dent fees and support schemes in the light of their actual efficiency and equity” keeping in mind that “free access [...]does not necessarily guarantee social equity (European Commission, 2006, p. 7)”. In 2011, the European Commission built on the Modernisation Agenda by pub- lishing another communication, “Supporting growth and jobs — an agenda for the modernization of Europe’s higher education systems” (European Commis- sion, 2011). In this communication, the Commission emphasized the importance of designing funding mechanisms in support of excellence; reaffirmed the need to achieve an adequate level of public and private funding for higher education; called for funding mechanisms to be linked to performance and introduce an ele- ment of competition; and recommended the facilitation of access to alternative sources of funding, including using public funds to leverage private and other public investments in higher education (e.g., through match-funding arrange- ments). 30 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding The recent financial and economic crisis has had profound negative effects on na- tional and regional economies throughout Europe. Around half of the European countries have reduced their education budgets during the years 2011 and 2012 (European Commission/EACEA/Eurydice, 2013, p. 32). In countries where funding is being cut, higher education institutions have increased their efforts in seeking new funding sources to support their activities. The level of public funding alloca- ted to higher education has not only been reduced, but also the nature and form in which it is provided to HEIs has been changing. In many countries, growing accountability requirements set by the governments have been accompanied by granting HEIs more institutional autonomy. At the same time, the efficiency of funding in terms of the capacity of HEIs to meet certain policy goals in a cost-effective way is becoming increasingly important throughout Europe. For this reason, it will be a crucial challenge for many governments to re-think both the design and implementation of higher education funding arrangements in order to enhance funding efficiency in the sector (Estermann, Bennetot Pruvot & Claeys-Kulik, 2013, p. 4). The purpose of this chapter is to provide a short overview of the recent trends related to financing higher education in Europe. It is organized into four sections highlighting the major topics of financing higher education in Europe: models of public funding, resource diversification, financial autonomy, and student funding. Each of these topics includes a brief description of the topic, a short analysis of the latest trends in European higher education systems, as well as Latvia’s current position vis-a` -vis these trends. An overview of trends as well as Latvian position with respect to trends is presented in a series of Tables (see Tables 5–9). The final section of the chapter offers a brief analysis of higher education as a public or private good, and includes some general insights to be taken into account when developing financing models of higher education. 2.1 Recent European trends in higher education financing Models of public funding There are a number of different ways in which to categorize or cluster alternative allocation models in the funding of higher education institutions. A frequently applied categorization distinguishes between negotiated, incremental, formula, and competitive funding (e.g., Eurydice, 2008; Jongbloed et al., 2010). For practi- cal purposes, this report adopts the categorization of Ziegele (2013) who has identified three typical pillars of funding models: (i) basic funding; (ii) performance funding; and (iii) innovation-/profile- oriented funding.5 Regardless of the diver- sity throughout higher education systems and funding models in Europe, these three pillars can, to a certain extent, be identified in most systems. Negotia- 5 In most European higher education systems, the public funding of research takes place through a dual support system meaning that research is funded both through basic funding and through innovation-/profile-oriented funding (mainly competitive research grants allocated by intermediary allocated by research councils, national academies or other national/federal intermediary bodies (cf. Jongbloed et al., 2010, p. 53). REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 31 ted, incremental, formula and competitive funding are instruments that could be applied within the three specific pillars. Basic funding can be described as an amount of public funding that remains largely stable over a specific period of time. The purpose of basic funding is to provide predictable and reliable financing that covers the main part of operational costs, the- reby enabling HEIs to perform their core tasks of teaching and research (Ziegele, 2013, pp. 73–74). As previously discussed, in most European systems, public autho- rities distribute basic funding to HEIs through the use of block grants. The overall amount of the block grant may be determined in different ways; through negotiation, incrementally on a historical basis, or via a funding formula. The importance of these different elements in determining the overall amount of the block grant varies across the systems (Estermann, Bennetot Pruvot & Claeys-Kulik, 2013, p. 8). Incremental funding, where historical allocations play a large role, is becoming less common, and in many systems, has already been replaced by formula-based approaches with input-oriented indicators. In 20 out of 34 European higher educa- tion systems, funding formulae were of very large importance in 2008, compared to 1995 when only seven systems attached a large importance to it (Jongbloed et al., 2010, p. 47–48). Number of systems Number of systems Table 1 Importance of input- and relative importance of and relative importance of versus output-related drivers input-related drivers output-related drivers of HEIs operational grants 1995 2008 1995 2008 Source: Jongbloed et al., 2010, p. 51 Extremely important 38 24 3 8 Important 4 18 3 16 Minor importance or unimportant 3 3 39 21 The importance of input and output drivers in determining the operational grant for teaching, research and ongoing activity is shown in Table 1. Input-related drivers remain extremely important or important in almost all European higher education systems. The most important input criteria include the number of students or publicly-funded study places, the number of staff, and past costs of an institution. However, compared to 1995, when there were only 6 systems in which output-related criteria played an important or extremely important role, in 2008, 24 European systems considered output-related drivers important or extremely important. Frequently used output criteria include elements from teaching and research activities: degrees conferred, study credits accumulated, assessment results, indicators related to publications, or competitive research grants (Jongbloed et al., 2010, pp. 49–51). Where funding formulae are used to calculate the block grants, these are largely dominated by input-oriented indi- cators, namely student numbers (at Bachelor level, then at Master level). The cor- responding output-oriented indicators (number of Bachelor and Master degrees conferred) are used less frequently or else have less weight in the formula (Ester- mann, Bennetot Pruvot & Claeys-Kulik, 2013, p. 9). Output-oriented indicators are typically part of the performance-based funding pillar, to be presented next. The main purpose of performance-based funding is to create financial incentives for HEIs to produce outputs and outcomes in certain areas of their activities by 32 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding applying formula funding6. Performance-based funding arrangements reward HEIs ex post — that is, they reward their past teaching and research performance (Ziege- le, 2013, p. 74). Despite the simplicity in terms of definition, it seems that perfor- mance-based funding is understood very differently across Europe. Nevertheless, a majority of systems consider their funding allocation mechanisms at least partially performance-based for teaching (via graduate-related criteria) and partially or main- ly performance-based for research, where indicators related to publications and external research funding are normally taken into account (see Figure 1). Figure 1 Relative importance of indicators used in funding formulae in European higher education systems Source: Estermann, Bennetot Pruvot & Claeys-Kulik, 2013, p. 10 The third typical pillar of funding models, innovation-/profile-oriented funding, underscores intentions expected to be carried out in the future. Concretely, this type of funding is often utilized under the label of “targeted/earmarked funding”, “competitive funding”, “strategic funding”, “project-based funding”, “excellence initiatives” or “centers of excellence” — to name but a few. Regardless of the name, all these funding instruments basically aim to finance and incentivize innovations, research (or sometimes teaching) excellence, or the development of institutional profiles in advance (cf. Ziegele, 2013, pp. 73–74, p. 78). Innova- tion-/profile-oriented funding can take many forms, such as funding that is alloca- ted on a competitive basis (e.g., the “Strategic Innovation Funding” in Ireland, established as a mechanism for institutional restructuring and modernization) or a non-competitive basis directly allocated to HEIs (e.g., Higher Education Inno- vation Funding scheme in the United Kingdom, which focuses on knowledge exchange). Innovation-/profile-oriented funding includes excellence initiatives (e.g., Germany’s “Excellence Initiative”), as well as project funding programs for carrying out strategic research found in many European countries7. 6 Or performance contracts which are related to part of the budget. 7 See http://www.excellence-initiative.com/ REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 33 Performance contracts (synonymous with target agreements, performance agree- ments), whereby certain goals are agreed between the funding authority and HEIs, are used in different ways within the funding pillars. With performance con- tracts, certain objectives, often in line with national strategic priorities and institu- tion-specific missions, are agreed between the funding authority and HEIs. If per- formance contracts are connected to basic funding, they usually do not have to have a direct impact on funding. However, if the performance objectives are measured clearly and linked to financial incentives, performance contracts often become an organic part of performance-based funding arrangements8. Concre- tely, those performance contracts would be very broad, based on framework agreements, but might also take the form of more detailed contracts, highlighting specific and measurable objectives and targets (Jongbloed et al., 2010, p. 30). In this case, they would belong to the third, innovation/profile-oriented pillar. Over the recent years, performance contracts have become a common feature in many European higher education systems. Currently, performance-based con- tracts are in use in 15 out of 22 European systems. These contracts have a clear impact on funding allocations for instance in Finland, Austria, Germany and the Netherlands (Estermann, Bennetot Pruvot & Claeys-Kulik, 2013, p. 11). When taking into account the latest developments of higher education funding models across Europe, some clear trends can be observed. First, it is likely that basic funding becomes more dynamic and demand-oriented (rather than supply- oriented) through the “money-follows-the-student” approach, where rewards and incentives are based more heavily on factors related to student enrolment, rather than on staff numbers or past institutional costs. Second, the relevance and weight of the performance-based funding, including the formula funding, is likely to increase. Performance-orientation sets HEIs incentives for improvement of quality and efficiency; both of which are crucial aspects in the increasingly com- petitive environment. Third, it is foreseeable that the relevance and weight of the innovation-/profile-oriented funding component increases especially in the form of competitive and targeted funding with a special emphasis on innovation and excellence, of which both are considered important prerequisites for regional or national competitiveness. Furthermore, it is likely that performance contracting becomes more widely used within the funding pillars due to the increasing per- formance-orientation in public funding modalities (Ziegele, 2013, pp. 74–79). To summarize: •Incremental funding is being applied less frequently, and in many systems has been replaced by formula-based approaches. •Although input-related drivers remain important in almost all European higher education systems, the use of output-related criteria is also continually increas- ing. •It is likely that basic funding of HEIs will become more dynamic and demand- oriented (rather than supply-oriented). 8 It is important to note that performance contracts are applicable to all three funding pillars (basic funding, performance-based funding, innovation-/profile-oriented funding) and not restricted to only performance-based funding arrangements. 34 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding •The relevance and weight of the innovation-/profile-oriented funding component is likely to increase; especially in the form of competitive and targeted funding. Input-related and formula-based drivers of the basic funding pillar have also been important in Latvia, but, contrary to many other European systems, the current funding model does not offer significant incentives for greater performance- and output-orientation. The innovation-/profile-oriented funding component in Latvia is currently composed of a number of different types of smaller and larger third-party funding streams (including EU Structural Funds) but not included in the system of state funding. Resource diversification Resource diversification (a.k.a. income/revenue diversification) can be understood as a generation of additional income through new or existing funding sources that contribute to balancing the income structure of the institution (Estermann & Bennetot Pruvot, 2011, p. 26). In many European higher education systems, HEIs have been encouraged to diversify their revenues and reduce their depen- dence on public funding. As a result of this, many countries have decided to grant more financial autonomy to HEIs to encourage a differentiation of institutional missions and diversification of resources (Jongbloed et al., 2010, p. 10). The rela- tive proportion of expenditure on HEIs from private sources increased in 16 out of the 19 European countries for which OECD data are available, between 2000 and 2010. Countries in which the increase has been more significant include the United Kingdom (from 32 to 75 percent), Portugal (8 to 31 percent), Slovakia (9 to 30 percent), Italy (23 to 32 percent) and Austria (4 to 12 percent), with EU21 average (14 to 23 percent) (OECD, 2013, p. 207). There are a number of alternative ways to categorize HEI sources of income. Tradi- tional categorization includes (i) operational grants allocated by public authorities for ongoing teaching and/or research activities; (ii) tuition fees (or other fees) paid by the students; and (iii) third-party funding, including all project and contract funding received from public, international and private sources (e.g., research council funding, ministry funded, specifically targeted policy programs, EU funding, contract research, and contract teaching) (Jongbloed et al., 2010, p. 44). In 2008, European public universities received on average 67 percent of their funding from public sources through operational grants. About 12 percent was from private households in the form of tuition fees. Third-party funds represented the remaining 21 percent. Table 2 below shows the development of income cate- gories over the period 1995–2008. A move towards a higher share of tuition fees (from 8 to 12 percent) and third-party funds (from 15 to 21 percent) as well as a lower share of operational grants (from 78 to 67 percent) all show increasing resource diversification. Table 2 Average proportion of 2008 1995 public HEIs’ main income Operational grant 67 percent 78 percent categories in 1995 and 2008 Source: Jongbloed et al., 2010, p. 44 Tuition fees 12 percent 8 percent Third party funds 21 percent 15 percent REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 35 A recent study conducted by the European University Association also confirms the existing trend of increasing resource diversification (Estermann & Bennetot Pruvot, 2011)9. Direct public funding continues to be the most important income source for HEIs in Europe, representing on average 73 percent of HEI income (see Figure 2). Although direct public funding is often allocated as a block grant, public authorities tend to also use competitive and targeted funding more frequen- tly than before. Co-funding requirements, whereby institutions are requested to finance part of the activities, are also becoming more frequent (Estermann & Bennetot Pruvot, 2011, p. 8). Figure 2 Average income distribution in European HEIs in 2008 Source: Estermann & Bennetot Pruvot, 2011, p. 27 Student financial contributions (i.e., tuition fees and other fees), represent a signifi- cant income source in some countries (on average 9 percent of HEI income). Stu- dent financial contributions have the potential to constitute a large income source. Especially in view of the economic downturn, the inclusion or introduction of fees continues to be at the heart of the political debate around funding models for higher education. However, in this respect, European countries seem to be moving in different directions. For instance, some of the Nordic countries (Finland, Sweden, Denmark), in which fee-free access to higher education has been a long- standing policy principle, have recently implemented fees for foreign (non-EU) students and have thereby added a cost-sharing element in their systems. On the other hand, countries like Austria, Estonia and the German states have decided to abolish fees for their domestic students and rely more on public funding (cf. Estermann & Bennetot Pruvot 2011, p. 8; pp. 30–33). Other sources of funding together account for nearly 20 percent on average of the total income structure of European HEIs. This includes income generated from contracts with the private sector (6.5 percent) philanthropic funding (4.5 percent), income generated by the provision of services and financial activities (4.1 percent) and funding received from international public organizations (mainly from EU) (3 percent). According to the same EUA study, it should be noted that specifically European funds are not always identifiable in the universities’ income structure; this may be 9 Figures presented in Table 2 and in Figure 2 are not directly comparable due to the differences in data collection and methodology. 36 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding for instance the case of structural funds, which are delivered by the national or regional authorities, and may be thus labeled as national/regional funds. Overall, these types of additional income source can exceed 10 percent of the average universities’ income in most systems. According to EUA, a worrying trend seems to be that in some countries, European funds are perceived as a mecha- nism to compensate decreases in national public funding. From the perspective of long-term sustainability, this is highly problematic. Moreover, European funds are often allocated on a competitive basis and therefore success in the competition requires institutional capacities and resources that in turn depend on financial means (Estermann, Bennetot Pruvot & Claeys-Kulik, 2013, p. 8). Resource diversification is facilitated by an institutional legal status enabling HEIs to behave entrepreneurially in terms of costing and pricing of activities, internal allocations, decision-making on commercial possibilities, and responsive supply of educational programs and research activities10. Furthermore, incentives for re- source diversification can also take the form of matching funds linked to funding generated from outside sources as well as (tax) incentives to stimulate philan- thropic giving to HEIs (Santiago et al., 2008, p. 248). It seems that a positive cor- relation exists between the degree of diversification of the income structure of the university and its perceived degree of staffing and financial autonomy. Noticeable positive correlations can be found in particular between income diversification and the ability of the university to invest in stocks and shares on the financial market, to borrow from banks or to carry over financial surpluses (Estermann & Bennetot Pruvot, 2011, p. 41). In order to implement their strategies and policies regarding the diversification of higher education funding, including in particular private sources of funding other than households, almost all European countries have developed an incentive of some sort for HEIs and/or private partners. The most commonly adopted incentive has been to offer tax relief for donors/sponsors/private partners of HEIs (adopted in 20 out of 33 systems) or to provide a regulatory framework authorizing insti- tutions to own intellectual property rights (adopted in 13 out of 33 systems), as well as financial or other support for partnerships with the private sector (adop- ted in 12 out of 33 systems) (Eurydice, 2008, p. 81). Many European governments have also influenced income diversification strategies through the modalities under which they allocate funding to the HEIs. For instance, specific criteria in funding formulae aimed at encouraging external funding, or the extended use of competitive funding, project funding and targeted funding can all offer strong incentives for resource diversification (Estermann & Bennetot Pruvot, 2011, pp. 46–47)11. The main trends in resource diversification can be summarized as follows: •During the past 10 years, the relative proportion of HEI income coming from private sources has increased in most of the European countries. This trend 10 If HEIs do not know the costs of their activities, it is also very difficult to set adequate prices. For this reason, cost calculation is an essential element in supporting the resource diversification pro- cesses. Determining costs also increases transparency on how HEIs spend money and what the real costs of their activities are (more on costing, see Estermann & Claeys-Kulik, 2013). 11 EUA glossary definition for funding formula: “[A]lgorithm based on standard criteria to calculate the size of public grants to higher education institutions for teaching and/or ongoing operational activity and, in certain cases, research. Criteria include input components and/or performance indicators.” (E.g. Estermann, Pruvot & Claeys-Kulik, 2013, p. 6). REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 37 is likely to continue in coming years, due to the constraints in maintaining or increasing public spending on higher education. •In many European countries the share of direct public funding (core funding) has decreased at the same time that the share of fees and third party funding has increased. Nevertheless, direct public funding continues to be the most important funding source for HEIs across most European higher education systems. •A number of European countries have recently offered financial incentives for HEIs and third parties for actions supporting the greater resource diversification of HEIs. Compared to many other European systems, resource diversification in Latvia can be considered very high. According to the Law on Higher Education Institutions, financial resources of higher education established by the state are formed from the resources of the State general budget, as well as other income, which institu- tions of higher education earn by performing activities towards the realization of the aims specified in the constitutions. In 2012, direct public funding covered only about 36 percent total income of HEIs whereas tuition fees (23 percent) and funding received from international organizations (including EU Structural Funds) (21 percent) together accounted nearly a half of HEIs income. Also funding from other sources comprised a relatively high share (20 percent) of HEI income (see Chapter 4 for further discussion). Financial autonomy Providing a higher level of institutional autonomy is often expected to improve the performance of HEIs and higher education systems as a whole. It is assumed that the more autonomous HEIs are, the better equipped they are to generate additional resources through fund-raising or efficiency measures, with the free- dom to orient their strategy towards available funds, potentially focusing on speci- fic research themes or shifting the balance between education and research. Based on this assumption, many governmental authorities among European countries have granted HEIs more freedom to manage their resources and deve- lop new income-generation policies (Steier, 2003, p. 162; Jongbloed et al., 2010). Financial autonomy is one of the most significant sub-areas of institutional auto- nomy12. Key dimensions of financial autonomy include at least (1) type of public funding allocated to HEIs; (2) HEIs ability to keep a surplus; (3) HEIs ability to bor- row money; (4) HEIs ability to own buildings; (5) HEIs ability to set staff salaries; and 6) HEIs ability to charge tuition fees (e.g., Estermann, Nokkala & Steinel, 2011; cf. Jongbloed et al., 2010, pp. 41–43; Estermann & Nokkala, 2009, pp. 18–26)13. 12 The European University Association (EUA) has compiled an “Autonomy Scorecard” highlighting four areas of institutional autonomy: organisational autonomy, financial autonomy, staffing autono- my, and academic autonomy. Autonomy Scorecard summaries are available at: http://www.eua.be/Libraries/Governance_Autonomy_Funding/Scorecard_summaries.sflb.ashx 13 Data for these dimensions has been obtained from the European University Association’s online database “University Autonomy Tool” at http://www.university-autonomy.eu/dimensions/financial/. The database contains data from 29 European higher education systems and mostly describes the state of HEI autonomy in late 2010. 38 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding 1. HEIs freedom in internal allocation of public funding. In Europe, there seems to be a clear trend towards the allocation of public funding through block grants instead of line-item budgets. Block grants cover several categories of expenditure and enable HEIs to have greater freedom in dividing and distribu- ting their funding internally according to their needs. In line-item budgeting, funding is allocated to particular items or types of expenditure such as person- nel salaries, capital investments, travel expenses, and building maintenance. With line-item budgets, HEIs have significantly less freedom in deciding inter- nal allocations (Estermann, Nokkala & Steinel, 2011, p. 30). Currently, in 25 European higher education systems, HEIs receive their basic public funding in the form of a block grant, whereas line-item budgets are applied only in three countries (Cyprus, Greece, Turkey). However, there are differences in how freely HEIs are able to internally allocate the block grant. In 14 systems (including, e.g., Denmark, Estonia, Finland), HEIs have no res- trictions on the allocation of funding, but in 11 systems (including, e.g., France, Hungary, Iceland) the funding authority has set more or less restrictive limita- tions for internal allocations. 2. HEI ability to keep a surplus. HEIs might either have a right to accumulate sur- plus from public funding or else are required to return any potential surplus to the funding authority at the end of the financial year. Currently, in 27 Euro- pean higher education systems, HEIs can keep a surplus either without restric- tions (15 systems) or else with some restrictions (12 systems). In contrast, only in 4 systems (Cyprus, Greece, Ireland, Lithuania) are HEIs unable to keep the surplus. 3. HEI ability to borrow money. Currently, in 23 European higher education systems, HEIs are allowed to borrow money from financial markets either without (7) or with (16) restrictions set by the external authority. In only 7 Euro- pean higher education systems (Greece, Hesse in Germany, Hungary, Nor- way, Portugal, Switzerland, Turkey) are HEIs not allowed to borrow money at financial markets. 4. HEI ability to own their buildings. In 22 European higher education systems, HEIs are able to own their buildings. However, HEIs are not necessarily able to autonomously decide on the sale of their assets; in only 8 systems are HEIs able to sell their buildings without restrictions set by the external authority (including, e.g., Hungary, Lithuania, Sweden). In 6 systems, HEIs are not at all allowed to own their buildings (three German states, Hungary, Lithuania, Sweden). 5. HEI ability to set the salaries of their staff. Salaries for senior academic staff can be determined freely by HEIs in only five European systems (Latvia, the Czech Republic, Estonia, Sweden, Switzerland)14. In all other (28) systems, the ability of HEIs to set salaries is restricted in one way or another (e.g., salary bands are negotiated with other parties or they are prescribed by an external authority for all staff)15. 14 Though there is a lower-bound limit for Latvia, as discussed in Chapter 4. 15 In EUA autonomy clustering, HEIs ability to set staff salaries is included under the area of “staff autono- my”. See EUA’s “University Autonomy Tool” at http://www.university-autonomy.eu/dimensions/staffing/. REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 39 6. HEI ability to charge tuition fees. Universities’ ability to set fees and decide on their level is often essential to ensuring their financial capacity, since it enables the institution to generate new funding streams through private contributions. In Europe, there are great differences across the systems in collecting and setting the level of fees. These differences depend mainly on the level of study (Bachelor, Masters, Doctoral level) as well as on student origin (national/ EU-students and non-EU students) (see Table 3). Table 3 Setting tuition fees in Europe Cooperation Ceiling set by law Fees set by law Universities free universities/ or external or external to set tuition fees external authority authority authority No fees National and EU students/ BB (DE), CZ, DK, FI, IT, LT, NRW (DE), EE, HU, LU, LV CH AT, CY, ES, FR, NL, TR GI, HE (DE), IE, IS, Bachelor level PT, UK NO, PLC, SE, SK National and EU students/ BB (DE), CZ, DK, FI, EE, GR, HU, IE, LU, CH IT, LT, NRW (DE) AT, CY, ES, FR, NL, TR HE (DE), IS, NO, PL, Master level LV, PT, UK SE, SK National and EU students/ BB (DE), CZ, DK, FI, EE, IE, HU, LT, LU, CH IT AT, CY,ES,FR,TR GR, HE(DE), IS, NO, Doctoral level LV, NL, PT, UK NRW (DE), PL, SE, SK Non-EU students/ EE, HU, IE, LT, LU, BB (DE), CZ, FI, LV, NL, PT, SE, SK, CH, DK, PL IT, NRW (DE) AT, CY, ES, FR, GR Bachelor level HE (DE), IS, NO TR, UK Non-EU students/ EE, GR, HU, IE, LT, BB (DE), CZ, FI, LU, LV, NL, PT, SE, CH, DK, PL IT, NRW (DE) AT, CY, ES, FR Master level HE (DE), IS, NO SK, TR, UK Non-EU students/ BB (DE), CZ, DK, FI, EE, IE, LT, LU, LV, NL, CH, HU, PL IT AT, CY, ES, FR GR, HE (DE), IS, NO, Doctoral level PT, SK, TR, UK NRW (DE), SE Source: Estermann, Nokkala & Steinel, 2011, p. 35 Generally speaking, European HEIs are more autonomous in setting fees for non-EU students than for national/EU students, whose fees are often set by either an external authority or not levied at all. For instance, in 8 European systems, HEIs are free to set tuition fees at the Masters level for domestic/EU Masters students, whereas in 10 systems, fees are not collected at all (at Bachelor level fees are not collected in 12 systems and at doctoral level in 12 systems). In 11 systems, universities are allowed to collect fees from domestic/EU Masters students, but external authorities in one way or another influence the process of setting the level of tuition fees (Estermann, Nokkala & Steinel, 2011, p. 34). The following main trends in financial autonomy have been observed in Europe (cf. Estermann, Nokkala & Steinel, 2011, pp. 36–37): •The overall level of financial autonomy across Europe has increased significantly over the last 15–20 years. In 2008, HEIs in 28 countries had a high or medium level of financial autonomy whereas this was the case across only 19 countries in 1995 (Jongbloed et al., 2010, pp. 41–43). 40 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding •Although the level of financial autonomy has increased in all of the aforementio- ned dimensions, this is particularly the case in the use of block grants. On the other hand, block grants have been accompanied by more stringent account- ability measures, some of which have involved reducing the capacity of HEIs to manage funds as they see fit. •In most systems, HEIs are not required to return a surplus to the public funding authority, although their ability to retain surpluses has also been questioned lately as a result of the economic crisis. •More European countries now allow their HEIs to borrow money on the financial markets. •HEIs in many systems have at least formally increased their financial autonomy by gaining ownership of the buildings they occupy. •In most European systems, HEI ability to freely set staff salaries remains restric- ted. •In a number of systems, there has been a noticeable move towards student contributions in the form of tuition fees, although in some systems, fees have also been abolished. Setting the level of fees is often regulated by external authorities, especially in the case of domestic/EU students. Compared to other European countries, Latvia scores high in the area of financial autonomy. Currently, it is 4th among the ranked 28 European higher education systems in EUA’s “University Autonomy Scorecard”. The financial autonomy of higher education institutions is defined in the Law on Higher Education Institutions. Institutions of higher education are financed by the founders. The funds of the State general budget to state-founded institutions are allocated as one-year block grants that are split into broad categories. The methodology of appropriating the state budget funding is specified by the Cabinet of Ministers Regulations No. 994. Latvian universities receive a one-year block grant that is split into broad catego- ries. They may keep a surplus and borrow money, providing they have the approval of an external authority16. That is, institutions of higher education report annually on the implementation of the budget to the Minister for Education and Science and the Minister of the relevant field, or the founder of the institution of higher education. Latvian institutions are also free to set salaries for their staff and tuition fee levels for all student groups. However, the Cabinet of Ministers Regulations No. 836 set the minimum wage rate for academic staff. Institutions are also able to own buildings. The Law on Higher Education Institutions states that the property of HEIs may include land, movable property, immovable property and intellectual property. State institutions of higher education have the right to make use of their property in order to achieve the aims indicated in their statutes. The property of state institu- tions of higher education is administrated separately from state property, which has been transmitted into their possession by the Cabinet of Ministers. 16 In the case of Latvia, this would be the Ministry of Education and Science [authors]. REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 41 Student funding Student funding — that is, student contributions (mainly tuition fees or other fees paid by the students) and student financial support systems (mainly grants, loans) — is clearly among the most controversial issues in the sphere of financing higher education. Questions about fees and loans tend to meet criticism in all countries on the grounds of their expected negative effects on equity. On the other hand, tuition fees and student loans (instead of grants) are also gaining popularity on the grounds of equity in many countries. Tuition fees — combined with adequate and well-targeted student support schemes — generate additional revenues for HEIs, thus enabling increases in participation rates. Tuition fees and loans are also regarded as more equitable by some authors since they transfer part of the instruction costs to those who also will directly benefit from education (Vossensteyn et al., 2013, p. 15). Tuition fees: In general, tuition fee policies can be divided into (1) up-front tuition fees vs. deferred tuition fees; and (2) universal tuition fees or no tuition fees vs. dual track tuition fees (cf. Johnstone & Marcucci, 2010, pp. 104–107)17. 1. Up-front tuition fees are payable at the time of matriculation and fee levels do not depend on a student’s (or his/her family’s) income level. Deferred tuition fees, on the other hand, are often paid upon graduation on an income-contin- gent basis once the graduates’ income has reached a certain agreed-upon threshold. Income-contingent loans are the most frequently-used way of defer- ring the tuition fee to the future. In addition, so-called “graduate tax” arrange- ments might also be considered a variation of the income-contingent loan scheme, whereby students who have attended higher education free of charge are responsible for paying income surtax throughout their working lifetime (Marcucci & Usher, 2012, p. 6). In Europe, at present only in the UK (England, Wales, Northern Ireland) has a deferred tuition fee system in the form of income-contingent loans been implemented (see Country Example 1). 2. In systems applying universal tuition fees or no tuition fees, all students either pay or do not pay tuition fees regardless of their academic merit or income level. However, in a dual track tuition fees system (a.k.a. “publicly subsidized study places” or “state-funded study places”), a certain number of free or very low cost study places are awarded to a selected number of students chosen by the public authority, while other places are available to qualified, but aca- demically lower performing students on a tuition fee-paying basis (Marcucci & Usher, 2012, p. 6). Tuition fee-free study places are generally awarded on the basis of academic merit, although financial need might also be taken into account. In addition to Latvia, other European countries applying the study place system include Hungary, Lithuania and Slovenia, where the majority of students benefit from state-funded places. In Latvia, 55 percent of 1st cycle students and 40 percent of 2nd cycle students pay fees (Eurydice, 2013). 17 Tuition fees are understood here as annual contributions paid by students to cover all or part of tuition costs in higher education. They include also other contributions of students to different admi- nistrative costs (known as “administrative fees” such as entrance fees, registration fees, certification fees) (cf. Estermann & Bennetot Pruvot, 2011, p. 5). 42 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Country example 1: England Background • Following the major transition in higher education funding that has been effective since September 2012, there have been systematic cuts to public funding for higher education institutions. • Underlying 2012 reforms is a two-pronged approach designed to (i) restructure higher education financing around tuition fees, and subsequently (ii) increase the amount of financial support directly available to students, in the form of income-contingent loans and grants. • These changes to the tuition fee and financial support system, have, among them, resulted in a three-fold increase in tuition fees in the year 2012/13. Tuition Fees • Prior to September 2012, fees for students pursuing 1st cycle programs were capped at GBP 3,375. Students enrolled as of September 2012 are required to pay fees ranging from GBP 6,000 (EUR 7,290) to GBP 9,000 (EUR 11,100) (maximum) per academic year, depending on the level set by individual higher education institutions. Part-time students have their fees capped at GBP 6,750 (EUR 8,200). In 2nd cycle programs, fees are unregulated. • Students are not required to pay up front and can apply for a loan to cover the full fee. Repayments are income-contingent, and managed automatically through the UK tax system (“Pay as You Earn-PAYE”) at a rate of 9 percent of income earned above GBP 21,000 (EUR 25,530) per annum. Following a policy change in 2010, the student loan is indexed in line with inflation, with interest set at 3 percent (a change from the previous 1.5 percent). Students can, however, make voluntary payments to repay the loan at any time. • In contrast, students pursuing 2nd cycle programs face widely varying, unregulated fees and, with only some exceptions, do not have access to financial support structures. Financial support for students • In addition to the basic tuition fee loan offered to students, they might also be eligible for a need-based grant of up to GBP 3,354 (EUR 4,080), which is offered to full-time students from household incomes of less than GBP 25,000 (EUR 30,390). In 2012/13, 40 percent of first-cycle applicants were awarded a full grant and 14 percent were awarded a partial grant. • Full-time students are also entitled to apply for a maintenance loan, which is intended to cover living costs for students over a 10-month period for the duration of their course or program. The maximum loan offered is between GBP 4,375 (EUR 5,320) and GBP 7,675 (EUR 9,330), depending on whether the students live in or outside of the family home, and on whether or not they are based in London. The modality of repayment is the same as for the tuition fee loans. In contrast to financial support for tuition fees, which, according to EU laws has to be granted to all students from the EU, support for maintenance is restricted to students from England. • For HEIs that charge more than GBP 6,000 (EUR 7,297), National Scholarship Program (NSP) awards must be offered alongside these pro- grams in order to target students from disadvantaged backgrounds. These awards might take the form of bursaries, fee waivers and “in-kind” support, such as access to personal laptops, etc. In addition to this, many institutions also offer other bursaries and scholarships for stu- dents for students from underrepresented socioeconomic groups. Sources: Eurydice, 2013; Vossensteyn et al., 2013 Although in the majority of European countries students pay tuition fees, there are nevertheless great differences in terms of which students pay, what they receive in return, and how much they pay. European countries fall into two groups when considering tuition fees as an HEI income source (Estermann, Bennetot Pruvot & Claeys-Kulik, 2013, pp. 7–8): • Group 1. Tuition fees typically represent around 5 percent or less of HEIs income in the Nordic countries (Iceland, Norway, Sweden, Finland, Denmark), as well as in Austria, Belgium, the Czech Republic, France, and Germany. Due to legislative restrictions, none of the Nordic countries collects fees from domestic/EU students, although recent changes in national legislation across Sweden, Finland (on an experimental basis), and Denmark mean that they are now able to charge tuition fees from non-EU students. • Group 2. Tuition fees typically represent around 10 percent or more of the HEI average income, and, as such, constitute the most important income source after public funding. Countries in this group are, e.g., Hungary, Ireland, Italy, the Netherlands, Latvia, Poland, Slovakia, Spain, and the United Kingdom. REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 43 The highest maximum fees at Bachelor level (first cycle) reach more than EUR 5,000 per year, e.g., in Ireland, Lithuania, Hungary, Slovenia, the United Kingdom, and Turkey (Eurydice, 2013, p. 4). Many European countries that have previously introduced tuition fees later decided to abolish them either entirely or partly (see, e.g., Country Example 2). For instance, although Hungary introduced tuition fees in 1994–95, it subsequent- ly abolished them in 1998 while introducing a private income-contingent loan scheme. Ireland also abolished its tuition fees in 1995, although reintroduced them in 2008. In Austria tuition fees of EUR 727 per year were put in place in 2001, but abolished again in 2008. Germany has moreover gradually given up on charging tuition fees. After enabling states to introduce tuition fees in 2007, those states that did introduce fees have been abandoning this practice in recent years. Currently, 15 of the 16 German states enable studying to be free of charge (Bavaria decided that fees are not in force as of the winter semester 2013/14). Only in Lower Saxony must students pay fees of up to EUR 1,000 per academic year, although it has decided to abolish them from the next academic year (Vossensteyn et al., 2013, p. 18; Eurydice 2013). Country example 2: Estonia Background • The Estonian higher education system was one of the European systems experiencing public funding cuts of up to 10 percent in the period from 2008 to 2012. While recovering from the global recession, the higher education budget eventually stabilized in 2011 and even increased in 2012. Since research funds have not yet returned to pre-crisis levels, the result has been a greater reliance on European funds. State-funded study places • In Estonia, higher education institutions — both public and private — are eligible to receive public funding from the state commission (“state- commissioned places”). The state commission effectively operates through a contract between the Estonian government and any given higher education institution, whereby the former purchases a certain number of graduates from the respective institution in question. Between 1995 and 2004, approximately 80 percent of public funding for these institutions was provided in the form of study places, which institutions receive in the form of a block grant. • State-funded places are allocated by higher education institutions on the basis of academic merit, whereby students who score above a certain threshold in the entrance examinations qualify for these places at public HEIs. These places are set by the government as a function of labor market demands. Tuition Fees • Prior to academic year 2013/2014, students in Estonia that qualified for a state-funded place did not have to pay fees, whereas all other students had to cover the full costs of their tuition. Both public and private institutions were free to set their own fees; although, in the case of the former, these were capped at an increase of 10 percent each year. • As of 2013/14, however, the government introduced a new fee system, whereby students at public HEIs are able to study without any fees, providing that they achieve at least 30 ECTS per semester and 60 ECTS per year. Anything short of this entitles HEIs to charge the student for each ECTS not obtained, providing that the cost per ECTS does not exceed EUR 50 (EUR 100 for arts, medicine, veterinary, dentistry and EUR 120 for aircraft piloting). Fees for private institutions are not regulated by the government. Financial support for students • In addition to state-funded places, the public sector also contributes to higher education funding in the form of direct student financial support, such as grants and student loans. From 2013/2014, a new, less merit- and more need-oriented study grant system has been implemented, whereby students are assessed on account of either (i) their household income or (ii) on academic merit. These grants – ranging between EUR 750 and EUR 2,200 per academic year for need-based grants and EUR 559 and EUR 841 per academic year for merit-based grants – are offered to approximately 17 percent of all students enrolled in state-funded places at HEIs, providing they are either Estonian citizens or temporary residents whose stay does not exceed the designated period of study. Tax benefits for parents are also available, depending on the status of the student concerned. • Alongside grants, full-time students are also eligible to apply for state-guaranteed loans, whose maximum amount cannot exceed EUR 1,920 per academic year. Sources: OECD, 2007; EUA, 2012; Eurydice, 2013 44 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Student financial support: Many European countries mix and match different types of grants (universal, merit-based, need-based) and loans (commercial or publicly supported, mortgage-style, income-contingent), and so the relative importance of different types of grants and loans varies significantly between the systems. According to the Eurydice review (2011, pp. 61–62), grants schemes are rarely universal, i.e., apply to all students in a given system (only in Denmark and Sweden), and are provided on the basis of financial need or academic merit, or a combination of both. Instead, need-based grants are most frequently used in European higher education systems. In fact, among all countries offering grants, only Iceland and Montenegro do not apply need-based grants. Although merit-based grants appear less often in the higher education systems, 20 out of 39 European systems still apply some sort of merit-based schemes. However, it should be noted that offering grants solely on the basis of academic merit raises several equity concerns. It is quite unlikely that academically-gifted students with relative financial ease would be dissuaded from attending higher education on the exclusive basis of not having a merit-based grant. Grants are, therefore, likely to serve as an effective policy instrument to promote equity of access if they are used primarily to facilitate the access of students who are simul- taneously academically-able and financially-needy. In countries where grants (or state-funded places) conferred exclusively on a merit-basis are common (e.g., Eastern European countries), a reliance on pure academic merit is seen as the only fair and proper criterion for student selection and financial support. However, merit is hardly ever “pure”, i.e., completely independent from certain socio-eco- nomic characteristics. It is quite well known that academic merit at the point of entry into higher education often depends on prior educational opportunities, which again, are often closely associated with the socioeconomic background of the student (Santiago et al., 2008, p. 223). A mixture of both need- and merit-based criteria for grants is present in some sys- tems such as Belgium (Flemish Community), Greece, and Italy. The countries that provide students with the highest amounts of need-based grants — with a maxi- mum in excess of EUR 5,000 per academic year — are Belgium (Flemish Com- munity), Denmark, Ireland, Spain, Italy, Austria, Portugal, Finland, UK (Wales), and Switzerland. In Germany, Liechtenstein, and Norway, there is a mixed system of grants and loans where part of the amount is given as a grant and part of it has to be paid back as a loan (Eurydice, 2013, p. 5). Table 4 Proportion of first Minority receives Majority receives and second-cycle students GRANTS systems GRANTS systems paying fees and receiving Minority pays FEES systems 5 7 grants in academic year 2009/10 in 31 European HE Majority pays FEES systems 14 4 Source: Eurydice, 2011, p. 45 Table 4 above collates information from two key characteristics related to student funding. The first is whether or not the majority of students pay fees, whilst the second is whether or not the majority of students receive support in the form of grants. By examining these two characteristics together, four main categories of systems seem to emerge across the European landscape. First, there are systems where the majority of students pay fees and also receive grants. There are four national systems that occupy this category: Cyprus, Netherlands, Slovakia, and the UK (Wales and Northern Ireland). Secondly, a category of systems that REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 45 is far more numerously populated refers to occasions where a majority of students pay fees, while a minority receives grants. Altogether there are 14 systems cate- gorized in this way, including, e.g., Ireland, France, Romania, Bulgaria, Belgium, and Spain. The third model refers to instances where a minority of students pays fees, while a majority receives grants. This model is in effect in seven European systems: Denmark, Malta, Finland, Sweden, UK (Scotland), Liechtenstein, and Norway. The final, fourth model comprises systems where only a minority of students pay fees and receive grants. This group consists of five systems: Germa- ny, Greece, Lithuania, Hungary, and Austria (Eurydice, 2011, pp. 45–47). Publically-supported student loan systems exist in approximately two-thirds of European countries while in 11 national systems student financial aid is based exclusively on grants. In 10 systems, loans are universal: that is, they are made available to all students (e.g., Denmark, Lithuania, the Netherlands, Slovakia, Finland). One significant difference between grants and loans is that need-based criteria are relevant in all except in two systems for grant allocation, but only con- sidered in two loan systems (the Walloon Community of Belgium and Poland) (Eurydice, 2011, pp. 52–54). To summarize: •Student funding continues to be among the most controversial issues in the sphere of financing higher education in Europe. Political debates are quite often more ideological than pragmatic. Due to the complexities related to tuition fees (or absence of fees) and student support, more comprehensive and multi- dimensional analysis are often needed in determining various equity aspects of student funding arrangements. •There is no general European trend. Some European countries that have pre- viously introduced tuition fees, have later decided to abolish them either entirely or partly. At the same time, other European countries have decided to increase the share of private investment by allowing public HEIs to introduce fees or charge higher fees while at the same time promoting equity of access by restructuring their student support systems. •Need-based grants are the most frequently used modes of student support across European higher education systems. Latvia applies a dual track tuition fee system with — in some cases — relatively high fees and relatively many fee-paying students18. The Latvian higher education system offers mainly merit-based support in the form of state funded study places, and relies more on government-subsidized, mortgage-style loans offered by com- mercial banks, rather than grants. Overview of European trends and position of Latvia Exploring the main European trends in higher education financing helps to posi- ` -vis these trends. Nevertheless, it should be tion Latvian financing model vis-a 18 For details see Chapter 4. 46 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding emphasised that European trends are not the main criteria to evaluate the strengths and weaknesses of Latvian financing model. What seems to be popular or good in Europe does not automatically mean that it would be applicable or good for Latvian higher education financing. European funding structures and models are tightly bound to national features (society, economy, demographics, etc.) of different countries, and it is reasonable to assume Latvia differs from these features with many respects. Drawing from the previous sections of this chapter and Appendix 1, the following ` -vis European Tables (Tables 5 to 9) offer an overview of Latvia’s position vis-a trends: Table 5 Models of public funding — European trends and Latvia Models of public funding European trend Current situation in Latvia Position of Latvia Structure of funding model • Three typical pillars for • Latvia applies only the pillar of Inconsistent with European trend allocating public funding “basic funding” in allocation of for HEIs can be found from most core public funding to HEIs of the European countries: • Performance contracts are (1) basic funding; applied between HEIs and MoES (2) performance funding; and (3) innovation-/profile- oriented funding • Performance contracts / target agreements are in use in 15 out of 22 European Basic funding • Basic funding: • Latvia applies formula funding Inconsistent / consistent and performance-based Formula-based approaches mainly with input-oriented with European trend funding: modalities with demand-based indicators (funded study places, input-oriented indicators research equipment) are substituting incremental • The overall public budget of funding with historical the HEIs remains largely emphasis (mixed approach constant and develops is common) incrementally on a historical • Performance-based funding: basis (rather than demand) Majority of systems consider • Current funding model does their funding allocation not offer significant incentives mechanisms at least partially for greater performance- and performance-based output-orientation • In 2008, 24 European systems considered output-related drivers important or extremely important (in 1995: 6 systems) Innovation-/profile-oriented • Innovation-/profile-oriented • The innovation-/profile-oriented Inconsistent with European funding: modalities funding is used more frequently funding component in Latvia trend to support national policy is currently composed of priorities and development of a number of different types of institutional profiles smaller and larger third-party • The relevance and weight of funding streams (including the innovation-/profile-oriented EU Structural Funds) but not funding component is likely included in the system of state to increase; especially funding in the form of competitive and targeted funding REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 47 Table 6 Resource diversification — European trends and Latvia Resource diversification European trend Current situation in Latvia Position of Latvia Public / private funding • Private expenditure on HEIs • Private funds (tuition) Consistent with / ahead of diversity has increased in 16 out of accounted total 23% European trend the 19 European OECD countries and “other funds” (excluding between 2000 and 2010 international/EU funding) • EU21 average of private 20% of Latvian HEI revenue expenditure on HEIs was 23% in 2012 in 2010 (Source: MoES, 2014) Diversity of sources • Funding of European public HEIs • Latvian HEIs funding structure Inconsistent with / ahead of in 2008: on average (2012): European trend – 67% from public sources – 36% state budget funding through operational grants – 23% tuition fees (in 1995: 78%) – 41% “other sources” – 12% from private (out of which 21% were households as tuition fees from international funding, (in 1995: 8%) mainly EU Structural Funds) – 21% as third-party funds (Source: MoES, 2014) (in 1995: 15%) • On average, EU funding ranges from 3–4% (Estermann & Bennetot Pruvot, 2011) to over 10% (Estermann, Bennetot Pruvot & Claeys-Kulik, 2013) of the total income of HEIs Table 7 Financial autonomy – European trends and Latvia Financial autonomy European trend Current situation in Latvia Position of Latvia HEIs freedom in internal • Block grants are used • One-year block grant split Consistent with European trend allocation of public funding in 25 systems, line-item budgets into sub-categories in 3 systems • No restrictions on the internal allocation of the block grant in 14 systems • Some restrictions for internal allocations of the block grant in 11 systems HEIs ability to keep a surplus • HEIs are able to keep a surplus • State funded HEIs can keep Consistent with European trend in 27 systems, not able to keep a surplus with an approval of in 4 systems external authority • No restrictions in keeping a surplus in 15 systems • Some restrictions in keeping a surplus in 12 systems HEIs ability to borrow money • HEIs are able to borrow money • Latvian HEIs are able borrow Consistent with European trend from financial markets money with an approval of in 23 systems, not able external authority to borrow in 7 systems • No restrictions for borrowing in 7 systems • Some restrictions for borrowing in 16 systems 48 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Financial autonomy European trend Current situation in Latvia Position of Latvia HEIs ability to own their • HEIs are able to own their • Latvian HEIs own their buildings Consistent with / ahead of buildings buildings in 22 systems, not able • Latvian HEIs can sell their European trend to own in 6 systems buildings (restrictions apply • No restrictions in selling assets in the case of State property) in 8 systems • Some restrictions in selling assets in 14 systems HEIs ability to set the salaries • HEIs are not able to set salaries • Latvian HEis are free to set Ahead of European trend of their staff freely in 28 systems, salaries the salaries of their staff can be set freely in 5 systems (above the minimum wage) HEIs ability to set the level of • In most European systems, HEIs • Latvian HEIs are able to set Ahead of European trend tuition fees ability to set the level of tuition their fees at all levels fees is restricted by the external authority, especially in the case of domestic/EU students Overview on financial • The overall level of financial • HEIs have a high level of Ahead of European trend autonomy autonomy across Europe financial autonomy, Latvia has increased significantly was ranked 4th position in EUA’s over the last 15–20 years “University Autonomy Scorecard” Table 8 Student funding – European trends and Latvia Student funding European trend Current situation in Latvia Position of Latvia Tuition fees / fees • A large diversity of fee • Latvia applies a dual track No clear European trend systems, no clear European tuition fee system trend • 49% of all students • Majority of students pay fees (full-time and part-time) pay in 28 systems, minority of fees (37% of full-time and students pay fees in 13 systems 97% of part-time students) (2009/10) (Source: MoES, 2013a) • During the past years, some • Compared to many other systems have abolished fees, European systems, a relatively whereas some systems have high fees are charged in Latvian introduced fees or raised HEIs the level of fees Student support • A large diversity of student • Latvian higher education system No clear European trend support systems, no clear offers mainly merit-based European trend support in the form of state • Need-based grants are most funded study places, frequently used in European and relies more on government- higher education systems, subsidized, mortgage-style but still 20 out of 39 European loans offered by commercial systems still apply also banks, rather than grants merit-based schemes • Publically-supported student loan systems exist in 2/3 of European countries REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 49 European trend Position of Latvia Table 9 European trends and position of Latvia Models of public funding Inconsistent with European trend — overview Resource diversification Mixed Financial autonomy Ahead of European trend Student support No clear European trend 2.2 What do these trends mean for the further analysis? In the previous sections, European developments have been described. Although sometimes there are clear tendencies, at other times, there are discernible differences. The European trends will be further used in two ways: •They are the starting point for criteria of assessment, which will be defined in Chapter 4. Some of the trends are clearly seen as beneficial for higher educa- tion, such as the trend towards increased autonomy, which is seen as a positive development, since it allows HEIs to adapt flexibly to changing environments while creating adequate incentive structures. The three-pillar model is also a good standard and referent point for public funding models, as it balances different functions of funding. The clear tendency towards performance-orienta- tion, ex post and ex ante, is also seen as a positive development. Diversification has different implications: on the one hand, it is positive, since it contributes towards the improvement of financial situation and institutional risk spreading; on the other, it might impose severe financial risks on HEIs. •Tracing European developments also generates ideas for how Latvia might reform the system. In the final proposal/recommendation, European benchmarks will be taken into account; since there is both no need to repeat mistakes made in other countries (for instance, political polarization on the tuition fee issue), and no need to reinvent the wheel if a good solution has been successfully deployed in another context that might also correspond to the Latvian profile. 2.3 Higher education as public and private good From an economic perspective, HEIs produce outputs that can be categorized as “public” or “private” goods. Using a standard economic definition, public goods (e.g., products, services) are goods that are non-excludable and non- rivalrous. Non-excludability means that a good cannot be provided exclusively to only some individuals in a way that other individuals could be excluded from consuming the same good. This therefore implies that consumption by some indi- viduals does not diminish the consumption levels of others of the same good. In the case of private goods, the situation is the opposite; individuals can be excluded from consuming the service or product if they are not willing or able to pay for it (i.e., a good is excludable), and consumption of a service or product reduces the possibilities of others to consume the same good or service (i.e., 50 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding a good is rivalrous). In addition, public goods create spillover effects. If they are being offered, people who do not purchase the goods nevertheless enjoy their benefits, e.g., dikes that are used to protect from water floods, etc. A public good has to be provided by the state and funded by taxes, as private markets would not lead to a sufficient provision of the good. A private good does not require state intervention and should be provided by the market. The public vs. private good argument regarding higher education is an explana- tion for the diverse tuition fee developments in Europe. In many European coun- tries, politicians tend to “buy” either one of the two positions, often leading to a politically polarized debate where the two positions are opposed in contradic- tion, leading either to political reform blockades or to an unreliable sequence of introducing and later abolishing tuition fees. This paper proposes economic analysis and rational arguments to overcome the political impasse. Economists have been clear that there are private benefits to be gained from higher education, meaning that there is rivalry and excludability. But, they are also convinced that there are public benefits of higher education (see Table 10). Public benefits refer to positive externalities of the good, i.e., bene- fits for society not taken into account in the individual cost-benefit-analysis of the student (hence justifying public funding)19. Table 10 Potential private and public benefits from higher education Benefits from higher education Private Public Economic Higher salaries Greater national productivity and development Employment Reduced reliance on public support Higher savings Increased consumption Improved working conditions Increased potential for transformation from low-skill industrial to knowledge-based economy Personal and professional mobility Social Improved quality of life Nation-building and development of leadership Better decision-making skills Democratic participation; increased consensus; perception that society is based on fairness and opportunity for all citizens Improved personal status Social mobility Increased educational opportunities Greater social cohesion and reduced crime rates Healthier lifestyle and higher life expectancy Improved health Improved primary and secondary education Source: Steier, 2003, p. 167 Higher education has elements of both private and public goods. People can be excluded from higher education, from a particular institution, from a particular program, or from a particular teacher. This exclusion can be based, for example, 19 Even different aspects of the same function can be both, rivalrous and non-rivalrous, as well as excludable and non-excludable. For instance, basic research published freely in the public domain is not excludable, or at least not secretive, while commercial research and development activity is likely to be subject to both rivalry and excludability (Marginson, 2007, p. 312). REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 51 on differences in academic merit; i.e., given that an individual has to meet certain conditions in order to have access to, and to graduate from, higher education institutions. However, nobody can be excluded from the higher productivity graduates exhibit at the labor market and the advancements made through their creativity and application of skills after successfully completing quality higher edu- cation. There is also wide agreement that higher education creates both public and private benefits as well as costs, and that those who benefit from higher education should also contribute to its costs (equity principle). Higher education creates multiple social and economic public benefits thereby justifying significant public investments in higher education. However, individuals (mainly graduates) also receive significant private economic and social benefits, making the recom- mendation that they bear directly at least part of the costs of their training, both efficient and equitable. Economic rationales provide no arguments for 100 percent public or private funding. Differences in opinion nevertheless arise when determining what the “right” balance might be between benefits and costs and on how to measure up the benefits and costs (especially in terms of money). In any case, several scholars consider the full public-funding model of higher education as inequitable and regressive, based on the fact that higher education students are disproportio- nately from middle- and higher-income families (e.g., Barr, 2004; Bevc & Uršiè, 2008; Johnstone & Marcucci, 2010)20. OECD’s statistical yearbook Education at a Glance provides calculations annually on the public and private costs and benefits of higher education. According to OECD (2013, p. 135), it is very difficult to generate correct and comprehensive estimates of public and private returns, meaning that rates of return must always be interpreted with caution. Nevertheless, large discrepancies between private and public returns “should prompt additional analysis to assess whether govern- ment tax schemes or subsidies are strongly distortionary” (ibid., p. 135). Based on OECD calculations, average net private returns in EU21 countries slightly exceed public returns (ibid., pp. 144–147). However, in some specific countries (Estonia, Turkey, Poland, Slovakia) private returns are considerably higher than public returns. On the other hand, e.g. in Belgium, Greece and Italy public returns are moderately higher than the private ones. This leads to the following conclusions: •Higher education is a “mixed good” creating both public and private costs and benefits. •Determining the exact public and private costs and benefits is difficult from a conceptual and methodological perspective. However, one-sided financing models emphasizing only public or only private dimensions (full public or full private funding) are neither adequate nor equitable. 20 For instance, Hölttä, Jansson and Kivistö (2010) note problems related to equity in Finland where higher education has been free of charge for all students for several decades. Despite the fact that equal opportunity and equity have been the driving forces in higher education policy now for four decades, the middle and upper classes are still year after year clearly overrepresented in the cohorts obtaining higher education — especially in those disciplinary fields and programs that yield the highest private rates of return (Medicine, Law, Business). 52 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding •Since the real balance between private and public costs and benefits is unclear, there is a wide range of potential arrangements between private and public funding that might be considered when developing an appropriate financing model. However, neither a pure market model nor a 100 percent free higher edu- cation model is within this range. In the case of Latvia, the first conclusion would be that economic analysis provides no basis for the polarized political discussions of the previous years, favoring either the argument of the pure private or public good. Acknowledging economic argu- ments might help in avoiding political reform blockades. Secondly, if we take the mixed good approach to the individual level, the dual track model seems to be problematic. Each student benefits from private returns and contributes to positive externalities. The economic rationale would instead suggest a certain cost-sharing for each student rather than an overall cost-sharing for all students combined. Third, the major question for Latvia will be where to move from the current situa- tion: towards greater private or public funding shares (or might the current situation be adequate)? The status quo section analysis where public and private funding in Latvia stand in comparison to other European countries, and concludes that, at present, total societal investment in higher education is too low due to both limited public funding for HE and R&D, as well as limited private contributions, particularly in the R&D sector. Private contributions through tuition fees tend to typically come from students who cannot attend HE on subsidized study places, and have to pay the full costs. Analysis shows that it is in particular students from more advantageous backgrounds that profit from the subsidized (tuition-free) study places. REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 53 3 Methodology of analysis: Criteria for Good Funding Models 3.1 Methodology to assess strengths and weaknesses At first glance, the assessment of strengths and weaknesses of higher education funding appears easy: review the performance of the Latvian higher education sector, evaluate the ways HEIs are well- or under-performing, and relate the per- formance to the underlying funding system. This sounds simple, however, there is a major analytical problem: performance of higher education is not only deter- mined by the level and the structures of funding, but also by many other factors, such as human resource policies, systems of quality assurance, the Bologna pro- cess, the governance structures, etc. Performance is a result of various factors, and it is highly difficult to isolate the influence of funding from all other factors. In order to identify the effects of the funding system on performance of the sector, two approaches will be employed as part of this project: •In the following analysis (component 1), the current funding model will be ana- lyzed against criteria for good funding models that were derived from European experiences. The analysis of European experiences leads to a catalogue of crite- ria for which the assumption could be made “if the criterion X is fulfilled then we could expect potential effects on performance in area Y”. •In a subsequent component of this project, Latvia’s funding model will be ana- lyzed to assess its alignment with national policy objectives for higher education. From current strategic documents, a catalogue of strategic objectives will be derived and an analysis will show if the current elements of the funding system are consistent, neutral or inconsistent with the objectives. This will be done in component 2 of this project. 54 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding 3.2 Sources for the assessment criteria In order to analyze the strengths and weaknesses of the current higher education funding system in Latvia and recommend adequate reform strategies, one must start with clear normative criteria representing the features of a “good” higher edu- cation funding model. In other words, any recommendations should be based on and justified by mutually agreed-to criteria. The criteria will then be transformed into tools for empirical analysis, especially in the interview guidelines. The responsibility for identifying the criteria is first assumed by the World Bank team, and then subject to a feedback cycle with the MoES to ensure they are con- sistent with the intentions. The criteria are derived from three different sources: •International experiences and standards regarding the features of “good” funding models; •Feedback and approval from the MoES; and •Stakeholder assessment of importance of the different criteria as obtained through interviews. A major source for the following criteria is the analysis of European trends in Chap- ter 3, as the following two examples could illustrate: •The European trend towards financial autonomy with lump sums, the right to keep surpluses, ownership of buildings, etc. is regarded as good practice and included in the set of criteria; and •The practice of the “three-pillar models” of state funding (balancing stability, performance-orientation, ex post and ex ante incentives) is also used to define the criteria below. Discussions with stakeholders revealed additional aspects, for instance, the impor- tance to legitimize budgets by transparent calculations or the question of whether the performance-orientation is feasible in terms of availability of performance indica- tors. From the various sources, we identified six major criteria to assess the financing system of Latvian higher education: •Strategic orientation; •Incentive orientation; •Sustainability; •Legitimization; •Autonomy and flexibility; and •Practical feasibility. These will now be explained in more detail and broken down into a checklist that will be applied to analyze the Latvian higher education funding system. Some of the criteria refer both to institutional funding of universities and individual funding of students, while others are only relevant in the context of institutional funding (see Table 6). The criteria will be explicitly used to identify strengths and weaknes- ses of the Latvian funding system in Chapter 4. REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 55 3.3 Explanation of the assessment criteria Strategic orientation Promote national strategies. Higher education financing has to promote national strategies and objectives. If a country, for instance, wants to focus on the interna- tionalization of higher education, then institutions should be financially rewarded if they contribute to this objective. Similarly, if a country wants to consolidate its university sector, then financial structures should not lead to a fragmentation of funds. If equal access is the top goal, then financial measures to attain this are most important. In short, funding should serve the strategies. For individual student funding, access and equity are major issues. Promote institutional profiles. It is not, however, only about national strategies. Within the framework of national goals, a higher education system has to develop institutional diversity. The differentiation and specification of institutional profiles should also be promoted by funding. The realization of institutional objectives should be related to financial support. A separate note (in the next phase of the project) will discuss specifically the ` -vis articulated strategic objectives. ‘strategic fit’ of the current funding model vis-a For this reason, this paper only analyzes the strategic criteria in an abstract way, investigating whether there are mechanisms able to link strategies and funding together, rather than interrogating specific strategic objectives in Latvia. Incentive orientation Create performance rewards and sanctions. Funding should have links to institu- tional performance; high performance should be rewarded, and sub-par perfor- mance should be sanctioned. The measurement of performance should follow political objectives and academic standards. Performance orientation induces financial flexibility and supports change processes financially. It is also important that the financial incentives reach the individual actors in teaching and research; hence, the reward and sanction system of the state should somehow find equiva- lents inside the higher education institutions. Regarding individual funding, there should be incentives for the efficient completion of one’s studies. Create a competitive environment. Performance-oriented funding is meant to indu- ce healthy competition among universities. Provide clear, non-fragmented incentives. From research on the effects of perfor- mance-oriented funding, we know that it is important to send clear signals with incentive systems. This is promoted by the simplicity and concentration of funding models instead of creating overly complex systems with fragmented effects. Each component of the incentive system and how performance against it will be measured must be clear and mutually understood by the institutions and the appropriate government agency. Avoid undesired side effects. It could happen that institutions react to incentive systems in a way that leads to undesired effects. For instance, contemporary 56 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding debate focuses on whether formula-funding systems that reward the number of graduates might increase the number of graduates, but only at the expense of quality, through “grade inflation”. Funding systems should therefore be analyzed in terms of these potentially undesirable side effects to determine whether there are measures that can expose and mitigate them. Balance ex post and ex ante performance orientation. Funding could set perfor- mance incentives in two ways: money can either be provided to support planned future performance (ex ante reward) or else past performance is measured and linked to funding (ex post reward). The instruments usually linked to ex ante per- formance funding are target agreements, while the typical ex post instrument is formula funding (leading to the conclusion that these two instrumental options should be combined). Sustainability Stability. Freedom of teaching and research needs a stable financial basis. Funding models, especially in the case of public funding, should, to a certain extent, include base funding components which they build upon incrementally. This would ensure a basic ability of the institutions to fulfill their academic tasks. Base funding could, for instance, be linked to study places or staff numbers. Guarantee continuity in funding mechanisms. A funding model is able to generate the desired effects if its features are reliable over an extended period of time. If the character of performance incentives is to permanently change, then the institu- tions would expect changes and not adapt to the incentives. If there is not suffi- cient time after a change in funding models before the next change is made, then there is little chance to work with the system productively. Continuity also applies to individual student funding. Allow long-term planning. Universities have to engage in multi-period strategic planning in order to develop their institutional profiles. Long-term planning becomes feasible if there are also elements of multi-period financial stability. Developments in teaching and research are furthered by the ability to predict and calculate future budgets and to make plans on that basis. Take into account cost differences. There are cost differences that need to be con- sidered, especially between different academic fields. For instance, it is substan- tially more expensive to “produce” a graduate in engineering than in business studies. Basic funding should take into account these differentiated cost levels. Promote risk spreading and management. Higher education institutions generate income from a variety of financial sources. The diversification of sources could lead to effective risk spreading instead of, for example, over reliance on a single major sponsor or revenue stream. A funding system should promote diversifica- tion and create incentives for the institutions to engage in financial risk manage- ment. Revealing financial risks and developing strategies for risk mitigation could also support financial stability. REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 57 Legitimization Provide unambiguous and balanced funding structures. The funding mechanisms should be understood by all relevant decision-makers in the higher education system. Definitions and indicators should be clear, and the components of the funding system should not include contradictions; in other words, different incentives should lead in opposing directions. The clear orientation promotes legitimacy of the system, as it will appear linked to clear messages and policy objectives. A further, crucial criterion for the legitimacy of funding systems is “keeping the balance” in different respects. Conflicting objectives in funding systems should be balanced; for instance, in an indicator-based funding element there should not be too few indicators (as this could be seen as unfair) but also not too many indicators (as this could lead to fragmented incentives). In a typical “three-pillar model” (see also Chapter 2) there should be a legitimate balance between basic funding, performance-oriented funding, and innovation-oriented funding of future developments. Finally, performance-driven state funding models need a balance between automatic, indicator-based allocations and discretionary funding, including negotiations about specific funds. Make funding transparent. Understandable and predictable funding is not possible without transparency of the funding mechanisms. Allocation models should explain budgets and why one institution receives more or less funding than others. If discretionary funding decisions are made, everyone should know how these decisions are made, who decides, and based on which criteria. Accountability standards should include instruments to make the balance sheets of institutions and all kinds of funding streams transparent. Support the perception of fairness. Funding systems should lead to a perception of fairness (with the above mentioned transparency as precondition). Fairness depends on the perceptions actors have about the criteria. In the case of higher education funding, fairness typically implies that the different situations of institutions have been taken into account when allocating funds (for instance, differences in profiles/subject structures) and that funding mechanisms should not merely perpetuate the historical distribution of funds among institutions, especially if these distributions were based on decisions made a long time ago with no connection to current circumstances. Fairness is also a major issue in the context of individual student funding. Autonomy and flexibility Allocate lump-sums. Financial autonomy means that higher education institutions should be able to spend their money flexibly and according to their own deci- sions. Full autonomy includes the lack of line-item allocations, the ability to build financial reserves and borrow money in the capital market, the financial responsi- bility for infrastructure and buildings, and the freedom to decide on salary issues. Public funds should come as a lump-sum, and the institutions should have all rights to generate private funds. From the perspective of individual student funding, autonomy for students’ decisions should be guaranteed. Guarantee academic freedom. Funding mechanisms must not restrict academic freedom. Public and private funding of teaching has to be without influence on 58 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding the specific content of teaching (that said, a government could prioritize a number of students in different fields or universities, and industry could decide to develop a study program together to train staff academically). Research funding should not determine the outcomes of research (but of course there could, for instance, be target agreements related to research funding explicitly identifying publications and dissemination activities as desired outcomes)21. Implement an adequate level of regulation. Financial autonomy should not lead to a situation without any financial rules. Rules should help prevent the misuse of funds and could also set common standards. Regulation has to create transpa- rency and foster trust but should not restrict the necessary flexibility. Guarantee autonomy of internal resource allocation. In the previous criterion on incentive orientation, we argued that incentives of state funding models should be perpetuated inside the university to reach the individual researcher or teacher. The design of these internal allocation models, however, should be determined by the university and unregulated by the state. This allows higher education institu- tions to link incentive mechanisms to their own specific profiles and strategic priorities. Promote accessibility of diverse income sources. Regulation should allow access- ibility to all kinds of funding sources. State universities should be allowed to acquire all kinds of resources. This could, for instance, imply the right to establish private commercial enterprises by public universities. Another relevant issue is the promotion of philanthropy through (tax) legislation. Accessibility to various sources is also an issue for individual student funding. Practical feasibility Use available data. Funding models might require new or enhanced data; for instance, new performance indicators may need to be gathered if performance- oriented elements are introduced or new cost data may be needed to support a field-oriented differentiation of funding. Such models could only be introduced if the necessary data is available. Formula funding could be difficult to implement if no data is available to adequately represent the political objectives included in the formula. If, for example, there are no country-wide statistics on outgoing or incoming students, it will be difficult to integrate student mobility in formula funding, representing the goal of internationalization. There are also examples in the context of student funding: if a country has problems generating income data, this has an effect on the construction of student loan access or repayment criteria. Ensure administrative efficiency. The development and administration of allocation models is costly. For instance, the introduction of target agreements can lead to a cost-intensive process of negotiations. Additionally, the development and main- tenance of required data could demand intensive data collection efforts. Efficiency (or one could also say the minimization of transaction costs) of funding tools is an important criterion that has to be balanced against other priorities; for example, 21 In this context, it is interesting to note that the EUA scorecard ranks Latvia 4th in financial autonomy but 20th in academic autonomy (Estermann, T., Nokkala, T. And Steinel, M., 2011). REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 59 the level of precision employed to measure progress towards political objectives must be balanced with the efficiency of developing and monitoring the indi- cator(s). Respect methodological standards. Modern funding instruments, such as perfor- mance-oriented funding of target agreements, have been implemented in many countries in recent years. This has led to a backlog of experience and lessons learned from various methodologies. For target agreements, one could set standards for templates to be used, funding mechanisms, reporting duties, etc. The developments of Latvian models should take into account methodological standards for institutional and individual student funding. Ensure coherence with funding levels and steering approaches. The reform of funding models should not be undertaken independent of the broader environ- ment. This means that, on the one hand, the combination of all instruments of governance in the higher education sector should result in a coherent approach to steering the system. Funding, quality assurance, student access, regulations, etc. have to be harmonized and lead to a clear idea of steering. On the other hand, the funding model must also be realistic about the revenue levels that could be generated. A differentiated model of resource diversification would make little sense if the government is the only realistic funding source. 3.4 Overview on the assessment criteria applied Table 11 provided below summarizes the intentions of each assessment criterion. In subsequent stages of the engagement, these criteria were confirmed with representatives of the MoES and discussed in interviews with representative stakeholders of Latvia’s higher education system. In Chapter 4, these criteria are applied to Latvia’s current higher education funding model to determine its strengths and weaknesses. Table 11 Overview assessment Strategic orientation Promote national strategies criteria Promote institutional profiles * Only relevant for institution, not for student funding. Create performance rewards and sanctions Create a competitive environment Incentive orientation Provide clear, non-fragmented incentives Avoid undesired effects Balance ex post and ex ante performance orientation* Sustainability Stability* Guarantee continuity in funding mechanisms Allow long-term planning* Take into account cost differences Promote risk-spreading and management* 60 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Legitimization Provide unambiguous and balanced funding structures Make funding transparent Support the perception of fairness Allocate lump sums* Guarantee academic freedom Autonomy and freedom Implement an adequate level of regulation Guarantee autonomy of internal resource allocation* Promote accessibility of diverse income sources* Practical feasibility Use available data Ensure administrative efficiency Respect methodological standards Ensure coherence with funding levels and steering approaches REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 61 4 Strengths and Weaknesses of Latvia’s Current Funding Model As mentioned before, the four elements of the funding system to be analyzed are state funding (teaching and research), diversification of financial resources, finan- cial autonomy, and student funding. This chapter analyzing the strengths and weaknesses of the system will follow the same four-element structure used both for the European trends in Chapter 2 and the description of the Latvia’s current funding model in Appendix 1. We will begin by presenting a general overview of the strengths and weaknesses of the Latvian higher education funding system, sorted by the list of criteria in Table 11, including a context analysis. After this we will provide a more detailed analysis of the specific elements of the funding system. In this latter part, each single strength/weakness is presented in the following way: (i) the issue is first briefly mentioned in a box, as well as the assessment criteria from Table 11 in Chapter 3 (section 3.4) that applies is mentioned in brackets; (ii) then a text is added to explain the assessment as a strength or weakness; and (iii) an assumption about potential performance effects is made. At the end of the analysis of each of the four elements of the funding model, a brief overall assessment is generated, which already indicate potential orienta- tions for reforms at this early stage. In quite a number of cases, the same issue could be considered both a strength and a weakness, depending on the criteria established. When it comes to design- ing proposals for reform at a later stage, we will need to make trade-offs in order to try and achieve the right balance. Before the four elements of the funding system are analyzed, section 4.2 provides an overview and analysis of the “political climate for change” in the Latvian higher education system, as a positive climate for change could be seen as a precondi- tion for all the detailed needs to realize change. Section 4.1 starts off with a short tabular summary of the main strengths and weaknesses observed. 62 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding 4.1 General assessment of the higher education funding system and its context The following table provides an overview of the strengths and weaknesses of the Latvian higher education and research funding system. It distinguishes be- tween the context of the funding system and the features of the funding system itself structured by the main criteria for assessment as presented in Chapter 3. Table 12 outlines major issues that are subsequently addressed in greater detail in the following analysis. Table 12 Overview of strengths Strengths Weaknesses and weaknesses Context: Strategic orientation Source: Authors • Diverse system of HE (many institutions, niche • Decreasing population players, different profiles, public-private) • Apparently low political priority given to HE • Substantial number of private HEIs and science (regarding low spending on HE • Start-up of quality assurance for study programs and R&D) and research institutes • No clear higher education and R&D strategies • Research institutes with more mass and focus and priorities • High percentage of young people who qualify • Inconsistent policy measures and political reform for HE blockade because of polarized discussions • Strong autonomous position of HEIs (public vs. private good) • Principle openness towards mobility — many • Many relatively small study programs students interested in study abroad • High proportion of drop-outs • High employment rate and high rate of • Limited opportunities for excellent students return on HE (graduates earn on average • Tendency to study abroad EUR 1,000 per month; 40 percent of employees • Opaque HR structures in HE, with opportunities only the minimum wage of EUR 285 per month) to have more than one job • A functioning data monitoring system • High teaching loads for staff, little time for (including performance and financial data) research • High adaptability of system and HEIs • Quality assurance for teaching and research only demonstrated in times of economic crisis in start-up phase • MoES and line ministries are multiple voices for • Low return rates of students who study abroad the interests of HEIs • Many graduates seeking employment abroad • Low attention for practice oriented competencies • Limited (project) management capacity in HEIs • No annual (financial) report of HEIs • No clear way to consolidation vs. competition yet Financing: Incentive orientation • Study places allow national planning according to • One-pillar model of state funding instead of labor market needs several pillars with balanced functions • Study places offered on basis of merit including • No real performance orientation in state funding rotation possibilities stimulate competition (hence also weak links to national or institutional • EU structural funds for research allocated strategies) with some form of competition • No funding for innovative initiatives • Attract many fee paying students (willingness • No clear approach to the role of state money to pay/additional resources for HEIs) for private HEIs • Competition for subsidized study places • No funding options for research-related and scholarships developments such as post-docs, knowledge • Existence of performance contracts between transfer activities etc. HEIs and ministry REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 63 Strengths Weaknesses Financing: Sustainability • Study places funding provides cost-oriented • Underfunding of the HE and research system stability in the system, but with a “money follows compared to most other European countries student” element and to own governmental objectives • Availability of substantial EU structural funds for • Promised funding increase not yet effectuated HE and R&D (reason for survival in economic • Lower funding tariffs for HE students compared to crisis) primary and secondary education • Cost basis for subsidized study places outdated Financing: Legitimization • Availability of student loans for many students • Many competing needs in case of budget with attractive repayment conditions increases (more quality in teaching, PhD schools, • Full-fee paying option creates access post-doc careers, triple helix, etc.) opportunities • Opaqueness and subjectivity in allocation of subsidized study places, planning problems through yearly interventions • Subsidized study places particularly benefit students from better socio-economic backgrounds • No subsidized study places for part-time students • Full-fee paying option and dual track system creates social inequalities • Scholarships only available to very few and only very best students, not motivating and effective • Student loans not attractive to large groups, e.g., the “guarantor requirement” forms a big hurdle • Hardly any need-based support nor means-testing mechanism for students from low-income families Financing: Autonomy and freedom • Large degree of (spending) autonomy of HEIs • Heavy reliance on EU structural funds for R&D, • Financial autonomy allows entrepreneurial which may not be a sustainable long-term freedom situation (plus co-funding problem in case of • Substantial level and good framework conditions matching funds) of resource diversification • Instead of diversification there is rather replacement of one large source through the other (with increased risk) • Relatively low funding from industry/companies Financing: Practical feasibility • Substantial outward international student • Decentralized system for student loans and mobility (many systems have problems to send scholarships (efficiency risks and problems students abroad). This means other countries pay for HEI with needs assessment) for the instruction costs. • Debt cancellation mechanisms too generous • Mismatch between academic year and fiscal year 64 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding 4.2 Political climate for change Strengths (political climate) Higher education institutions and policies in Latvia are highly adaptive to changing environments. (Criterion: practical feasibility) The Latvian higher education sector has been affected by public budget cuts of around 50 percent since 2008. Nevertheless, the higher education sector has seemingly endured. Although EU funds have played a major role in this respect, this fact might also be attributed to the ability of HEIs to adapt to the cuts by reducing their costs and by generating new revenues. In general, the Latvian higher education system is able to undergo widespread changes. Potential performance impacts: Efficiency. Weaknesses (political climate) The debate about education as a public or a private good is emotional and leads to political blockades. (Criterion: practical feasibility) In economic terms, higher education is a “mixed” good, leading to the necessity of public and private cost-sharing. Contemporary debates in Latvia tend to ignore these facts to a certain extent, adopting polarized normative positions of either complete marketization (private good) or free access for all (public good). These normative positions ultimately lead to political blockades, as they are neither ratio- nal nor really feasible. For instance, the 100 percent free access-solution for all students would require substantially greater funds and would enable all students from a more favorable socio-economic background to study for free. This is not realistic in a situation of competing demands for public resources, such as re- search, health care, or even social security. Potential performance impacts: Stagnation, necessary changes blocked. The higher education sector is in a situation of drastic underfunding, leading to deficiencies in many respects and consequently to competing demands for higher funding. (Criteria: practical feasibility, strategic orientation) Higher education in Latvia is underfunded. This became clear from the longitu- dinal analysis of funding in Latvia (having not recovered from financial crisis) in comparison to (i) other European countries and (ii) the government’s own tar- gets (documented in “optimal” and “minimum” prices for study places). This leads to deficiencies in many respects: there are doubts concerning the quality of studies, the decreasing quality of services (sometimes universities are even not adequately heated in winter), no time for professors to conduct research, and almost no funding for “triple helix” developments (as suggested by the Higher Education Council). Given this situation, it is quite clear that any proposed higher education financing reform must create a kind of “package” involving an improve- REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 65 ment of the system and its effects and an increase in public funding. Instead of “public good” discussions, reform proposals will have to focus on creating added value, with more public funds. A major task in the future strategic development of HE in Latvia must strike a balance between setting policy priorities and address- ing the financial consequences that this will have for the public budget. Strategic choices must be made, and incentives must be set to achieve ambitions. Potential performance impacts: Restrictions to performance in all respects, quality problems, problems with international competitiveness of the sector. Politically the whole education sector is often seen as one unit in terms of funding. This is a problem for the higher education sector. (Criterion: practical feasibility) Taking into account the budget for the entire education system, it seems to be argued that Latvia is not below the EU average. Although this might be the case, this still remains a major problem for higher education, which remains sub- stantially below average. In a situation where (higher) education is a key driver in knowledge-based societies, the current approach of generating funds for new educational purposes from only within the education sector is highly problematic. Potential performance impacts: Same as previous weakness, as underfunding is per- petuated. Overall conclusions (political climate for change) •The higher education sector in Latvia is highly adaptive and capable of dealing with drastic changes in funding. But the political climate for change in higher education funding is difficult: there are polarized normative positions and a ten- dency to reallocate funding only within the overall education budget. •The higher education sector in Latvia is massively and systematically underfun- ded. The way out lies in a paradigmatic shift towards higher education as a key to economic development and in a “package” of additional funding and added value through the funding system. HE stakeholders would need to agree to a “social contract” in which a more explicit strategic orientation is underpinned by new funding elements that stimulate working towards national objectives in higher education and research. 4.3 Instruments of state funding: funding of teaching — study place model State funding of teaching and research will be analyzed separately, as the current Latvian system for funding separates these two core functions of HEIs as well. This does not mean that there is no relation between the two; the section on Euro- pean trends has shown that in many countries basic funding of universities and also performance-oriented funding uses an integrated model including teaching and research funding. In the strengths and weaknesses such relations between teaching and research will not be neglected. 66 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Strengths (study place model) With the study place model the “money-follows-the-student” principle is introduced into public funding. The link to accreditation promotes quality. (Criteria: create a competitive environment, coherence of steering approaches) Similar to some European countries, basic public funding in Latvia is based on a formula model using a student-based indicator and a price-per-student approach. This leads to a situation where funding is oriented towards the “money-follows- the-student” principle. Instead of funding according to staff numbers, a first step towards a “quasi-market” is taken, by basing financial allocations on the “product” of the higher education institution and by assigning a specific “price” to it. In ge- neral, this tends to promote competition between universities. In such a model, it is important that study places are allocated to HEIs on the basis of some notion of quality and competitive behavior. If new fields or study programs of high impor- tance arise (from the perspective of students or from the perspective of national needs), funding of study places could be adapted to this. Yet, because of the use of planned parameters, it is not a fully demand-driven model. Without the decision of the central planner, adaptation cannot take place. The funding of study places requires accreditation to ensure a minimum quality standard for publicly-funded study places. Different steering approaches are linked in a coherent way. Potential performance impacts: Promotion of quality. The study place system allows to plan [sic] national priorities and helps to satisfy labor market requirements in terms of graduates needed in different fields. The consultation and analytical process linked to planning helps to come to valid planning outcomes and represent a cooperative culture. (Criterion: promote national strategies) In general, there are two options for a student-based public funding formula: (i) to follow real student demand for study places; or (ii) to fund according to greater central planning, including a structure of study places based on specific subject disciplines. Latvia primarily follows the second path: the number of study places per field and university is determined through a planning process. In the Latvian context, where a certain priority for STEM graduates is assumed (for instance because fee-paying students choose “cheaper”, affordable fields with questionable labor market expectations), the planning approach enables the pro- motion of national priorities, ultimately leading to a certain steering effect into fields relevant for the Latvian economy. If a ministry engages in the planning of student places, it requires objective infor- mation to underpin such plans, since a central planner does not necessarily make the right decisions. It seems to be very positive that the MoES bases its decisions on a couple of information-gathering processes, such as analyzing parameters like the real demand or the number of graduates, stakeholder consultations, with a particular focus on labor market needs, and negotiations with universities. Such a process could lead to well-informed decisions and could relate student places to the requirements of labor markets. It also enables a kind of mixed approach between planning and real demand: planning parameters could adapt to the real demand situation. Another positive aspect of the process has been the REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 67 high-level discussions between the minister, ministry representatives, and rectors regarding the principles of the study place allocation model which were particular- ly prominent in the process of planning study places in 2012 and 2013 (such discussions did not exist before). This leads to a cooperative culture and should be continued. Potential performance impacts: Orientation to labor market needs. The study place model differentiates prices per study place according to cost of different academic levels and different disciplines. (Criterion: take into account cost differences) The cost per study place varies between Bachelor, Master and Doctoral level and also between different fields. A funding model has to take into account the cost situation and differentiate between the prices per study place. The Latvian model seems to be doing exactly this and is based on a detailed, empirically-founded cost calculation (which is not regularly updated, see weaknesses). For higher education institutions that fall under the responsibility of the MoES, the current differentiation in prices generally appears to be reasonable. Potential performance impacts: Promotion of quality and proper funding levels. The way in which the study places model is applied leads to a quite stable basic funding: The funding volume resulting from study places for each university remains largely the same. This is based on a three-year contract updated yearly through a specially agreed document. The fact that the budget results from a price*student place calculation also leads to transparency of allocations. (Criteria: stability, make funding transparent) The study place model is used in a way that does not (or only marginally) change the budget for a HEI. MoES and the university sign a three-year contract defining budget volumes. This means that, on the one hand, there are yearly planning processes, stakeholder consultations, etc., but on the other, this largely leads to a mere shift of study places within an institution. The budgets resulting from study places are ultimately largely historical. This is an advantage in terms of stability: the university could rely on a certain amount of public basic funding that promotes long-term planning for institutions (for the downside of this, see weaknesses). Furthermore, the public allocation process is also transparent: the number of stu- dy places and the prices are multiplied, determining the budget. This simple algorithm clearly explains the rationale behind the ministry’s decision to allocate funds. Potential performance impacts: Promotion of quality. The study place model does not restrict flexible allocation of funds inside the university. (Criterion: autonomy of internal allocation) Latvian universities are used to dealing with a lump sum budget. During the inter- views, the team heard about models that deal with the budget centrally: public funds do not go directly to the faculties but are instead initially centralized at the rectorate level. Following this, they are then allocated to faculties, but not necessarily 1:1 according to the student place model. Since internal autonomy of 68 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding resource allocation is not restricted, universities are able to choose internal allocation models according to their needs. Potential performance impacts: Performance according to HEIs profiles. The study place system introduces a strong merit-based element into the funding system. This leads to high performance incentives on the side of the students. (Criterion: create performance rewards and sanctions) Study places are allocated to students according to their academic performance, meaning that the allocation principle is merit-based. Aspects of social need only become relevant as a second order criterion once two equally-achieving students are compared. The result is a highly competitive situation between students, and high incentives and rewards for individual performance. It appears that this logic in Latvia is perceived to be a fair way of distributing subsidized study places. The incentives become even stronger once, as in the University of Latvia or the University of Agriculture, the “rotation principle” is applied: study place allocation is reconsidered for students every year such that students with low performance in their university courses might cede their free study place to students who, having previously paid tuition fees, have now improved in their performance. Strong performance incentives are then not only realized at the time of entry to the university, but indeed throughout the study process. Potential performance impacts: Student performance, competition and efficiency. The study place system involves a number of line ministries in higher education funding. This is beneficial for the reputation of higher education in the government. (Criterion: promote institutional profiles) The study place system does not only work within the scope of MoES but also for the universities that fall under the responsibility of different line ministries (health, defense, etc.). Although this structure has its drawbacks, it also has a couple of advantages: there is close contact between the universities and the respective line ministries (i.e., those that correspond to their disciplinary profiles). Furthermore, there are opportunities to establish specific regulations that fit with the respective sector; for instance, study places funded by the Ministry of Interior are linked to the obligation to work at least 5 years as a civil servant (so the state has a guaran- teed return on the investment in study places). Subsequently, a major effect is that there are “many advocates” for higher education — not only MoES, but also line ministries — which have an insight into the culture, logic, and needs of HEIs. It should also not be forgotten that some line ministries are able to generate more favorable conditions for HEIs in the form of higher prices per study place. Potential performance impacts: Investment in human capital, shared responsibility, recognition of public value of HE. REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 69 Weaknesses The study place model is underfunded. In stakeholder consultations this was connected with two different issues: on the one hand, people said that the number of study places funded is not sufficient, leading to access problems; on the other hand, the price per study place was criticized as being too low, leading to quality issues. We see the second problem as the first priority (but there is a weakness in the one-sided focus on merit-based instead of means-tested allocation). (Criteria: guarantee continuity in funding mechanisms, perception of fairness) As previously stated, there are two relevant benchmarks with regards to assessing the situation of public funding in Latvia: (i) GDP statistics compared to other European countries, and (ii) the Latvian government’s own targets documented in the normative definition of “minimum” and “optimum” prices per study place. In terms of both benchmarks, however, the current state of play is characterized by insufficient funds. Insufficient public budgets can refer to both teaching and research expenditures, since, through the teaching side, the study place model is affected. Examining the features of the study place model raises the following questions: What does underfunding actually mean? Is the share of study places related to the total number of students too low, or is the price per study place too low (or both)? The price per study place is an issue of quality, but is also related to the existence of research opportunities. Following drastic cutbacks of public funding and study place prices, some universities reacted by reducing service staff, enlarging student groups, and increasing teaching hours per academic staff such that, in some universities, there was almost no time for research (in Latvia there is a span of yearly teaching hours; cutbacks had the effect of approaching the upper level of this span to be able to fulfill teaching obligations with reduced funding). These are clear weaknesses in terms of the quality of and available time for research. Financial cutbacks minimized the potentials to generate a kind of basic funding for research through the study place model (since with lower teaching hours a certain involvement of teachers in research activities would be possible). Acknowledging that public funds per student place are too low does not necessarily mean that the model should just inflate prices: instead, it might be a good idea to link added value to increased funding (e.g., by introducing clear incentives according to state objectives, see further weaknesses below), rather than to just “throw money” into the existing system. As previously discussed, the team does not necessarily regard the lack of a free study place model as a weakness. First, in the chapter on European trends, it was argued that there is no economic rationale behind a full publicly- (or privately-) funded model of higher education — as this typically leads to blocked reforms. Second, in a situation where there are numerous competing funding requirements and scarce resources, it would not be helpful to give up one of the funding streams, since the diversification of financial resources helps to divide the risk. Third, with the students’ veto right on tuition fee issues in the academic senate, there is a restriction in the governance structure preventing excessive tuition fee levels. Fourth, the universities we talked to seemed to have adequately adap- ted their tuition fee policies according to their situation (for instance, the University of Latvia charges average study place prices and the University of Daugavpils charges almost no tuition fees because of the difficult economic and social situation in the region). Fifth, even if the absolute number of study places is not 70 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding increased, the percentage of free places will rise due to demographic changes. Last, it is questionable whether or not the problem of students potentially leaving the country to study abroad (often used to justify models of 100 percent public funding) is a matter of tuition fees, or whether it is instead a matter of the attrac- tiveness of higher quality programs elsewhere. In the case of the latter, it would again be better to invest additional money in higher state subsidies per study place. One also has to bear in mind that, in general, studying abroad is relatively costly compared to studying at home. In Chapter 4.4 on student funding, we analyze the weaknesses of this part of the system and show that the Latvian system results in serious disadvantages for potential students with lower socio-economic status. The mainly merit-based allocation of study places generates a social problem; differences in income only feature as a second-order criterion when distinguishing between equally-perfor- ming applicants. The unspecific increase to 100 percent free study places is not, however, the adequate instrument to overcome this, since it fails to collect a con- tribution from those students who could afford it. One should look for more targe- ted approaches to promote students in a needs-based manner. Potential performance impacts: Quality problems and intransparencies. Rewarding the number of study places is purely input-oriented; the system does not create performance incentives in teaching and research (neither ex ante nor ex post). A balanced three-pillar model is not realized. (Criterion: create performance rewards and sanctions) Thinking through the dimensions of the three-pillar model of public funding, two of the columns do not exist in Latvia, leading to an imbalance in the fun- ding system. Study-place funding is an adequate instrument for basic funding — the first column exists. However, a missing element involves ex post rewards and sanctions that can stimulate performance. This leads to a problem in funding for teaching, as student retention and successful graduation are not rewarded. The overall incentive results in the maximizing of study places, not improvements in performance. With respect to research funding, we will, in the next section, argue that basic public funding for professors is missing; and, that should this be created, it would seem more reasonable to do that not according to study places, but instead in line with research performance, generating more opportunities to fund research for successful universities on the basis of research indicators. Also in the third column, performance-oriented pre-funding of new initiatives has not yet been realized. Although target agreements between MoES and universities exist, they are not used for investments in innovations. If universities create new study programs, they can only create new study places by deducting these from their own traditional programs; curriculum innovations are thus always at the expense of other programs within the university, and creative ideas do not allow additional funding. It is almost impossible to generate additional funding with new programs or other innovations. Although the study place model enables top-down innovations initiated by the MoES, it does not give equal chances to universities for bottom-up initiatives. Potential performance impacts: Problems for performance according to objectives, for quality and for innovativeness. REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 71 Despite the lack of separate performance-oriented funding pillars, there are performance considerations in the decision process on numbers of study places. But this discretionary, non-automatic system does not lead to performance incentives; in fact, funding remains historical. (Criterion: create performance rewards and sanctions) Performance aspects like labor market perspectives, dropout and graduation rates, or the relationship between planned study places and actual demand are taken into account during the process of allocating study places numbers (in the three-year agreements and also in the annual protocol concerning university- internal shifts of study places). This, however, restricts budget place reallocations to within universities and results in the involvement of MoES in micro-managing study places. The overall public budget of the universities remains largely con- stant and develops incrementally on a historical basis. Ultimately, therefore, there is a lot of regulation but no financial incentive. Performance considerations are thus too dependent on negotiations and discretionary decisions (and not on automatic mechanisms). The technical reason behind these problems is that all kinds of purposes are mixed within the study place model, as this is the only state funding component for higher education. It should lead to stability, but also to performance orientation. It should guarantee state influence on field structure, but without compromising inter-institu- tional allocation. These goals should be reconciled in one funding component. Potential performance impacts: Problems for performance according to objectives and for transparency. The budgets are largely historical, but there could be annual shifts in study places (whereas academic and fiscal year are not harmonized). This leads to instability for HEIs. (Criteria: limited budgetary changes, non-fragmented incentives) The allocation of budget places is reconsidered annually by the state. This leads to a problematic instability in the internal planning of field structures, such that the number of state sponsored study places in specific programs is not reliable enough. This becomes even more complicated taking into account the fact that academic year and fiscal year do not correspond to one another. The detailed steering of study places in specific programs also sometimes leads to very few subsidized study places for certain programs, inducing fragmentary effects. Potential performance impacts: Quality problem and intransparency. Despite the ongoing discussions about diversity of institutional profiles in the university sector, public higher education funding does not provide incentives to develop specific profiles. (Criterion: promote institutional profiles) Many European countries intend to create a HE sector with institutions pursuing differentiated missions. Mission-diversity helps to serve the various needs of stakeholders. An excellent HE system needs internationally-competitive research universities, but also universities that serve regional needs or focus on knowledge transfer as “innovative universities”. Institutions should build on their strengths and develop clear profiles. The current funding system provides only a very vague mechanism for this (taking profiles into account in determining the study places, 72 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding but without considering the effects on historical institutional funding, see previous weakness). There are no indicators measuring profiles and no encouragement from a central HE strategy or through incentives for the institutions to actively promote their profiles. Potential performance impacts: Not addressing the diverse needs of different tar- get groups and insufficient profiling of HEIs. Though the analysis of the relationship between major state objectives and funding of HEI still has to be done in the second step of our project, the interviews already demonstrated that the state funding system is not based on national priorities. Promoting priorities through funding is not an easy task as the example of consolidation of the sector shows. (Criterion: promote national strategies) We already mentioned that clear rewards of adhering to state objectives on fund- ing are missing, especially once the objectives of promoting institutional profiles and minimizing drop-outs are taken into account. The public HE funding also does not help generating critical masses or reducing unnecessary duplications in study programs. We could neither find incentives for the development of the regional mission of universities, nor for engagements in knowledge transfer. The MoES has already started to relate incentives to the idea of consolidating the higher education sector through the study place allocation criteria. In the stakeholder interviews, some interviewees voted for the establishment of large units, such as merging programs in the same disciplines, etc. Others warned of the danger of over-consolidation, since too great a focus on minimizing duplica- tions might substantially reduce competition in the system and subsequently lead to monopolies. Centralization programs in one place could endanger regional access and interdisciplinary collaboration at a specific site. Others argue that a decentralized, regional choice of specific programs across a number of univer- sities would promote the ability to adapt to (regional) labor market needs. It becomes clear that potential initiatives for consolidation have to be examined criti- cally from the perspectives of monopolization and access (in the region). It is also clear that funding mechanisms to promote consolidation are not easy to implement. A suitable approach might be a mixed top-down and bottom-up approach, whereby the state provides incentives for consolidation, but the suggestions where and what to consolidate are made by the institutions. Then they could for instance take into account the regional aspects. A well-functioning mechanism that promotes desirable forms of consolidation is an important task for funding reforms. Potential performance impacts: Not enough support for national priorities. A system with a simple formula and a “price list” has the potential to be very fair, but there are different cases where the system is not coherently used. This endangers the reliability of the system and creates the impression the system could adapt to political considerations and that the rules of the game are unstable (or not the same for everyone). (Criterion: support perception of fairness) In general the study place system is highly rational: there are numbers of student places, a transparent price system and a very simple algorithm to calculate budgets REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 73 using these parameters. It could easily be justified and understood why an institu- tion gets a certain sum of money out of the system. Applying the same algorithm to every university could also be perceived as a kind of fair solution. This position was supported by the interviews, where interviewees regarded the principles of the study place system as adequate. The mechanism is nevertheless not applied in a coherent way. First, universities receiving their budgets from different ministries (for example, the case for medici- ne under the MoES and Ministry of Health) get different prices. Second, in certain cases, a reduction in study places was compensated by a university-specific price increase in order to stabilize the overall budget. In other cases, students with factor 6 (for defense) and factor 3 (for engineering) are effectively sitting together in the same classroom. In general, the allocation of study places does not adhere to a consistent rational logic and, from the perspective of some interviewees, ultimately results in a certain degree of subjectivity (for instance, in some cases it seems difficult to explain why one university receives study places in a specific field, but others in the same fields do not). Given that the strength of such a formula system is based on its reliability and coherence, such specific exceptions endanger trust in the system or might lead to losing the competitive element. The strength of formula systems lies in their automatic character; the coherent use of the model parameters should not be compromised according to discretionary political decisions. If the rules of the game are adaptive, then this creates the tendency to put efforts into influencing the rules instead of following the rules. The conclusions from this have to be carefully analyzed; if a recommendation to harmonize the field coefficients between all ministries were made, this might increase the underfunding if the solution were to take the lowest price (see the advantages of involving line ministries above). Potential performance impacts: Problems with (public) trust, intransparency and feeling of fairness. Excluding part-time students from the budget places model is problematic in a situation of demographic change with declining numbers of traditional students. Particularly then, increasing the number of non-traditional students, especially in part-time studies, can be attractive. (Criterion: avoid undesired effects) The initial rationale behind excluding part-time students from free study places was the assumption that part-time students are in a more favorable financial situa- tion. However, even students from low-income families with free study places might have the need to work during their studies; and there could potentially be students with children that look for part-time places. As the demographic tran- sition leads to lower numbers of traditional students, the funding system should seek to promote as much accessibility as possible, especially for non-traditional students (such as those aforementioned). There is no reason why a student eligible for a free study place should not be able to choose between full-time and part-time study. Potential performance impacts: Access problems. 74 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding There was almost no update of the cost coefficients and the basic price since 2002. Current studies offer the opportunity to check and correct the prices. It is more important to focus on relative than absolute prices. (Criterion: take into account cost differences) Generally, the rationale behind calculating costs within the study place model is accepted in Latvia. However, the parameters used were calculated in 2002, if not before; of which there has been almost no update and revision of prices since. Since 2002, there have also been major technological changes, for example, especially regarding IT technology; indicating that it might be time to reconsider existing prices. A study seeking to update the cost parameters was undertaken last year, calcula- ting the coefficient for computer sciences (Erins, 2013). This is a good starting point to check and update the price structure of the model, which could generate similar considerations across all study areas. The logical approach of the study is sufficient: it attempts to calculate the cost determinants from empirical findings (on student-staff-ratios, technological features of teaching, etc.), but at the same time makes clear that any such cost factors are ultimately normative. For example, with respect to the student-staff-ratio, the study states that in 1992 the ratio was 9.2; in 2001 it was 15; and, at present, we can assume it is 19 given efficiency savings generated from developments in IT. Though the starting point is empirical one, ultimately there is a normative assumption made. Hence, it is important that these normative decisions are made transparent and are discussed with the HE community before being set by the MoES. The student-staff-ratio example also makes clear that the relevance of absolute prices should not be overestimated: if we take the status quo of a specific year as a starting point, then this is determined by the level of state funding. The cost will change pro- viding there is the decision to increase quality by better ratios — and, as such, one does not have an objective picture of the one-and-only real cost. This means funding levels are ultimately always determined politically. The calculated price does not justi- fy underfunding as “the state does not cover the real cost”; underfunding always has to refer (as argued before) to the benchmarks of international comparisons and politi- cal objectives. This means that the major value of recalculation lies in the decision of whether the relative prices between the disciplines are still valid or ought to be adap- ted to technological changes across the disciplines. Nevertheless, an additional aspect that could be taken into account by further cost calculations, and which refers to the absolute level, is whether there have been general developments in the last few years that have increased costs, which have not been taken into account in the old prices. For instance, changes in energy costs might be a major issue. This could lead to messages such as “compared to the old price model there were general cost increases by XY”, which could then be used as an information source for the de- cision on the development of public budgets. Potential performance impacts: Quality problems. Many of the weaknesses mentioned before together lead to the fact that the study place system is not transparent (despite its general nature of being an easy calculable model). (Criterion: make funding transparent) Multiplying study place numbers with a price from a published list seems to be very transparent — but the factual use of the system substantially reduces this transparency. The complex and implicit value-judgment laden process of taking REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 75 into account performance in calculating student numbers, the involvement of numerous ministries and the practice of granting exceptions to the rules, all lead to lack of transparency. The model should change in a way that reflects how clear it seemingly is at first glance. Potential performance impacts: Lack of trust in the system, also among the main funders and therefore less political support for new investments in the sector. There are single cases of funding student places in private higher education institutions, but no systematic approach to the eligibility of private institutions to receive money from the study places model. (Criteria: support perception of fairness, create a competitive environment) In some very few cases, student places are also allocated to private higher education institutions. This is the outcome of single, specific decisions based on three criteria: higher quality, no accredited programs in the public sector, and an insufficient number of specialists. This means that study places in private HEIs are a kind of exception and effectively the second-best option, providing public institutions are unable to supply the desired places. It would be better to have a systematic approach with clear “rules of the game” for competition between public and private HEIs. Two options for a general position seem to be possible: either the allocation of study places is completely up to the choice of the best students, whether they are private or public universities (meaning that private uni- versities would receive the same price), providing that quality standards are met; or alternatively, as the study place system, factually-speaking, is a system of basic funding, that this basic budget is only given to public institutions, on account that states should not engage in the basic funding of private institutions. In the latter case, the only option to allocate study places to private institutions would be to enable study places to feature as part of the innovation-oriented component of the funding model: if the government would grant money towards innovative new study pro- grams and there would be a competitive process between the best concepts, then there is no reason why private institutions could not be a part of that process. Further developing the model would require choosing between these approaches. Potential performance impacts: Intransparency and lack of coherent public policy approach undermines trust in the system. Overall conclusions (instruments of state funding) •Having an element of planned study places with differentiated prices is generally a positive and desirable element in the funding system. It orients the focus towards the tasks of a higher education institution, enables strategic state plan- ning, is stable and transparent, and represents a cooperative culture between ministry and HEIs. It also incentivizes efficient student behavior and leaves some leeway for the discretion for internal university budgeting. Specific problems arise from the way in which this system is handled in Latvia. •A major problem is that study places constitute the only component of public higher education funding. This means that the system is subsequently over- burdened by having to link this funding to target agreements and performance data, both of which effectively contradict the objective of stability behind basic funding. Using performance data as an implicit mechanism in the background of 76 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding the study place calculations does not lead to real performance orientation, something that could instead be solved by separating performance-oriented funding — ex post and ex ante — from basic study place funding. •Since there is currently a “one-pillar” model, the current system is not sufficiently output-oriented and does not adequately promote the differentiation of university profiles. It could also already be seen that important state goals are not trans- formed into financial incentives (a comprehensive analysis of this will follow in a separate paper in the next part of the project). A tricky issue is sector-conso- lidation, where interviews revealed the contradicting arguments for cooperation and large units vs. competition and decentralization. •If this separation of funding pillars is done, it should reflect the fact that the study place model is to a certain extent historic and incremental. The planning should explicitly address study places numbers of the previous planning period as the starting point for the new period, devising very clear arguments for limited and focused deviations from the status quo. •The planning process leading to these deviations is not yet sufficiently focused. If the performance issue is separated from study places and made more explicit in a different component of the public funding model, then there are two remaining aspects that should determine the study place planning. On the one hand, it seems reasonable to plan the overall student numbers in terms of major subject areas, including stakeholder consultation and labor market analysis. This leads to an overall idea in which disciplinary fields study places have to be increased or reduced. On the other hand, the issue of real demand remains. If, over a certain period, study places do not lead to actual demand (but still are maintained), this should lead to a correction in student places assigned to the institution. With focused mechanisms, study place budgets, on the one hand, imply a historical development, but on the other, offer opportunities to arrive at rational reallocations between institutions. •The study place model is not entirely used in a coherent way, which reduces both its objectivity and trust in the system. Yearly state interventions by shifting budget places within the HEI create problematic instability. •It is also problematic that study places are limited to full-time students and that outdated cost coefficients are used. •A restructuring of the model and the implementation of new funding elements could go some way in overcoming the current underfunding of the Latvian system: new elements could create added value that makes additional financial investment attractive. Underfunding in terms of quality-related issues (resulting from low prices) is more severe than the fact that some parts of study places are free (i.e., without tuition fees). •Restructuring is also necessary in order to increase transparency in the model and to relate it to clear “messages” for fund-recipients; in particular through clear pillars of the funding model with established functions, and more focused calculation rules and procedures. •A systematic approach for (or against) the inclusion of private higher education institutions into the budget place system is necessary. REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 77 4.4 Instruments of state funding: funding of research Though this section primarily focuses on state funding for research, given that many EU funds (particularly the EU structural funds) are allocated through a state agency and constitute a large share of research funding, the section addresses both funding sources. As such, the following section, focusing on “resource diversification” is limited. Strengths (funding of research) The integrated funding of universities and non-university research institutes creates competition within the whole research sector. In addition, EU research funds as well as the funds awarded through various competitive research programs, require institutions to compete with other national and international HEIs and other research organizations. (Criteria: create a competitive environment; national strategies) The current funding model for research in Latvia depends, to a large extent, on EU resources, which, though allocated competitively, are contingent on criteria that are not very transparent. Until now, the State Education Development Agency has distributed structural funds in such a way that all HEIs effectively, in some way, benefit. Other external funds, often from EU sponsors as well as industry, put HEIs in direct competition to other (inter)national research institutions. The principle to fund institutes, both within and outside, of universities leads to competition in the research sector as a whole. The same goes for the funds that are allocated through the public research programs, such as the State Research Program, the Commercially Oriented Research Program and the Fundamental and Applied Research Program, based on competitive evaluations of research proposals by committees installed by ministries, the Latvian Council of Sciences and the National Academy of Sciences using criteria that reflect national research priorities. Potential performance impacts: Quality and adherence to national strategies. In order to use the very limited resources available, HEIs must set their own priorities to wisely spend the money and to do research that can have an impact. A strong initiative is the support given to young talented researchers to establish their own research groups. (Criterion: Promote national/institutional strategies) Due to a relatively limited research budget that is allocated largely by a compe- titive mechanism, i.e., EU structural funds, institutions and the allocating agency (State Education Development Agency) can be encouraged to link research fund- ing to national research priorities and/or their own strengths. A positive develop- ment is the initiative to support young talented researchers to establish their own research groups with EU structural funds. Potential performance impacts: Promotion of quality, research careers and long- term planning. 78 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding The cost of research differs between the disciplines; the allocation mechanisms take this into account, at least to a certain extent. For instance Riga Technical University with an expensive cost structure receives a relatively large part of the research funds. (Criterion: take into account cost differences) Cost differences between disciplines are acknowledged in the state research funding, and, as such, an engineering university (like Riga Technical University, RTU) benefits from this, by way of investing and maintaining a more expensive research infrastructure. Research funding includes components explicitly dealing with infrastructure maintenance cost and there is a coefficient differentiating between disciplines. Nevertheless, the RTU example shows that there are still difficulties in financing expensive research equipment necessary to conducting engineering research at an internationally-competitive level across their research areas. This compels RTU to prioritize those areas in which it would like to achieve such an internationally-competitive position, and deprioritize others. This is a ge- neral development in many countries and institutions. The question is how many priority areas Latvia and Latvian HEIs can, and are allowed to, afford. Potential performance impacts: Quality and guarantee continuity. Basic research funding is predominantly based on historical developments and as such provides financial stability. However, the lack of transparency about the exact allocation weakens this a bit. The research funding, particularly coming through EU funding sources, has made Latvian universities survive in times of heavy economic recession and strong budget cuts for teaching. (Criteria: stability, make funding transparent) Basically, research funding through EU structural funds and infrastructure funds have enabled most Latvian HEIs to survive, compensating budget cuts in teach- ing, which had subsequently left few resources for research. However, the way these research funds are allocated is unclear and does not provide a stable basis for the sustainable development of the research sector. The same goes for the allocation of state research funds. None of the stakeholders were able to provide clear information about the way in which it is allocated. There is a coefficient for the development of scientific institutions which depends on performance criteria, but from the perspective of stakeholders this is handled in a rather implicit way and does not lead to major financial effects. Nevertheless, research funding is motivated by a strong historical basis, which, by definition, preserves stability for the institutions. Potential performance impacts: Quality and space for long-term planning. Institutions have large autonomy to invest their resources, which enables them to set priorities and underpin their own strategies. (Criterion: autonomy of internal allocation) It appears that HEIs, to a large extent, are able to use research funding to support their own internal research priorities and strengths. This enables HEIs and re- search centers to focus on their strengths while leaving other research domains to other HEIs. However, there are concerns at the ministry and agency that HEIs may also cross-subsidize teaching activities with research funding, whereas HEIs complain that EU research funding often requires matching the funding from their own resources (including for teaching), which are already scarce. REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 79 Potential performance impacts: Research performance and longer term research strategies. Strong dependence on external research funds, like EU structural funds but also the public research funds available through the State Research Program/ Commercially Oriented Research Program and the Fundamental and Applied Research Program, provide ample opportunities for performance incentives. This is further supported by the recent research evaluation process. (Criterion: create performance rewards and sanctions) The allocation of research funding through external funds (mostly EU) implicitly provides performance incentives. Though no explicit transparent allocation or per- formance criteria are currently applied, if HEIs do not perform well, they may lose credibility in subsequent rounds, and not be awarded such funds anymore. The recent research evaluation process provides better insights into research per- formance across the many research institutes in Latvia. This can encourage HEIs, research institutes, the government and the Agency to search for proper indica- tors that can be applied, if one wants to strengthen the performance dimension in research-funding mechanisms. In this respect, further steps could be taken in the Latvian higher education system. Potential performance impacts: Research performance, innovation and internatio- nal competitiveness. Weaknesses (funding of research) Though the mostly historically based state research funding provides stability for HEIs, amounts are relatively limited and the matching requirements of EU funds as well as the dominance of research funding from EU structural funds endanger a stable financial foundation for the Latvian research system. The public underfunding of the Latvian system also refers to research. (Criteria: stability, perception of fairness) A strong reliance on EU structural funds in order to support university research has ensured the financial viability of Latvian research during the period of econo- mic crisis. Though this funding stream may be available in forthcoming years, the dominance over regular state research funds as well as private research capi- tal provides future uncertainties for the research system from a financial point of view. The different funding streams produce irrationalities in planning: for instan- ce, although machinery is financed by EU funds, its maintenance costs have to come from state funding, which might not be available or foreseen, since there is no integrated planning process. Another problem lies in the co-funding approach of European funds: successes in external funding competition might “eat up” all flexibility in state funds as more and more state money is bound in co-funding obligations. In general, there are not enough elements of long-term, stable public funding sources for research (for instance looking at the EUR 13 million state science funding in 2011 compared with EUR 69 million EU funds in the same year (MoES, 2012)). Like with the study place system, also the funding of research covers only a part of a defined “optimal” base funding. The state funding component for scien- tific development of universities allocated no funds from 2009 onwards (in 2014 80 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding only as small ad-hoc funding with a specific purpose). The funding of research development is largely left to the EU funds. Potential performance impacts: Low funding levels and uncertainty about the fund- ing may create problems with the quantity and quality of research. The mainly historical approach to distribute basic state research funds, together with perceived opaque criteria for the allocation of “additional” funds (e.g., through the EU structural funds and the competitive public research programs) does not breathe a performance oriented atmosphere. The performance oriented coefficient also does not create such a climate. (Criterion: create performance rewards and sanctions) Though competition is available — particularly for EU funds — state funds for basic research appear to be in the end allocated based on historical distribution. Similar to the study place system there is a use of performance indicators “behind the scenes” which does not become transparent and hence does not lead to sub- stantial impact. EU structural funds are also distributed on the basis of relatively unclear criteria from the perspective of stakeholders. Until now, EU structural funds were distributed among all HEIs and research institutes according to a lo- gic, which included relative size. Though some equality was applied, the exact criteria were opaque which hampers (performance based) competition. The competitive public research programs invite proposals from universities, enterprise, research institutions and non-governmental organizations that address research topics meeting the goals of the research programs in line with national research priorities, scientific and national importance and innovation. However, stakeholders could not immediately indicate the importance and working of these programs, which raises the impression that most institutions are not familiar with the exact rules of the game and opportunities of these programs. Basic state funding for equipment is, according to the MoES, related to indicators, such as the number of state-funded students, graduates, publications and pa- tents, faculty holding doctoral degrees and professorship. In fact, it is not induc- tive to creating a performance-oriented climate, as the criteria and their applica- tion do not seem to be transparent to stakeholders. Potential performance impacts: Research performance problems in terms of the quality and quantity of the outputs and potential underemployment of potentially available resources. The historical allocation of basic state research funding and the relatively equal distribution of EU funds among various HEIs without using explicit performance measures create an atmosphere in which the allocation is not considered fair. (Criterion: support perception of fairness/make funding transparent) Though the aforementioned strengths hinted at the potential for explicit perfor- mance orientation in the allocation of EU funds, this opportunity has not yet been exploited. HEIs seem to perceive the current distribution of research funding (including EU funds) as non-transparent because of a lack of clear awarding and performance criteria. Given that funds are not explicitly allocated on the basis of performance strengthens this perception. Moreover, although EU-funds are currently distributed in a “relatively equal way” (since everybody gets something), REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 81 without clear objectives or criteria, institutions are left with the feeling that the allocation just follows historical balances, rather than openness, competition, quality, or performance. This might be regarded as unfair, and as not addressing well the needs of the country. Potential performance impacts: Quality problems and lack of competition based on quality. There is a felt lack of a national research strategy among stakeholders. This results in a research system that does not focus strongly enough on national research priorities as well as the needs of society. They also feel no support to accomplish such a strategy. (Criteria: promote national strategies; promote institutional profiles) There is a general feeling among HEIs, the Ministry and the Agency that there is no real national research strategy with national research priorities that universi- ties and research centers must adhere to. The national research system is instead largely driven by bottom-up initiatives from HEIs (rather than a top-down govern- ment steering mechanism). In cases where it becomes clear that Latvia receives fewer funds from the EU Horizon2020 funds than it invests, the Agency is then asked to turn this situation around. As HEIs feel neither a strong push towards a national research strategy nor towards particular research priorities, they attempt to build their own research profiles. The first, and recent, research evalua- tion indicated that only a limited number of research institutes/centers demon- strate international competitiveness (15 out of 76). This could provide a basis for stronger research prioritization, with HEIs focusing more closely on their strengths, and funding agencies correspondingly allocating the available funds more selectively; i.e., the basis for the establishment of places for research excellence is there, but it is not yet used to promote such a development. Potential performance impacts: Quality problems and lack of competition. There is no integrated system of basic funding of teaching and research. This means that research funding is coming as a kind of top-up funding despite the fact that it’s basic funding. In the logic of the three-pillar model basic funding is put into the third pillar with no funds left for focused priorities. (Criteria: stability, balanced system) The general idea of close interactions between teaching and research within a university usually leads to an integrated basic funding of teaching and research. Basic funding then allows a very basic realization of the two core tasks, with flexi- bility in using the funds for one or the other (restricted by defined teaching loads). As has been shown in the section on state funding of teaching, this is not done in Latvia: basic funding is not sufficient to engage substantially in research; no research driven criteria are applied to determine basic funding; and with the university and the research institute there are even two separate artificial units to receive funds for teaching and research, leading to a complete separation of the revenue streams. In terms of the three-pillar model the funding of research institutes gets the character of on-top funding in the third pillar, creating the impression that research is not a basic task. This also leads to the effect that institutional public funding of research is not targeted and focused as one would expect from the third pillar. Instead of a limited basic research funding as part of a general basic budget to fulfill all tasks of a university plus a targeted investment 82 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding in promising research areas and national research priorities Latvia realizes a lack of integrated basic funding and a non-targeted top-up funding of research infra- structure. Potential performance impacts: Problems with research quantity and quality. There is a lack of stimulation of important elements for the advancement of research and innovation. (Criterion: avoid undesired effects) To develop research areas at levels that are internationally competitive, it is, for example, inevitable that post-doc career opportunities are made available. There are currently no systematic funding mechanisms promoting this. Despite the Higher Education Council putting forth a “triple helix” model of research, knowledge transfer and industry relations, there are only very limited competitive funds available to promote these kinds of developments. Furthermore, HEIs that seek to develop innovative new study programs or research lines have to finance pre-investments largely by themselves, since there are no “innovation funds” available at either the ministry or institutional level. Potential performance impacts: Lack of a competitive environment to stimulate innovative, excellent and internationally competitive research. Scholarships from EU structural funds given to Master and PhD students/researchers may not always lead to successful completion or to stimulate an innovative research labor force. (Criterion: avoid undesired effects) Not all Master and PhD graduates will go on to work in academia or in research- intensive jobs. Many students/graduates with scholarships that were intended to train them as specialists for the (academic) labor force might drop out of their studies or choose jobs outside the “innovation sector”. This is likely to be a “loss or risk” that one has to take. In addition, the criteria for allocating these scholars- hips ultimately lie with the universities, and, as such neither the state nor the Agency has control over the use of the instrument. Finally, the structure of the research sector includes non-university research institutes that offer attractive working conditions for PhD candidates. However, only universities can award PhDs. This requires smooth collaboration, which is currently not supported by the funding mechanisms. Potential performance impacts: Potentially high drop-out rates for Master and PhD programs and problems with performance of young researchers. Academics working in HEIs can earn substantially different salaries based on the types of activities they are involved in (teaching and research) or where they work. (Criterion: perception of fairness) Academics can earn different salaries based on the activities they are involved in. Teachers earn less than researchers working on EU-funded research projects. Depending on the number of research projects a professor is engaged in, the salaries might substantially increase. For a well-operating academic labor market, it appears problematic that the salary can so heavily depend on the type of activity one does. Although some form of salary rewards might be stimulating, REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 83 differences that are too large may harm the employee-motivation, especially for young researchers with limited access to larger research projects. Academics from Riga working in the region require substantial financial compen- sation for both any additional costs they accrue (e.g., travel) and for the fact that they are willing to work for a regional institution. The autonomy of institutions to respond to such demands may put financial pressure on regional HEIs, while creating a situation of (substantial) inequalities in employment conditions between employees working at the same institution. Potential performance impacts: This provides labor market distortions with a high risk to lose young academic talents for science. Overall conclusions (funding of research) •Overall research funding levels are relatively low in Latvia compared to most other European countries. Basic state funding for public research is particularly limited, leading to a situation of austerity and an R&D system that is not competi- tive internationally. State research funding needs a good balance between basic funding of research (which should be integrated with basic funding of the teaching mission) and targeted, focused funding of research priorities. This balance does not exist in Latvian state funding which is characterized by non- focused top-up funding of research. •Research funding from EU structural funds constitutes the main research income of research institutes/centers and enabled universities to survive financially since the economic crisis hit Latvia in 2008. One could ask the question whether EU-structural funds will endure and offer sufficient financial viability for the R&D system in the long run. •Most stakeholders indicate a lack of any national research strategy, and suggest that research funding is not currently linked to national research priorities. They are therefore able to set their priorities and strategies (which, though necessary, results in possible fragmentation of research efforts). The institutions realize, however, that they have to compete for research funding from EU structural funds. This puts the Agency in a position to formulate priorities and national research strategy that institutions can then adhere to. However, the allocation criteria used by the Agency are not perceived as transparent and, as such, the Agency misses out on the opportunity to firmly set the agenda. Also, the cri- teria of the national competitive research programs appear to not be fully known among stakeholders. •The way in which basic state research funds are distributed among HEIs and research institutes/centers is, to a large extent, non-transparent, and creates the perception of an atmosphere of unfairness, despite the fact that there seems to be a kind of formula system including performance indicators (in an implicit way). •Many stakeholders indicate that a stronger performance orientation could help the system. If additional resources could be opened up, than a transparent rela- tionship to explicit performance criteria would be welcomed. The idea of joint funding of the two core missions of the university could also require an inte- 84 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding grated system of performance indicators in teaching and research, leading to a flexible lump sum from the performance oriented funding pillar. •The evaluation process recently conducted provides a good basis for a selective research funding system that is potentially more aligned with national research priorities, competition, and focus on strength areas. The quality process can be used to formulate quality-oriented (performance) indicators that may be integra- ted into the research funding systems of the Ministry and the Agency, e.g., inclu- ding performance agreements. 4.5 Diversification of financial resources for HEIs Strengths (diversification of resources) The legal structures enable resource diversification. (Criterion: promote accessibility of income sources) The legal framework in Latvia allows HEIs to diversify their resource base and to look for all kinds of income streams with only very few restrictions. They are allowed to charge tuition fees, principally without regulation of their volume. They are also able to generate profits from professional training or commercial compa- nies. They might also establish foundations and rent out their facilities (for educa- tional purposes). Overall, the system enables HEI institutions to generate specific revenues according to their particular situations (for instance, the University of Latvia owns a lot of real estate and possesses endowments). Potential performance impacts: This autonomy is expected to generate an outside orientation of HEIs. There are many fee paying students who are willing to invest in higher education. (Criteria: stability create a competitive environment) Many students are apparently willing to invest in higher education and collectively create a substantial resource base for HEIs. These additional revenues for HEIs would help them survive and to start up new initiatives, such as new teaching pro- grams (especially as public funding through the study place model does not stimulate program innovations). Potential performance impacts: Innovativeness and orientation towards the market (“relevance”). Substantial funding from EU structural funds for HE and research is a major source of diversification. (Criteria: financial sustainability; promote national strategies; competitive environment) EU structural funds enabled the HE sector in Latvia to survive in the period of economic crisis since 2008 and, helped to further develop the Latvian R&D sector. Given that these funds are allocated through a special agency provides the oppor- tunity to promote national research priorities, stimulate competition, and enhance performance orientation. HEIs are strongly aware of the importance of their REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 85 income from EU structural funds (allocated within Latvia) and other potential EU-research funding (allocated though EU agencies), and, as such, will be res- ponsive to criteria related to such funds. Potential performance impacts: Quantity and quality of activities. Latvia has a substantial private higher education sector which offers students alternatives next to the full-fee paying opportunities of the public institutions. (Criterion: stimulate a competitive environment) The existence of a substantial private higher education sector offers students additional choice, provides them with access opportunities beyond the scope of the public budget, and enables more professionally-oriented programs to flourish. In addition, this challenges public HEIs to offer relevant, good-quality education. This of course requires institutions some level playing field for private higher edu- cation to compete in terms of diplomas and degrees that are offered. Since private HEIs often offer more professionally-oriented programs, they also stimulate diver- sity in the system and foster close cooperation with industry. Potential performance impacts: Quality, satisfaction of diverse needs, relieve of the public budget. Weaknesses (diversification of resources) There is strong reliance on tuition fees and EU structural funds rather than on a stable state budget for teaching and research (about 1/3 of total funding). (Criteria: guarantee continuity in funding mechanisms, promote risk spreading and management) Alongside the positive effects in terms of creating a competitive environment through income diversification, the strong reliance on tuition revenues and EU-structural funds for research instead of stable basic funding from the govern- ment may harm the long-term financial viability of HEIs in case these revenue streams are not very reliable. Due to demographic decline, it is well-known that tuition fee-revenues are under pressure. In addition, structural funds may not be eternal, either (though they appear stable in the mid-long-term). As such, it would be good if HEIs intensify their pursuit for further resource diversification in order to further spread the risk. At the moment, financial sources outside the state budget typically lead to new dependencies and risks, instead of addressing these risks by spreading them across a balanced set of income streams. Potential performance impacts: Quality problems and a potentially shrinking HE system. Income from private sources like industry or community services appears to be underdeveloped. (Criterion: promote risk spreading) Both stakeholder interviews and research suggest that revenues from other sources (like business and industry, but also from research and services for pub- lic sector organizations and international sponsors) are limited. So on the one hand the share of diversified funds seems to be high and does not necessarily 86 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding have to be increased, but on the other hand the degree of diversification within these funds is not sufficient. Though HEIs receive about 15 percent of their revenues from other income sour- ces, it is not known how much of these revenues are linked to educational “servi- ces”, donations, or, for instance, renting out facilities, etc. Potential performance impacts: Insufficient transparency and explicit risk manage- ment. A variety of funders may distract HEIs from setting their own research priorities. (Criterion: promote institutional profiles; avoid undesired effects) Though it is good that institutions are sensitized to external incentives around per- forming in certain areas through resource-competition, such competition may have adverse effects if the performance criteria are not steering the institution in the right way. It can thus either contribute towards, or distract from, HEIs setting “the right” priorities. In the Latvian case, where EU structural funds for HEIs are so significant, it is important that these allow or stimulate institutions to develop their own (research) profiles, providing they fit with national strategic priorities for higher education. Without well-established priorities, the system can easily dege- nerate into ad hoc activities, which are contingent on available financing. The role of “other sources” is substantial (around 15 percent) but is not transparent. Potential performance impacts: Less strategic focus and as a result intransparen- cy, less mass and reduced quality. National data as well as institutional information demonstrate the there are many resources, which are defined “other”. This lack of transparency harms a full understanding of the funding and financial situation of HEIs. (Criterion: make funding transparent) At both the national level and the institutional level, there appear to be substantial financial flows labeled as “other revenues”, which might correspond to endow- ments, income from rental activities or anything else. It is encouraging to see that — at least the largest universities — are capable of generating additional revenu- es. The risk, however, is that society cannot be easily convinced that HE is under- funded. Not knowing where these resources come from and what they are spent on makes HE out to be a bit of a “black box”. Although strong institutional autono- my easily allows for cross-subsidizing between various types of activities, it does so only at the expense of the real cost calculation of education and research. Potential performance impacts: This decreases trust in the HE system and a redu- ced likelihood of increased public spending on HE and research. Despite the positive general assessment of state regulations in the context of diversification, there are a few minor (perceived) restrictions for generating income from diversified sources. (Criterion: promote accessibility of diverse income sources) Although current regulation for public universities enables them to achieve com- prehensive revenue generation, there are some exceptions. Yet there is no reason why, for example, conference facilities cannot be rented out for purposes other REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 87 than education; something that is presently prohibited. Similarly, machinery fun- ded by EU structural funds cannot currently be used for commercial purposes in the first 5 years; curtailing the possibility to generate additional income. Potential performance impacts: Underemployment of premises, equipment and re- sources as well as suboptimal university engagement with society. Overall conclusions (diversification of resources) •The Latvian HE sector has made a number of strong steps in the direction of resource diversification: the legal framework for this is favorable (with very few exceptions). As such, HEIs have become less dependent on state budgets and thus can survive political-economic shocks like the recent financial crisis. The major external resources appear to be tuition revenues for teaching and nationally-allocated EU structural funds for investment and research. However, further revenues from private resources like industry and public organizations appear to be underdeveloped. The share of diversified resource seems to be fine, but the degree of diversification through spreading revenue over a variety of sources could be increased. •Tuition fees for additional student places may be an unreliable source of income in Latvia due to demographic decline. In addition, the strong outward internatio- nal student mobility may impact on these resources. As such, HEIs must offer students attractive and good-quality education to ensure this income stream is as viable as possible. Moreover, EU structural funds may also not be an ever- lasting revenue base: although there is mid-term stability, countries and HEIs must also forecast and prepare for long-term research revenues. •Latvia shows that many people are willing and capable to invest in higher edu- cation. However, the best students, who often come from more advantaged groups in society and are likely to have the best employment opportunities, are exempted from making private contributions. This means that Latvian HE is missing out on an additional revenue stream. •Finally, there is an issue concerning transparency, particularly with regards to the relatively large portion of resources labeled as “other revenues”, particularly for a few universities. If the HE sector wants to plea for additional resources to overcome a situation of underfunding, one has to clearly demonstrate what is meant by “other resources” and how these are allocated. 88 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding 4.6 Financial autonomy of HEIs Strengths (financial autonomy) There is strong institutional autonomy to internally distribute resources and also to build financial reserves. (Criteria: guarantee autonomy of internal resource allocation; guarantee academic freedom) Latvian higher education institutions exercise a large degree of autonomy with respect to the internal allocation of financial resources. This implies that they are relatively able to reallocate resources between departments and different activi- ties. As such, cross-subsidization is possible in cases where an institution wants or needs to do so, e.g., in order to maintain a study program with relatively low student numbers. Aside from money, state-funded student places are also able to be reallocated by the HEI, up to 10 percent of student places. Although HEIs are allowed to build reserves for future periods, this remains a theoretical propo- sition, since financial constraints do not allow substantial sums to be carried over to the next year. Potential performance impacts: Strategic focus and quality. The financial autonomy provides a prerequisite for developing institutional strategies and profiles. (Criterion: promote institutional profiles and strategies) Within the limits of total resources, HEIs can mobilize the financial resources necessary to develop and realize their own strategies and profiles. They have the freedom to allocate funds according to their own research and teaching prio- rities. This is a necessary condition for HEIs in becoming successful; particularly in teaching and research areas. It sets incentives for the efficient use of resources. Potential performance impacts: Strategic focus on strengths creates mquality (excellence) and efficiency. Higher education institutions also have the autonomy to set the tuition levels for fee-paying students. (Criteria: stability; promote accessibility of income sources; take into account cost differences) With the freedom to determine their own tuition levels, institutions are also able to determine which student markets they want to serve. This will help them to financially sustain particular study programs or to generate resources necessary for new initiatives and innovations. It also enables institutions to distinguish between low- and high-cost programs, and to use tuition fees as price signals on the student market. Finally, it enables HEIs to pursue their own plans for study offers, beyond those study places determined by the state. Potential performance impacts: Satisfaction of society’s needs for relevant qualifi- cations. REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 89 Higher education institutions also have the autonomy to borrow money at the capital market for investing in infrastructure, like buildings or expensive research equipment. (Criteria: stability; take into account cost differences) HEIs are given the freedom to borrow money on capital markets to invest in re- search infrastructure or “housing”. Since capital markets use strict criteria, HEIs seeking to invest often also need complementary financial support via govern- ment or EU structural funds. But this autonomy provides more flexibility for long- term investments in innovative ideas. Potential performance impacts: Innovativeness. Weaknesses (financial autonomy) Institutions are not fully aware of the degree of autonomy they have. (Criteria: transparency; provide clear and non-fragmented incentives) Following stakeholder interviews, it became clear that neither representatives from HEIs, nor from the Ministry, nor the Agency knew exactly the precise limits of the financial autonomy of HEIs. Can they use teaching resources for research or the other way around? Can they cross-subsidize teaching with research grants from EU-structural funds projects? Are they able to set their own tuition levels beyond the levels of state subsidies for study places, or even beyond the actual / normative costs calculated by the ministry? Potential performance impacts: Intransparency can lead to suboptimal levels of quality and efficiency. The financial autonomy of HEIs can raise issues with external partners whether resources are used for what they were meant to do. (Criteria: transparency; unambiguous and balanced funding) During the stakeholder interviews, some external partners of HEIs raised the point of questioning whether some funds are used appropriately for their intended activities. Are teaching funds used for research, or are EU structural funds for research used to maintain low tuition fees? It seemed as though there were con- cerns about what happens with the money given to HEIs. Such non-transparency may be harmful for public trust in HEIs. However, rather than enforcing spending and autonomy limitations, the issue of trust should could instead be resolved through more transparent performance relationships and greater transparency with regard to the volume and quality of teaching and research. It would be fatal if, given the impression of the misuse of funds, the situation returned to earmarking and specific line-items. The focus should be on the transparency of income streams and on the effects the use of money has in terms of academic per- formance. Potential performance impacts: Intransparency can lead to reduced trust and therefore suboptimal investments by government, industry and students in HE. 90 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Financial autonomy of HEIs may prevent them from aligning with a national strategy. (Criterion: promote national strategies) If HEIs enjoy a large degree of (financial) autonomy, they may not feel strong incentives to adhere to national priorities and strategies. One can think of the number and vast diversity of study programs, e.g., leading to duplications of pro- grams in particular fields, while leaving other fields under-served. One might also conceive of situations where strategic research orientations of various universities overlap or are not adequately filled. As a result, the ministry may have lesser grip on the HE and research landscape than they might wish for. On the other hand, activities could be organized in a more efficient and flexible way compared to a situation in which the ministry defines everything. Decentralized decisions usually benefit from better information. Finding the right balance is thus an art. Potential performance impacts: Problems with national priorities. Overall conclusions (financial autonomy) •Higher education institutions enjoy a great deal of (financial) autonomy and, as such, can flexibly, efficiently and effectively spend their resources. They can also use this spending freedom to develop their own strategies and priorities for teaching and research. •Whereas HEIs often appear to be unaware of their real autonomy — potentially leading to a sub-optimal allocation of resources — some external stakeholders perceive that they have too little influence on what universities can or can’t do. Somehow the opaqueness about this situation will have an impact on the trust- relationships HEIs have with their external partners, like the Ministry, the Agency as well as industry, etc. Transparency, rather than returning to a state of greater finance regulation, should be the answer to this emerging problem. •The freedom to make their own decisions, e.g., with respect to tuition fees, educa- tion offerings, research priorities, financial reserves or capital investments, enable universities to behave as competitive organizations. However, the rules of the game must be transparent and the system needs to be guided by some national strategies or priorities in order to generate a more effective HE system as a whole. 4.7 Student financing (tuition fees; study costs, student loans and scholarships) Strengths (student financing) Latvia has many tuition fee paying students. (Criteria: create a competitive environment; promote accessibility of diverse income sources) Latvia has a very high proportion of full fee-paying students compared to many other European countries. This indicates that many people attach substantial value to higher education and are willing to bear the financial burden of the tuition REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 91 fees. It also provides HEIs with substantial additional revenue to contribute towards the maintenance of their institutions, offer a wide array of study programs, and launch new initiatives. The fact that many students need to pay may also stimulate a more customer- oriented attitude among students and institutions, which may result in higher quality services. Potential performance impacts: Investments in higher education, quality. Tuition fees are often related to the amount of government funding provided for various study programs (disciplines) and as such also take into account cost differences. They also can take into account capability to pay. (Criterion: take into account cost differences) Students in more expensive study programs (e.g., science and engineering) often pay higher tuition fees than those in lower-cost studies, such as law, business administration and social sciences. Since full-tuition students constitute the majo- rity of students, this also guarantees that more expensive studies will not be underfunded. This may create a good signal to the market, although might also incentivize students to opt for cheaper programs at the expense of more expen- sive (and sometimes national priority) programs (what is currently counterbalan- ced by the distribution of state-financed study places). The University of Latvia reacts to these potential problems by setting a flat fee for all students (average of prices for study places, this also guarantees affordability of expensive programs). Some programs or institutions in the region use their autonomy to exempt stu- dents from paying the tuition fees, since many of them are from poor back- grounds (e.g., at the University of Daugavpils). These students will then have to be cross-subsidized by other students or revenues (which are also limited as seen above). Potential performance impacts: Quality, access and well-considered/cost-oriented study choices. Student loans are in general available to a substantial number of students covering tuition fees, living expenses, other study costs as well as study abroad. Repayment conditions are favorable. (Criterion: perceived fairness) All students who want to borrow and who have relatives or friends that can act as their guarantors are able to take up student loans for tuition fees and living expenses. As such, most students should be able to pay for their costs of study and repay them after graduation. The loans include relatively favorable repayment conditions, such as no interest during studies, a one-year grace period, relatively low interest during repayment, and various government debt cancellation arrange- ments (in case of having a child or working in “socially desirable” jobs). This sti- mulates education investments by young people, guarantees access, and helps Latvia to attract relatively many people to higher education regardless of the very low public investments in HE. Student loans can also support students seeking to study abroad. Potential performance impacts: Access. 92 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Merit based scholarships for very few absolute top performing students on publicly subsidized student places create a positive climate for top-performance. (Criterion: create performance rewards and sanctions) Students on publicly-subsidized full-time study places can compete for a relatively small number of scholarships (14 percent of them receive one, about 5 percent of all students). These scholarships (of EUR 100 per month) cover a substantial part of the monthly expenses of a student. Only the top-performing students are eligible and awarded the scholarship, thus generating a pursuit towards excellence among the top-performing students. This is another element that proves that overall the Latvian funding system is largely merit-focused, rather than means-based. Potential performance impacts: Student performance (excellence), efficiency. Weaknesses (student financing) Heavy reliance on fee paying students in connection with demographic change creates access issues and endangers financial viability of HEIs in the long run. (Criteria: stability, perception of fairness) Due to demographic developments that exhibit a declining trend in Latvia, the strong reliance on tuition fee-revenues poses a threat to the financial viability of many HEIs in the long run. In any case, it calls for a greater emphasis on efficiency in the system in terms of minimum numbers of students in study programs and classes, teaching methods, etc. The combination of a reliance on tuition fees and strongly merit-based (and not means-/needs-based) subsidization leads to problems in terms of access for students from lower socio-economic backgrounds. Sometimes the high share of fee-paying students is declared responsible for “brain drain” from Latvia, which, in particular, occurs to tuition-free countries in Northern Europe. This is nevertheless an assumption and there is no empirical evidence confirming or rejecting this argument. Taking into account the fact that attractive- ness of studies (in terms of funding) is not only related to tuition fees, but to the whole financial situation (including living costs), it is not fully plausible that tuition fees in Latvia results in students migrating to Scandinavian countries. Many stake- holders confirmed that those students choosing to study abroad do so, on the basis of expected quality outcomes and the reputation at universities in European countries, compounded by a lack of trust in the quality in Latvia. As such, this will not be used here to criticize the tuition fee situation. Potential performance impacts: Reduced income may endanger the quality and efficiency of education. Distinction between publicly subsidized students and full-cost fee paying students based on grade point average in secondary education (dual-track system) creates a potential loss of income for the HE system and could endanger fairness and hence access to higher education for lower socio-economic classes. It also forces many students to work. (Criteria: promote risk sharing; promote accessibility, fairness) The one-third discrepancy between students who get on publicly-subsidized study places and those who have to pay for their own education (which is first of all based on merit, i.e., success in secondary education), though a good mechanism to sti- REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 93 mulate high-quality students to enter HE, might also generate conditions of social unfairness. In general, all around the globe, children of richer (and often higher- educated families) tend to show substantially better results in secondary education. As such, giving the tuition-free study places to the best students in practice means that these places will most likely be given to children from the better-educated and more affluent parts of Latvian society. Rewarding excellence implicitly means sanc- tioning lower socio-economic classes, even when they qualify for higher education. As a result, students from poorer backgrounds more often than not have to pay for higher education. This leads to inequalities and raises concerns about the criterion of fair access to higher education. Interestingly, one can also argue that if so many students from less educated and less affluent backgrounds are prepared to pay for HE through tuition fees (currently two-thirds of the student body), then HEIs lose tuition revenues from the other third of the student population who in most cases could afford to make these payments. The aforementioned situation leads to a high percentage of students working, many of them even full-time (stakeholders also reported students taking one year off from their studies to earn money). This calls for target-oriented and efficient study processes. Potential performance impacts: Access/equity problems as well unexploited reve- nue generation capacity. Calculation of tuition fees is often based on the ministerial prices from the study place system. The real cost of education is perceived to differ from this. (Criteria: take into account cost differences; financial sustainability; promote diverse income sources; transparency) HEIs can charge full tuition fees and are in principle free to determine the maxi- mum. In practice, institutions tend to charge the value that is allocated by the Ministry for the state-funded places, as this is also the amount that students can borrow through the “study loan” scheme available for study fees. Institutions nevertheless differ: for example, the University of Latvia charges every student the average amount of the various “study place subsidies” they receive from the government, while some regional HEIs substantially reduce their tuition rates or charge no fees at all because their “experience” informs them that students cannot afford to pay tuition fees. Altogether this means that the system is opaque, and that HEIs often do not charge the full costs of education to their fee-paying students. If this is true (i.e., that they are underfunded through the state study place funding model), then they are also charging tuition fees that are too low from their “full-cost paying tuition students”. These then also need to be cross- subsidized from some other revenues, which endangers financial sustainability and transparency. In addition, by failing to distinguish between fees for students in different study programs results in a situation whereby some students “over- pay” while others “underpay” for their program, with respect to the full costs. Finally, the full fee-paying model does not appear to work for many regional insti- tutions. On the one hand, they feel they are not able to charge full fees to students as they will then lose their market share. On the other hand, they experience diffe- rent cost structures than universities in larger cities. Since regional institutions are generally smaller and have fewer state-funded study places, they expressed that they tend to reduce the wages for “local teachers”. If they attract particular teachers/researchers from larger cities, they then have to pay them higher wages (comparable to what they could receive in the cities) in order to come work for 94 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding them. All in all, cost structures are not transparent and are not well-matched to full-cost tuition policies. Potential performance impacts: Problems with teaching quality and access levels in programs that charge the full costs. The scholarships for the best publicly funded students are only available to the “happy few” and are so much focused on a very small group of excellent students that they do not create incentives for the large majority of students. (Criteria: create performance rewards and sanctions; perception of fairness) Offering scholarships to only the few very best students is intended to help students with their costs of living, while stimulating excellence. Since the scholar- ships only serve very few students on publicly-funded places, and only the top 5 percent of students, these subsidies are only helping students who have already been awarded a subsidized study place — those most probably given to students from better socio-economic classes (see above). In addition, the envisaged com- petition for excellence will only happen among the few already top students on publicly-subsidized study places. All other students will consider themselves ineligible, and thus will not strive towards excellence. Potential performance impacts: Access problems, less performance effects than advocated. Student loans are offered by the institutions using government guarantees for private banks to lend the money. Also the scholarships are offered via the HEIs. (Criteria: transparency, ensure administrative efficiency, fairness) Given that loans are offered on an individual basis by HEIs, one runs the risk that administrative systems differ among them; meaning that student loans are not pro- moted and communicated in the same way as might have been possible through one administering body. This could also lead to a situation in which students at one HEI are informed differently from students elsewhere, in the sense that they could be better helped. A strictly decentralized system is also likely to be more expensive in terms of operation costs, since HEIs have to probably each perform particular administrative actions that are then duplicated across HEIs, e.g., making arrange- ments with private banks; leading to inefficiencies. The same goes for the decentra- lized administration of merit-based scholarships. The decentralized approach — according to the stakeholders — also does not seem to work for means-testing, meaning that universities felt they were unable to adequately assess student needs. Potential performance impacts: Access/equity problems and efficiency losses (mo- ney that could be better spent). To obtain a tuition fee loan or a student loan one needs to have a guarantor guaranteeing collateral in case the student/graduate cannot repay his/her debt. But many Latvian school leavers are not able to provide such a person. (Criteria: promote national strategies; fairness) In countries where a large part of the labor force earns a salary close to the social minimum (around EUR 285 per month), demanding a guarantor who can repay the debt in case of default seems to be a particularly stringent criterion. This po- tentially results in excluding the poorest part of the population from one of the few REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 95 available funding sources, in cases where one would like to study on a fee-paying basis. This strong push towards a guarantee that student loans — rightfully — are to be repaid appears to be at odds with the various ways in which graduates can later have part, or all, of their debts written off, such as those who have children (30 percent debt cancellation for each child) as well as those working in “socially desirable jobs” (in which case the state covers the repayments). In some cases, there are alternatives to seeking guarantors; for instance, munici- palities can sometimes act as guarantors (motivated by the desire to recruit local labor force) or else there may be funds from donations. These options, however, are not widely available. Potential performance impacts: Access/equity problems and potential loss of talen- ted people. Student loans for other costs than tuition fees (like living expenses and other study-related costs) also are merit based. Need based student loans are missing. (Criteria: promote national objectives; fairness) Student loans (for living expenses and non-tuition study-related costs) can only be taken up by students on state-subsidized study places. Full-tuition students cannot take up such a loan; nor are they entitled to any scholarships. The norma- tive approach behind the merit-based model permeates the entire system, and stakeholder interviews indicated that this is based on a widely-accepted social concept. This implies that parts of the student population most in need of finan- cial support are denied such support. This creates a situation of inequity and disables access for students from lower socio-economic backgrounds. Since Latvia aims at increasing participation in order to generate a highly-educated labor force — expressed through its adherence to the European ambition to have 40 percent of the employees aged 25 to 34 that have been educated to degree- level — one could assume that there were stronger need-based policies to sup- port students from disadvantaged backgrounds. This, of course, requires instru- ments that are able to measure financial need, which interviewees suggested, though not necessarily easy to implement (e.g., because of an extensive shadow economy in the country) are neither impossible. If it is estimated that 40 percent of the labor force has an income at the level of the social minimum of EUR 285 per month and graduates on average earn EUR 1,000 per month, there must be some basic data available to gauge income levels. Potential performance impacts: Access/equity problems, potential loss of talents. Students seem not to be well informed; they need more information for rational study decisions. (Criterion: promote national objectives) It is also often the case across many countries that students make ill-informed decisions. This seems to also be true in Latvia: going abroad because of doubts about quality, debt aversion because of unclear labor market prospects, a multi- tude of study fee calculations, special systems such as the “rotation” of state study places, etc. Accessibility, especially for students who can’t seek help from their parents since they do not have an academic background, demands that there is an information system in place to support study choices. Potential performance impacts: Access/equity problems; loss of talented students. 96 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Overall conclusions (student financing) •The high proportion of fee-paying students constitutes a considerable resource to the system. HEIs get substantial additional revenues, which they can spend according to their own priorities, such as underpinning basic operational costs or funding new initiatives. However, in certain regions, people are often so poor that they cannot afford to pay the full tuition fees, resulting in some institutions dropping their prices. The fact that this occurs demonstrates that HEIs are able to adapt and respond to social issues. •With a declining demographic tendency, the forecasted number of fee-paying students will decline, resulting in diminishing revenue possibilities for HEIs. •Since many students have to pay full tuition fees if they want to study, this means that not all capable youngsters will enroll in higher education; or else will drop out at a later stage, due to the costs. This means that the full potential of people capable of achieving higher education may be underexploited, which ultimately might result in lower participation rates than anticipated by the govern- ment (e.g., the 40 percent ambition for the proportion of the higher educated in the 25–34 age cohort participating in the labor force). •One can also argue that the fact that so many students in Latvia are willing and able to pay tuition fees means that the system misses out on some revenues that could be generated from other students (i.e., one-third of the student popula- tion), for whom tuition fees would likely be affordable (see next bullet). •Problems with access to higher education are compounded by the strong merit- orientation of the system. Although it is good to stimulate student performance with merit-based elements, in the Latvian system this tends to lead to cumulative benefits for the very best: they land themselves free study places, receive scho- larships, and are then able to take out an additional loan to cover living expen- ses. It is moreover well-known (and well-documented) that the highest-achieving students generally come from the better-educated and more affluent. Neverthe- less, means-/need-based elements also play a minor role, but only as second- order criteria for the allocation of study places. •It is very positive that Latvia appears to have a well-functioning student loans system with relatively favorable repayment conditions, since this helps about 20 percent of the fee-paying students with their tuition costs, as well as suppor- ting 15 percent of subsidized students with their living expenses. •However, for several reasons, large numbers of students cannot or do not want to use the loan facilities. This might be due to the “guarantor” requirement and non-availability of student loans (for living expenses) for students on fee- paying places. As such, many students need to take on jobs alongside their studies in order to pay for their costs, or else ask for support from their families. •Scholarships are only available to the very best students on subsidized places. As such, they only reach a very small select group of students who are likely to belong to the wealthier parts of society. This is not a very effective way of sti- mulating excellence, and fails to create incentives for the majority of students who will never be able to attain top performance. REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 97 Appendices Appendix 1 Latvia’s Current Funding Model 1.A Relevant framework conditions in Latvia The development of the Latvian higher education funding model will need to take into account relevant framework conditions in the country. Latvia had one of the fastest growing economies in Europe over the past decades; however, it has also seen a dramatic contraction during the economic crisis. Annual GDP growth was cumulatively at 33 percent during the years of accession to the European Union (2004–07); the cumulative decline from 2008–10 was at minus 25 percent (Aslund & Dombrovskis, 2011, p.12). After the phase of contraction due to the economic crisis, annual GDP growth has since been picking up, reaching 5.3 percent in 2011 and 5.0 in 2012 respectively. Unemployment fell from 16.3 percent in Q2 in 2012 to 11.3 percent in Q4 2013 (Central Statistical Bureau of Latvia). However, unemployment of tertiary educa- tion graduates is at 6 percent, significantly lower than the average rate. The indivi- dual and societal benefits of tertiary education have been extensively discussed elsewhere (see e.g., Arnhold & Kwiek, 2011, pp. 88–92); however, as for neigh- boring countries, tertiary education in Latvia can also be considered “the best unemployment insurance”. The most recent comprehensive research on the gra- duate employment is dated 2007. From the data available it seems that there are comparable employment outcomes for different subject areas, with the exception of graduates of humanities and social science which have slightly lower employ- ment outcomes three months after graduation (Ministry of Welfare 2007, p. 78). At-risk-of-poverty rate, which is the share of people with an equalized disposable income (after social transfers) below the at-risk-of-poverty threshold, for the age cohort 18–24 peaked in 2010 at 22.3 percent; slightly decreasing to 19.7 percent in 2012; with the rate being significantly higher across some regions in 2012 (e.g., 30.2 percent in Vidzeme, 30 percent in Latgale and 20.4 percent in Zemgale re- gions (Central Statistical Bureau of Latvia). The rate for students of that age cohort who are in tertiary education is slightly lower, as the following graph shows (Figure 3). 98 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Figure 3 Tertiary education students at risk of poverty or social exclusion Source: Authors’ calculations, based on Eurostat, SILC database However, approximately 16 out of 100 students are at risk of poverty and social exclusion. In 2012, the guaranteed minimum include (GMI) benefit was scaled back by 12.5 percent, from LVL 40 (EUR 57) per month to 35 (EUR 50) per month. Responsibility for providing the GMI benefit was devolved to local government. Latvia is one of the countries in Europe that has experienced and continues to experience significant demographic decline as a consequence of both lower birth- rates and migration trends. The net migration trend, for example, has continued since 2009; in 2012 it was minus 11,890 (Central Statistical Bureau of Latvia). More- over, the effect has been widespread across different regions (Table 13). Table 13 Long-term net Region Net migration of population (number of persons) migration of population, by region (2012) Riga -4,056 Source: Central Statistical Bureau of Riga region 240 Latvia Vidzeme -1,589 Kurzeme -2,334 Zemgale -1,544 Latgale -2,577 Total -11,680 Alongside these trends in migration, the school age population has also been rapidly declining since 2008 (Figure 4); however, anecdotal evidence indicates that a large share in particular of well-performing students emigrate at the end of secondary schooling22. 22 In a survey on their plans to study abroad, 50 percent of high school students in Latvia said they had such aspirations (Dream Foundation, 2011). REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 99 Figure 4 Evolution of total post-secondary school-age population in Latvia 2002–12 Source: World Bank; Graph compiled by authors Over the next decades, Latvia will thus be confronted with the challenge to increase productivity as the basis for continuous growth, given its fast and significantly shrinking population. The higher education sector will play a paramount role in pre- paring highly skilled individuals that are able to address these challenges. 1.B Description of the higher education sector in Latvia Performance of Higher Education in Latvia Higher education systems across the world have different missions and strategic goals; however, in one way or another all systems strive to transmit high-level skills to young people, prepare students for the labor market (including the aca- demic labor market), contribute to research and development and the ‘third mission’ of universities which can be defined as their role in regional develop- ment and societies as a whole. A full discussion of the performance of the Latvian higher education system would be beyond the scope of this report; however, a short overview focusing on select indicators seems helpful for the following discussion. As an EU member state Latvia has defined national targets for Europe 2020, the European Union’s competitiveness strategy. Two out of the five headline targets pertain to higher education (http://epp.eurostat.ec.europa.eu/portal/page/ portal/europe_2020_indicators/headline_indicators): •3 percent of the EU’s GDP should be invested in R&D. While 3 percent is the overall EU target, the national target for Latvia is 1.5 percent. Latest available Eurostat data show that in 2012 Latvia allocated just 0.66 percent of its GDP to R&D. •At least 40 percent of 30–34 years olds in EU member states should have completed a tertiary or equivalent education according to the other headline target related to higher education. The national target for Latvia is 34 percent; according to Eurostat 2013 data, 40.6 percent of Latvia’s 30–34 year olds have completed a tertiary education, so the overall EU target has already been attained. 100 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding In the context of the EU and the aforementioned indicators, enrollment and attain- ment rates, on the whole, do not seem to pose a serious problem. Tertiary level attainment has continuously increased since 2005 when it was at just 18.5 per- cent. The percentage of female students has also been continuously above 60 percent in recent years23. The latest available Eurostat data on graduates in science, technology, engineering, and math (STEM) are from 2012, and Latvia had 13.7 STEM graduates per 1.000 inhabitants in the 20–29 age cohort which seems low in the European comparison (EU 27 average was 16.8 in 201124. However, this issue already receives significant attention by policy makers in Latvia. Figure 5 shows that the distribution of students across ISCED levels (or levels according to the European Qualifications Framework)25 follows what can be considered a typical Northern European and UK pattern with a significant share of students being enrolled at the Bachelors level. There is a higher percentage of doctoral candidates in Latvia than in neighboring Lithuania; however, overall the percentage is lower than in comparator countries, perhaps pointing at possi- ble issues concerning the professional ‘pipeline’ for academia and also innova- tion-related professions that require skills at the academically advanced level. Figure 5 Distribution of students by the level of studies (2010) Source: UNESCO Institute for Statistics (2014), accessed on March 14, 2014 at http://stats.uis.unesco.org/ unesco/tableviewer/ document.aspx?ReportId=143 Vibrant higher education systems tend to have a high degree of internationaliza- tion and strive to attract renowned international scholars and talented students from other countries. However, also outward mobility can be highly beneficial, in particular if students return after a mobility period and become “agents of change” in their own evolving higher education systems and contribute as gra- duates to the labor market of their home country. 23 http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&language=en&pcode= tps00063&plugin=1 24 http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&plugin=1&language=en&pcode= tps00188 25 ISCED is an abbreviation for the International Standard Classification of Education, an instrument for compiling internationally comparable education statistics. http://epp.eurostat.ec.europa.eu/ statistics_explained/index.php/Glossary:International_standard_classification_of_education_(ISCED) REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 101 Figure 6 Outbound student mobility ratio Source: UNESCO Institute for Statistics (2014), accessed on March 14, 2014 at http://stats.uis.unesco.org/ unesco/tableviewer/ document.aspx?ReportId=143 While stakeholders in Latvia raise concerns about outbound student mobility, this type of mobility in Latvia is comparable to neighboring Lithuania and signifi- cantly lower than in Estonia. From the data at hand alone, outbound student mobility should not be a great source of concern in the Latvian sector. However, as in neighboring Baltic countries, outbound mobility of students does not seem sufficiently balanced by inbound mobility, which can be considered a proxy for system attractiveness in a European and international context. Scandi- navian countries and the United Kingdom, in particular, are much more successful at attracting foreign students, who often pay significant fees for their education abroad. Through these fees as well as through the transfer of know-how and more generally the inflow of talent, these students contribute to the increasing attractiveness of their receiving higher education systems. Figure 7 Inbound student mobility ratio Source: UNESCO Institute for Statistics (2014), accessed on March 14, 2014 at http://stats.uis.unesco.org/ unesco/tableviewer/ document.aspx?ReportId=143 As previously mentioned, investment in R&D is very low in Latvia. In 2005, it was at 0.56 percent of GDP, and it has fluctuated between 0.46 and 0.70 percent since 200926. 26 http://epp.eurostat.ec.europa.eu/portal/page/portal/europe_2020_indicators/headline_indicators. 102 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Accordingly, Latvia, overall, does not perform well in the area of research and development in comparison with neighboring countries. This applies in particular to indicators like the number of peer-reviewed articles published, though langua- ge barriers and preferences might also play a role. As Figure 8 shows, Latvia performs significantly lower than comparator countries. Figure 8 Number of peer-reviewed articles published Source: Scopus (2014) accessed on March 14, 2014 at http://www.scopus.com/ The number of patent applications has been fluctuating in recent years. Signifi- cantly less patent applications have been originating from Latvia during the years of the economic crisis (Table 14). Table 14 Breakdown of Invention Patent Applications by Categories and Years, 2007–2013 Total 2007 2008 2009 2010 2011 2012 2013 2007–2013 National applications 147 215 243 185 183 205 233 1411 Including domestic applications 139 206 240 178 173 193 224 1353 International applications (PCT) 15 7 – – – – – 22 Total number of applications 162 222 243 185 183 205 233 1433 Source: Patent Office of the Republic of Latvia, http://www.lrpv.gov.lv/en/patent-office/statistics/inventions The number of patent applications originating from Latvia that have been filed with the European Patent Office tended to be lower than those from neighboring Estonia, as illustrated in Table 15, with the exception of a substantial increase in 2013: REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 103 2011 2012 2013 Table 15 European patent applications by country of Estonia 29 42 41 origin Latvia 27 25 80 Source: European Patent Office Lithuania 14 19 22 Romania 20 35 30 UK 4,753 4,717 4,567 Czech Republic 164 139 149 Poland 247 385 371 Germany 26,226 27,276 26,645 Austria 1,735 1,874 1,995 Netherlands 5,619 5,063 5,826 To summarize, while the low level of funding for higher education does not seem to affect the mere number of students and graduates (the section does not dis- cuss the quality of provision), there might be a negative impact on research outcomes as illustrated by low number of articles in peer reviewed journals. This coincides with a comparatively low percentage of doctoral candidates out of the overall student population. These trends may negatively impact the future research capacity of Latvia, which may affect the viability of R&D as well as the overall attractiveness of the Latvian higher education system. Development of the Current System of Higher Education in Latvia The Latvian higher education system evolved in accordance with legislative changes introduced since 1991. In 1991, the legislative body of Latvia passed the Law on Education, which provided the legal basis for the introduction of tuition fees in higher education. This was a move from a fully state-regulated higher edu- cation system towards a system characterized by the interplay between the state, market and academia (Goedegebuure, Kaiser, Maassen & de Weert, 1994, p. 4). This development was further supported in 1995, when the national legislative body — Saeima — passed the Law on Higher Education Establishments. This law outlined the current structure in higher education and established the framework for institutional autonomy in higher education. In effect, higher education institu- tions were able to determine their internal structure, develop and adopt their own internal codes of conduct and procedures, establish academic programs, deter- mine the levels of pay above governmentally-established minimums for academic staff, and set tuition-fee levels at the institution. These changes were in line with the overall liberalization and democratization reforms taking place in the country following the collapse of the Soviet Union. Reforms in higher education thus aimed to modernize the sector, in order to meet the needs of a democratic society and market economy. The move from a fully state-regulated system towards a market-based and autonomous one changed the landscape of the sector. 104 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding In the reforms, significant emphasis was placed on the provision of enhanced educational mobility opportunities. Accordingly, the degree structure in the Lat- vian higher education system adheres to the three-cycle system of the Bologna Process, comprising Bachelors (undergraduate), Masters (graduate), and Docto- ral-level studies. Within this three-cycle system, study programs can be of either professional or academic orientation. Programs of both orientations are offered by university and non-university types of public and private tertiary institutions (Eurydice, n.d.). Universities administer programs on the level of Bachelors, Masters, and Doctoral or their equivalent level of studies. Non-university types of institutions offer Bachelors and Masters degree programs. The distinction between university and non-university types of HEIs in Latvia is stipulated by the Law on Higher Education Establishments (Saeima, 1995). The main distinction between the two types of institutions, as mentioned above, is that while universities offer Doctoral study programs, non-university HEIs do not have such study programs. Non-university HEI status can, however, change their status and become universities by developing and receiving accreditation for a particular Doctoral study program. Colleges are distinct types of non-univer- sity institutions that offer first-cycle professional higher education programs, in accordance with what was described as ‘short higher education’ in the Bologna context. The full duration of these programs is between two and three years. The funding formula in the case of these institutions is similar to the one applied for public HEIs, whose allocation is done on a per-capita basis, per study pro- gram. College graduates may continue pursuing higher education, should they wish to obtain higher professional or academic degrees. Holders of academic and professional bachelor degrees are eligible for admission to both types of master studies, whose paths make them also eligible for doctoral studies, resulting in the promotion of upwards educational mobility. Another significant outcome of higher education reforms was the expansion of the sector. The number of institutions of higher education grew from 10 state- owned institutions in 1988, to 34 public HEIs and 27 private HEIs; including both colleges, and three branches of foreign HEIs (Central Statistics Bureau, 1989; MoES, 2012). To provide quality assurance in higher education, it was stipulated that only state-accredited HEIs and study programs were able to graduate stu- dents and issue a corresponding diploma recognized by the state (Saeima, 1995). The condition of accreditation of tertiary institutions and study programs was extended to accessibility of public funding for higher education, such that only accredited study programs are eligible for state funding, and only students in these programs can receive student loans that are subsidized by the govern- ment. One element of continuity from the previous era is the multi-ministerial oversight of the sector. There are currently seven ministries that oversee at least one of the institutions of higher education in Latvia (Table 16). The most recently established institutions of higher education operate under the oversight of the Ministry of Edu- cation and Science (MoES), together with some older institutions. REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 105 Table 16 Supervision of ministries over public HEIs and colleges Ministry Institutions of Higher Education Colleges University of Latvia Riga Building College Riga Technical University Riga Business College Daugavpils University Riga Technical College Liepaja University Olaine College of Mechanics and Technology Latvia Academy of Sports Education Liepaja Maritime College Ministry of Education Latvia Maritime Academy Jekabpils Agrobusiness College and Science Riga Teacher Training and Educational Daugavpils Medical College Management Academy Rezekne Higher Education Institution Malnava College Ventspils University College P.Stradins Medical College of the University of Latvia Vidzeme University of Aplied Sciences Riga 1st Medical College BA School of Business and Finance Riga Medical College of the University of Latvia Ministry of Health Riga Stradins University Red Cross Medical College of Riga Stradins University Ministry of Agriculture Latvia University of Agriculture – Latvia Academy of Culture Ministry of Culture Latvia Academy of Arts Latvia Culture College of Latvia Academy of Culture J.Vitols Latvia Academy of Music Ministry of Defense National Defense Academy of Latvia – Fire Safety and Civil Protection College Ministry of Interior – State Border Guarding College State Police College Ministry of Welfare – Social Integration State Agency Source: Authors, based on data provided by MoES, 2014 The majority of HEIs established after 1990 is privately funded, and primarily loca- ted in Riga. However, several public higher education institutions that receive direct public subsidies have also been established; among which are regional public non-university type HEIs in Valmiera, Rezekne and Ventspils, established in 1996, 1993 and 1997 respectively. All institutions of higher education — univer- sity and non-university type institutions including colleges, which offer short cycle professionally oriented higher education — receive public funding according to the same set of rules, elaborated in greater detail later. In 2012/2013, Latvian HEIs together offered a total of 910 study programs across eight subject areas and 29 study directions. The majority of study programs is implemented in Social Sciences, Commercial Sciences and Law: 316; followed by 106 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Engineering, Manufacturing and Construction: 160; and Arts and Humanities: 110. The distribution of the total number of students (99,474 students) across subject areas differs slightly from that of study programs, i.e., the largest share of students study Social Sciences, Commercial Sciences and Law: 39,252; Engineering, Manufacturing and Construction: 13,751; Health and Social Welfare: 11,832; which points to differences as to the average number of students per study pro- gram in various subject areas (MoES 2012). The most recent data on higher education published by MoES display the ten- dency of a decreasing number of students within a relatively stable number of stu- dy programs. At the beginning of the academic year 2013/2014, the number of study programs was close to the previous reporting year — 901; in state HEIs and colleges, 700, and in private HEIs and colleges, 201. The distribution of programs across subject areas has not significantly changed: Social Sciences, Commercial Sciences and Law: 310; followed by Engineering, Manufacturing and Construc- tion: 159; Arts and Humanities: 122; Health and Social Welfare: 83; Natural Scien- ces, Mathematics and Information Technology: 82; Services: 68; Education: 63; and Agriculture: 14. The most notable changes of the program structure have taken place in Arts and Humanities which gained 12 study programs and in Edu- cation which lost 15 study programs. Table 17 Study Programs offered by HEIs in Latvia, 2013/2014 Number of Number of Proportion Proportion programs Number of programs Number of of of No. Total administered students carried out students programs students Subject Number of number of by public at public by private at private at public at public Area Subject area programs students HEIs HEIs HEIs HEIs HEIs (%) HEIs (%) 1 Education 63 5,435 63 5,435 0 0 100 100 2 Arts and Humanities 122 8,119 98 6,441 24 1,678 80 79 3 Social Sciences, Commercial 310 36,317 186 18,380 124 17,937 60 51 Sciences and Law 4 Natural Sciences, Mathematics and Information 82 6,636 73 5,451 9 1,185 90 82 Technology 5 Engineering, Manufacturing 159 13,786 144 13,127 15 659 91 95 and Construction 6 Agriculture 14 1,559 14 1,559 0 0 100 100 7 Health and Social Welfare 83 10,977 69 10,118 14 859 83 92 8 Services 68 6,834 53 4,899 15 1,935 78 72 Total in HEIs and Colleges 901 89,663 700 65,410 201 24,253 78 73 Of Undergraduate Studies which (College, Bachelor, 504 72,650 368 51,233 136 21,417 73 71 Professional) Graduate Studies 397 17,013 332 14,177 65 2,835 84 83 (Master and Doctorate) Including Doctoral Studies 93 2,404 85 2,198 8 206 91 91 Source: Authors, based on data provided by MoES, 2014 REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 107 Student numbers have, however, changed more prominently: in 2013/14, the total number of students is 89,663, which represents a decrease of about 6 percent compared to the previous year. Again, the distribution of students across subject areas does not match that of study programs. The number of students in both public and private HEIs studying Social Sciences, Commercial Sciences and Law is 36,317; Engineering, Manufacturing and Construction: 13,786; Health and Social Welfare: 10,977; Arts and Humanities: 8,119; Services: 6,834; Natural Sciences, Mathematics and Information Technology: 6,636; Education: 5,435; and Agriculture: 1,559 (MoES, 2014). Higher Education Students in Latvia Entrance to tertiary education in the form of first level professional education (i.e., short cycle) and Bachelor degree programs is granted to secondary educa- tion degree holders who meet the admission criteria set by the relevant higher education institution(s). Since 2006, most higher education institutions in Latvia admit students on the basis of the national centralized high-school graduation exams (Cabinet of Ministers Regulations No. 846, adopted on October 10, 2006, “Regulations Regarding the Requirements, Criteria and Procedures for Admission to Study Programmes”) in which students are selected competitively based on their results in national exams as per their chosen field of higher education study. Institutions of higher education are free to set additional student selection criteria should they wish. In principle, students are able to study in either full-time or part-time mode, provi- ding that part-time study programs are offered by tertiary institutions in the res- pective area of studies. Not surprisingly, the proportion of students in full-time study programs at public institutions of higher education has always been bigger than in part-time study mode. In 2013/14, 80 percent of all students at public HEIs were in full-time education (MoES, 2014). While in full-time study programs at public HEIs, a proportion of students are able to study in the state-funded study places without paying tuition, in part-time study programs, students are almost without exception charged tuition fees. That is, only full-time students in Latvia are eligible to compete for fully state-funded study places (Cabinet of Ministers Regulations No. 994, 2006). In 2013/14, 35 percent of full-time students at public HEIs, including colleges, paid tuition fees (MoES, 2014). For part-time studies, nearly all students paid tuition. Data from 2013/14 show that the majority of students, 73 percent, study at public HEIs, colleges included (MoES, 2014). Of the 65,410 students enrolled in public higher education sector, 56 percent paid tuition fees, charged by their institution. Depending on the institution and study program, tuition fees at public institutions of higher education in Latvia in 2013/14 ranged: from EUR 882 to EUR 5,208 per academic year for Bachelor degree students; from EUR 384 to EUR 15,000 in Masters’ degree study programs; and from EUR 1,067 to EUR 9,135 in Doctoral degree study programs (MoES, 2014, p. 77). 108 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Figure 9 Students by mode, level and financing of their studies at public HEIs, 2013/2014 Source: Authors, based on data provided by MoES, 2014 Table 18 summarizes the latest information on tuition fees and other fees collected in public or government-dependent private higher education institutions in Europe27. Across eight countries in the first cycle of higher education, and five countries in the second cycle, no fees are collected. Compared to other European countries shown in Table 18, where fees are collected, tuition fees in Latvia (as well as in Lithuania and Hungary) are relatively high (even in nominal value), both in the first and second cycles. However, because of the dual track tuition fee system applied in Latvia, the proportion of students paying fees is to some extent lower, when compared with those European countries where other than nominal (< EUR 500) fees are collected. The primary pool of students for HEIs in Latvia is local residents. At the same time, institutions of higher education seek to increase the number of international stu- dents. According to the Guidelines for the Development of Education 2014–20, the Government of Latvia aims to increase the number of foreign students in higher education institutions so that by year 2020 8 percent of the total number of students are foreign students studying for obtaining a degree or qualification (project approved by the Cabinet of Ministers on January 7, 2014). Admission requirements for international students include completed prior education which would qualify them for admission to tertiary education programs in their country of origin. An additional requirement is a good command of English. International degree seeking students in Latvia are only able to study in full-time mode. International students studying in Latvia pay tuition fees. Some institutions of higher education set higher tuition fees to non-EU students, while others charge the same amount of money across all students on the program. Students who are also citizens of the European Union are eligible to compete with local students for state budget places at public HEIs if they are able to study in the Latvian language28. 27 Information in Table 18 refers to fees collected in public or government-dependent private higher education institutions and covers fees of domestic/EU students in the first and second cycles only (Eurydice, 2013, p. 2). All fees are in nominal value (EUR). 28 However, state funded study places are also provided in programs which are either fully implemen- ted in an EU language or for programs where the majority of courses are in an EU language/-es (e.g., English philology or modern languages). REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 109 Table 18 Tuition fees and other fees in European higher education systems in 2013–14 1st cycle min. 1st cycle max. Most common 2nd cycle min. 2nd cycle max. Most common Proportion of students Country (EUR) (EUR) fee (EUR) (EUR) (EUR) fee (EUR) paying fees (%) Belgium (Flemish) 80 611 611 80 611 611 70 pay fees Bulgaria 59 741 59 793 Almost all pay max. fees All students pay Czech Republic 20 21 20 21 admission fees Denmark no fees no fees no fees no fees no fees no fees no fees Majority pay minimum Germany 200 1,000 200 1,000 fee Fees mainly charged Estonia 0 7,200 0 7,200 for incomplete ECTS 60% pay fees, all 1st Ireland 2,500 6,000 2,500 4,000 30,000 6,000 cycle pay 2500 EUR student contribution Greece no fees no fees no fees no fees no fees no fees no fees Spain 713 2,011 1,074 1,052 4,734 1,074 70% pay fees France 183 2,000 254 10,000 65% pay fees Croatia 665 1,329 665 1,329 61% pay fees Italy 1,300 1,300 88% pay fees Cyprus no fees no fees no fees no fees no fees no fees no fees 55% of 1st cycle and Latvia 903 4,876 918 6,571 40% of 2nd cycle pay fees Lithuania 625 5,260 1,411 6,249 48% pay fees Hungary 795 5,532 1,556 6,569 43% pay fees Malta no fees no fees no fees no fees no fees no fees no fees Austria no fees no fees no fees no fees no fees no fees no fees Poland 41 41 41 41 Portugal 631 1,066 631 1,066 All pay fees 45% of 1st cycle and Romania 525 2,819 525 2,819 37% of 2nd cycle pay fees Slovenia 1,210 9,375 2,800 1,250 12,462 2,800 Less than 20% pay fees All pay registration fees Slovakia 10 1,960 10 2,940 (10–100 EUR) Finland no fees no fees no fees no fees no fees no fees no fees Sweden no fees no fees no fees no fees no fees no fees no fees England 11,099 11,099 4,810 All 1st cycle pay fees All students pay fixed Iceland 373 373 fees Norway no fees no fees no fees no fees no fees no fees no fees Switzerland 830 3,319 830 3,319 Almost all pay fees Source: Authors’ calculations, based on data provided by Eurydice National Student Fee and Support Systems, 2014 * The range of tuition fees at public HEIs in 2013/14 according to data from the Ministry of Education and Science is slightly different. The lowest fee for part time Bachelor degree studies was EUR 882, for full time studies – EUR 968. The highest fees respectively were EUR 2077 and EUR 5208. In Masters’ degree programs the least tuition in part-time studies reported was EUR 384, in full time studies – EUR 818. The highest tuition in part time Masters’ degree study programs was EUR 3256, and in full time studies – EUR 15,000 (MoES, 2014, p. 77). 110 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding In addition, since 2012, international students in Latvia, together with students residing in countries that offer scholarships to Latvian students, can apply for a scholarship within the framework of intergovernmental agreements (as per Cabi- net of Ministers Regulations No. 68, 2012, “Procedures for Granting Scholarships to Foreigners”). Scholarships are allocated to students for study programs and research as specified by intergovernmental agreements. If the study program is not specified, international students in undergraduate and graduate study pro- grams studying in Latvian or some other official EU language may apply for one year of scholarship. For students in study programs administered in the Latvian language, Baltic philology, literature and culture or Master level studies in Latvian history, the scholarship can be awarded for two consecutive academic years, providing all course requirements are met. The minimum amount of the scholar- ship for international students in college, Bachelor and Masters degree programs is EUR 498, and EUR 669 a month in Doctoral programs. At the same time, governmental regulations might also mean that no scholarships are awarded if there is no sufficient funding for this purpose in the state budget for the respective academic year (Cabinet of Ministers Regulations No. 68, 2012). In 2012/2013, there were 88 scholarships distributed to foreign students, researchers, and facul- ty — 58 scholarships of which were for studies and research, and 30 of which were for participation in summer schools (MoES, 2013a). With respect to international full-time students in Latvia, most of them pursue a de- gree in the field of medicine and health care (MoES, 2012, p. 92). Among local students, however, enrollment is highest in the areas of social and commercial studies and law (MoES, 2013a). Overall, 42 percent of students were studying in these subject areas. Half of the students in social and commercial studies and law were enrolled at public HEIs. The majority of these students studied full time and independently financed their studies. Table 19 Students by subject area at public institutions of higher education in 2013/14 Proportion of Proportion Government government of students Proportion Proportion funded funded No. Total in the of students Full time of full time students at students at Subject number of thematic at public students at students at public HEIs public HEIs Area Subject area students group HEIs public HEIs public HEIs (no tuition) (no tuition) 1 Education 5,435 8% 100% 2,812 52% 2,308 42% 2 Arts and Humanities 6,441 10% 79% 6,184 96% 4,424 69% 3 Social Sciences, Commercial 18,380 28% 50% 13,152 71% 4,617 25% Sciences and Law 4 Natural Sciences, Mathematics 5,451 8% 82% 5,356 98% 4,676 86% and Information Technology 5 Engineering, Manufacturing 13,127 20% 95% 10,774 82% 8,854 67% and Construction 6 Agriculture 1,559 2% 100% 1,025 66% 807 52% 7 Health and Social Welfare 10,118 15% 92% 9,549 94% 6,200 61% 8 Services 4,899 7% 71% 3,125 64% 2,605 53% Total in HEIs and Colleges 65,410 100% 51,977 34,491 Source: Authors’ calculations, based on data provided by MoES, 2014 REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 111 There are some differences in terms of enrollment by subject area when Latvia is compared to EU27; however, the differences are less pronounced than one could expect from public debate which tend to highlight low(er) enrollment in STEM subjects in Latvia. Enrollment in humanities and social sciences combi- ned in Latvia accounts for 49 percent of all students enrolled; it is on average 46 percent in EU27. The STEM subjects account for 22 percent of all stu- dents enrolled in Latvia; the corresponding figure is 24 percent for EU27 (see Figure 10). Figure 10 EU-27 Tertiary Students (ISCED 5-6) by field of education (2010) Source: Authors’ calculations, based on Eurostat database While across law, social and business studies, there is a strong competition for local students between private and public HEIs, applicants in other subjects mostly study at public institutions. Across all study programs for services, arts and humanities, 71 and 79 percent of all students, respectively, are enrolled in the public sector. Public institutions enroll 82 percent of students in the area of natural sciences, mathematics and IT; 92 percent in health and social welfare; and 95 percent in engineering, manufacturing and construction. Agriculture stu- dents are exclusively enrolled in public institutions. Public funding covering tuition fees by subject area is most available to full-time students in natural sciences, mathematics and IT programs — 86 percent of which study free of charge. This is also the subject area with the highest pro- portion of full time students. The next top two subject areas with nearly a total full- time student enrollment are (i) health and social welfare and (ii) arts and humani- ties. However, in these subject areas, the government funds between 61 and 69 percent of tuition fees. Social and business studies and law are the most com- petitive in terms of publicly-funded study places, since the government covers tuition fees for only 25 percent of full time students (MoES, 2014). The aforementioned migration issues might possibly trigger questions about repayment modalities of migrating students. However, students who have studied free of charge in Latvia and have subsequently decided to move to another coun- try are not required to repay part of their study-costs. They would only need to pay back a government-guaranteed loan to cover the costs of their studies, if applicable. At the moment, no data are available for Latvia on the proportion of higher education graduates who have received state-funded higher education and have moved on to pursue professional careers in other countries (however, general data on migration are provided in the initial part of this section). 112 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Across Latvia, a high number of students pursue work alongside their studies. A representative survey of students in Latvia reveals that almost half of full time students in Latvia are employed besides their studies (Koroleva et al., 2013). Of all students, 37 percent said they work full time, spending on average 30 hours per week working in their jobs (Koroleva et al., 2013, p. 51). The same study reports that in 2013 on study-related activities, full-time students spent about 34 hours a week on average (p. 56). On the one hand, this work experience might contribu- te to the development of skills and practical competences of students. However, a study on undergraduate student employment in Latvia finds that working while studying has a negative effect on their academic achievement (Auers, Rostoks, & Smith, 2007). An empirical study undertaken by these authors confirm that the majority of working students also pay tuition fees. While it seems likely that the high number of students working alongside their studies is related to the issue of drop-outs, further research is needed in Latvia to determine to what extent the inability to finance studies contributes to students dropping out of higher education. According to statistics provided by the Ministry of Education and Science (2013b), the drop-out rate at public institutions of higher education, (excluding colleges), has fluctuated between 12 percent and 18 per- cent during the years 2000 to 2010. The drop-out rate has been the same as in public institutions, on average, at private institutions of higher education. 1.C Funding levels of higher education and research in Latvia The focus of the following analysis is on the technical features of funding instru- ments. It is nevertheless also relevant to examine the Latvian situation of higher education with respect to funding levels; especially since there are recurrent dis- cussions regarding Latvia being an “underfunded” system. In order to analyze the validity of this argument, Latvia is once again compared against European benchmarks. The higher education sector in Latvia is funded from public and private sources. The total spending for higher education in 2012 was 1.4 percent of GDP or EUR 311.2 million (MoES, 2014). The state budget contributed 34 percent of the total funding. Private funding from students paying tuition fees paid con- stituted 24 percent. Other sources (where half of the funding comes from EU structural funds), constituted 42 percent of the total higher education revenue. As a proportion of GDP, higher education funding has not changed across the past decade, although there has been an increase in terms of the absolute budget. In 2001, the total higher education sector budget was LVL 68 million (EUR 99 million) and constituted 1.5 percent of GDP (MoES, 2002). As shown in Figure 11, the level of public expenditure on higher education in Lat- via (expressed as a percentage of GDP) was clearly lower than the EU-27 average — and was, in fact, the lowest across the Baltic countries — between 2001–2010. In 2010 (most recent data), public expenditure on higher education represented only 0.8 percent of GDP in Latvia, versus an average of 1.26 percent in the EU-27 countries and 1.23–1.27 percent in Estonia and Lithuania respectively. Unlike in Latvia, public expenditure has been constantly increasing in Estonia and Lithua- nia between the years 2006–2010. In 2008, just before the financial and econo- REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 113 mic crisis, Latvian public expenditures accounted already for 1.0 percent of GDP before the budget cuts in 2009 and 2010 returned it to the lowest levels in Europe. Among all EU-27 countries in 2010, only Bulgaria (0.61 percent of GDP) exhibited a lower level of public expenditure on higher education than Latvia. Figure 11 Total public expenditure on higher education Source: Authors’ calculations, based on Eurostat database Figure 12 Public funding in 2012 compared with 2008, adjusted for inflation Source: EUA – Nazare & Estermann, 2013 (http://www.auth.gr/sites/default/ files/eua_presentation-_autonomy _greece.pdf) The above graph (Figure 12) illustrates another perspective on the dramatic decline in public funding for higher education during the crisis years. 114 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Figure 13 Annual expenditure on public and private educational institutions in 2001–2010 per student (purchasing parity standard based on full-time equivalent students, ISCED 5-6) Source: Authors’ calculations, based on Eurostat database When expenditures (both public and private) on higher education are measured per full-time equivalent student in purchasing parity standard (PPS), Latvia’s expenditure levels are close to the expenditure levels of Estonia and Lithuania throughout the period of 2001–08 (Figure 13)29. However, due to the economic and financial crisis, annual expenditure per student in Latvia fell behind the levels of the two other Baltic countries, especially in 2009 and in 2010. Overall, annual expenditure on HEIs per student is very low across all Baltic countries in compa- rison to other European countries. Over the years 2001–10, expenditure per stu- dent in Baltic countries has been only half of the EU-27 average (the difference has been around EUR 4,800–5,900 per annum depending on the year). In 2010, Latvia’s annual public and private expenditure per student was third lowest in among all EU-27 countries after Bulgaria (EUR 3,763) and Romania (EUR 2,956). If one would take a look only at the public expenditures per student, Latvia would again drastically fall behind the two other Baltic countries. The situation remains similar, even if we make similar comparisons for R&D expenditures in Figure 14. In 2011, R&D expenditure in Latvia’s higher education sector was still clearly behind other Baltic countries and the EU-27 average, but has been steadily increasing following the significant drop in 2009 (Figure 14). From 2001 to 2011, Latvia has been able to increase the expenditure levels in total by 0.17 percentage points. This increase is lower than the respective increase of Lithuania (0.29 per- centage points), and Estonia (0.31 percentage points), but higher than the increase in the average of EU-27 countries (0.08 percentage points). Furthermore, it should be noted that, in 2011, expenditure for R&D in the higher education (0.34 percent of GDP) sector constituted almost half (0.34 percent) of the total Latvian expenditure for R&D (0.7 percent of GDP) (see Figure 9). 29 Expenditure per student in public and private institutions measures how much central, regional and local levels of government, private households, religious institutions and firms spent per student. It includes expenditure for personnel, other current and capital expenditure (Eurostat). REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 115 Figure 14 Expenditure for R&D in higher education sector as percentage of GDP Source: Authors calculations, based on Eurostat database To summarize: The higher education and R&D system in Latvia is significantly underfunded, com- pared with both EU averages as well as Baltic countries, who are close neighbors and competitors. In the higher education sector, the drastic underfunding in pub- lic budgets is compensated only partly by private contributions. Given the magni- tude of this problem, one would expect repercussions concerning the quality of higher education. It would be desirable if transparency initiatives like the new U-Multi-rank project, in which Latvian universities participate, would shed more light on this particular issue30. 1.D Financial autonomy of HEIs in Latvia Institutions of higher education in Latvia are autonomous, in accordance with the Law on Higher Education Establishments (Saeima, 1995) which provides them with the status of public authority. This means that the government has no right to intervene in the way public and private HEIs manage their budgets, beyond the scope of the regulations in the framework of which public funds to HEIs are allocated. According to the law, institutions of higher education in Latvia can acquire and manage their property, as well as take out loans for institutional purposes from commercial banks and other lending institutions. They may receive donations from legal and private entities, in which case they need to deposit this funding in a special budget account of the institution (Saeima, 1995). Higher edu- cation institutions are free to determine their tuition fees and the total number of students that can be admitted annually. Overall, HEIs in Latvia enjoy a significant amount of financial autonomy (see Chapter 2 and Table 20), as the EUA auto- nomy scorecard exercise highlighted: 30 http://www.umultirank.org/ 116 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Table 20 Latvia’s position Rank System Score in the EUA financial autonomy scorecard 1 Luxembourg 91% Source: EUA, in Estermann 2 Estonia 90% & Bennetot (2011) 3 United Kingdom 80% 4 Latvia 80% 5 Netherlands 77% 6 Hungary 71% 7 Italy 70% Portugal 70% Slovakia 70% 10 Denmark 69% 11 Ireland 66% 12 Switzerland 65% 13 Austria 59% 14 North Rhine-Westphalia 58% 15 Finland 56% Sweden 56% 17 Spain 55% 18 Poland 54% 19 Lithuania 51% 20 Norway 48% 21 Czech Republic 46% 22 France 45% Turkey 45% 24 Brandenburg 44% 25 Iceland 43% 26 Greece 36% 27 Hesse 35% 28 Cyprus 23% Source: EUA, in Estermann & Bennetot (2011) However, institutions of higher education are responsible for the rational and pur- poseful use of their financial resources as stipulated by the law. REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 117 The Ministry of Education and Science only regulates how many students are going to study on government-funded study places. This precise number is stipu- lated in an annual protocol that complements a “performance agreement” (run- ning over a 3-4-year period) between the HEIs and the MoES31. The Law on Higher Education Establishments (Saeima, 1995) stipulates that the founder of a HEI is responsible for financing its operations. In the case of a private HEI, this means that the institution is financed from private contributions. In the case of public institution, this generally means that the government is responsible for allocating funds to support operations of the HEI. Looking at the total budget of public HEIs, about 31 percent come from the national budget designated to cover the expenses of educating a certain number of students in government-funded budget places (MoES, 2014). This funding is allocated to the institution as a lump sum. In instances where a public HEI does not spend all the money allocated for the running year, it is not required to return these funds to the state budget. Thus, in principle, public HEIs can build reserves. The MoES is also involved with monitoring whether or not the public HEI in que- stion has met the terms of agreement for which the state funding was allocated — i.e., regarding the number of specialists that must be educated32. In cases where the HEI has failed to uphold this part of the agreement, it must justify its reasons for doing so. If the MoES considers that the public HEI did not adequately meet the terms of agreement and did not, moreover, spend the money as per the designated purpose, it does not budget free study places in the respective program for the particular public HEI for the following year. Thus, when allocating the state budget funds for free study places at public HEIs, the Ministry of Educa- tion and Science reacts to the behavior of the HEIs in a prospective manner. Incorporated within the agreements between MoES and HEIs concerning the number of specialists that must be educated in the scope of state budget places, is a provision enabling HEIs to reallocate public funds up to the amount of 10 percent to other programs than the ones for which the amount allocated by the MoES33. Thus, institutions of higher education have some flexibility with regard to funds allocated. The MoEs is currently considering whether or not to remove this 10 percent flexibility margin, in order to ensure that HEIs do not spend public funds on educating specialists for which no public funding is usually foreseen. Some aspects of institutional autonomy are nevertheless regulated, such as in respect to setting wages and to hiring staff. The law on higher education establishments stipulates that at least 65 percent of academic personnel need to have a doctoral degree (Saeima, 1995) at universities (i.e., institutions confer- ring doctorate degrees). At academies, this proportion must be at least 50 per cent, whilst at other HEIs, this figure drops to 40 per cent. The government also regulates the thresholds of the minimum monthly compensation for academic staff at public institutions of higher education (Cabinet of Ministers Regulations No. 836, 2009). 31 Agreement Protocol updated annually as an Annex to the Contract between the HEIs and Ministry on the preparation of a certain number of graduates and scientific activity. 32 For a discussion on available “performance” data (in fact, input and output related data), see Appendix 2. 33 Interview with MoES expert. 118 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Table 21 Minimum wage Average remuneration of thresholds for academic staff Minimum monthly wage academic staff at at institutions of higher in EUR as required by public HEIs in 2011 education No. Academic position regulations (EUR/per month) Source: Cabinet of Ministers 1. Rector 1,410.07 n/a Regulations, 2009; MoES, 2013c 2. Professor 1,175.29 1791 Note: n/a = not available. 3. Vice-Rector 940.52 n/a 4. Associate Professor 940.52 1371 5. Dean 940.52 n/a 6. Assistant Professor 752.7 1028 7. Department Chair 752.7 n/a 8. Vice-Dean 601.87 n/a 9. Lecturer 601.87 747 10. Assistant 480.93 421 Higher education institutions are able to pay higher salaries to their academic staff than the minimum stipulated by the government. The average compensation of the academic staff at public HEIs in 2011 for the most part was moderately higher than the minimum set by the government. However, there is significant variation between institutions, as the following Figure 15 shows. Figure 15 Remuneration of academic staff at public HEIs in 2011 Source: MoES, 2013c In most cases, about 40 to 50 percent of the institutional budget is spent on remu- neration of faculty and staff. The exceptions to this is Ventspils University College (VeA), which, in 2012, spent only 24 percent of their budgets on salaries (MoES, 2014). A further breakdown of this compensation expenditure shows that the REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 119 majority of higher education institutions spent 40 percent or more of their salary budget on the wages of academic staff; the only exception to which was the Latvia Academy of Arts which spent 28 percent on the wages of faculty in 2012 (MoES, 2014). The largest share of the salaries budget at this institution, 66 percent, was allocated for the wages of general personnel; administrative personnel re- ceived the remaining 6 percent of the remunerations budget at Latvian Academy of Arts in 2012. Table 22 Expenditure of public institutions of higher education on wages in 2014 Academic staff Administrative staff General staff Expenditure Remuneration (of remuneration (of remuneration (of remuneration total total total) total) total) thousand thousand thousand thousand thousand No. HEI Euro Euro % Euro % Euro % Euro % 1 LU 68,703 28,006 40.8% 14,355 51.3% 3,470 12.4% 10,181 36.4% 2 RTU 59,233 22,119 37.3% 12,749 57.6% 4,260 19.3% 5,110 23.1% 3 LLU 28,068 10,230 36.4% 4,550 44.5% 619 6.1% 5,061 49.5% 4 DU 11,929 4,629 38.8% 2,702 58.4% 1,106 23.9% 821 17.7% 5 RSU 43,822 14,444 33.0% 6,130 42.4% 4,367 30.2% 3,947 27.3% 6 LiepU 4,619 2,262 49.0% 1,551 68.6% 168 7.4% 544 24.0% 7 LKuA 3,486 1,325 38.0% 717 54.1% 108 8.2% 499 37.7% 8 LMâA 5,075 2,015 39.7% 561 27.8% 124 6.2% 1,330 66.0% 9 LMûA 4,323 1,796 41.5% 1,147 63.9% 649 36.1% 0 0.0% 10 LSPA 2,830 1,521 53.7% 839 55.2% 240 15.8% 441 29.0% 11 LJA 2,376 1,178 49.6% 747 63.4% 134 11.4% 297 25.2% 12 RPIVA 4,048 2,187 54.0% 1,015 46.4% 235 10.7% 938 42.9% 13 RA 5,965 2,271 38.1% 1,340 59.0% 0 0.0% 931 41.0% 14 VeA 7,688 1,877 24.4% 992 52.9% 740 39.4% 145 7.7% 15 ViA 2,968 1,254 42.3% 862 68.7% 57 4.5% 334 26.6% 16 BA 3,476 1,642 47.2% 871 53.0% 515 31.4% 256 15.6% Source: MoES, 2014 For Vidzeme University of Applied Sciences and University of Liepaja, the largest share in wages was spent on administration — 68 percent. Rezekne Higher Edu- cation Institution, on the other hand, did not report any budget spent on the wages on administration. One reason for variation in the distribution of the salaries’ budget appears to be that wages of academic staff at public HEIs reflect only compensation for teaching workload. Although there is an expectation that academic staff at public HEIs per- 120 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding form research, the scientific activity is not accounted for in the workload of acade- mic staff at institutions of higher education. Additional compensation for academic staff is possible in the scope of research projects in which case the compensation is covered from project funding and, in principle, signifies a different status for the recipient (e.g., assistant professor vs. researcher). Figure 16 Distribution of expenditure at public HEIs, 2012 Source: MoES, 2014 Institutions of higher education also have flexibility regarding other lines of expenditure. The second largest category of expenditures in 2012 at public institutions of higher education was on goods and services, for which public HEIs spent between 10 and 29 percent (MoES, 2014). Capital investment was the third ranked, where some public institutions of higher education were allocated sizeable amounts. The three largest expenditures on this position were made by Latvia Academy of Culture (to the amount of 30 percent of the total institutional budget expenditure in 2012); Jazeps Vitols Latvian Academy of Music (27 percent); and several institutions spent about 25 percent on this expenditure line. Institutions of higher education have some autonomy to influence which students are able to study free of charge in state budget places. Several institutions prac- tice a so-called ‘student rotation’ one-in, one-out scheme of state budget places, based on students’ results in semi-annual exams (although there is no law requiring this practice). The underlying principle is that state budget places are allocated on the strict basis of academic merit, such that students who were initially admitted to a budget place and yet perform lower in semi-annual exams might have to forfeit their place to a higher-performing student who initially had to pay tuition fees. This student rotation takes place twice a year based on the overall exam performance. At the University of Latvia — which is the largest HEI implementing student rotation of budget places based on academic results — changes affect less than 10 percent of students that were initially admitted to budget places34. In contrast, government directives are relatively strict with regard to the distri- bution of governmental stipends for students in budget-funded places. Based on government regulations, publicly-funded monthly stipends are awarded to the 34 Stakeholder interviews. REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 121 highest academic-achieving students on the program (Cabinet of Ministers Regulations No. 740, 2004). Criteria such as need, disability and other socio- economic factors are only taken into account in instances where two candidates have the same academic results. These are taken into account in cases where a single payment stipend for which students facing some extraordinary personal hardships can apply. On these stipends, higher education institutions are only entitled to spend up to 5 percent of their annual publicly-funded stipend budget line. As mentioned above, higher education institutions in Latvia enjoy considerable financial autonomy. The main criterion against which they are held accountable for spending public funds is linked to the number of specialists educated under the framework of agreement between the MoES and a given institution. Another aspect of their institutional accountability is their compliance with the require- ments of private donors regarding the use of their donations. Conditions for spen- ding these funds are usually set out in the terms of donation. Assessing financial operations of public HEIs in Latvia from 2009 to 2012 exhibits an annual growth in public HEIs assets (Civitta, 2014). However, the fixed costs coverage ratio has gradually been declining since 2009. This means that the pro- portion of costs has been growing in relation to HEI revenues. At the same time, there is an acceptable level of debt to capital ratio at public HEIs that does not raise concerns in the short term. The analysis of public HEIs financial operations by Civitta (2014) indicates that liquidity is one of the strengths of public higher education institutions in Latvia: public tertiary institutions are able to meet their short-term obligations; a phenomenon which Civitta explains by the fact that pub- lic HEIs have large financial reserves. Nevertheless, from 2009 to 2012, the public higher education sector operated without profit with EBIT margin before tax, and with interest rate payments standing close to zero. 1.E Public state funding to higher education in Latvia General Overview of Public Funding for Higher Education The government determines how public funds are distributed to institutions of higher education. There are two ways that determine this. The first is via direct allocations from the state budget to the institutions (Cabinet of Ministers Regula- tions No. 994, 2006). The second is via indirect subsidies through the govern- ment-guaranteed student loan system, whereby the state subsidizes the interest on student loans issued by commercial banks, covers the grace period, finances loan forgiveness, and acts as a secondary guarantor for the loans issued by com- mercial banks within the scope of its student loans scheme (Cabinet of Ministers Regulations No. 220, 2001). Direct allocation of public funds to institutions of higher education falls under the remit of general funding that covers the study process for a certain number of students in free budget places and science funding. In 2012, these direct subsi- dies constituted about 31 percent of the total higher education budget (MoES, 2014). The funding allocated directly from the national budget to science was about 5 percent of the total higher education budget. 122 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Indirect subsidies to higher education via the publically subsidized student loans scheme constituted LVL 2.7 million (EUR 3.8 million) in 2012 (Studiju un zinâ tnes administrâcija, 2012). This component of higher education funding is primarily concerned with ensuring access to higher education for students. State support to student borrowing enables a larger group of students to cover their tuition fees. There is no readily available information on the total proportion of higher educa- tion graduates and current students who hold outstanding student debt from the government’s loan scheme either for tuition or for student living costs loan. However, the annual borrowing rate to cover tuition fee among students who pay tuition since 2009 has been 4 percent, on average. The average borrowing rate of governmentally subsidized loan for covering living costs has been about 1.4 per- cent among students who pay tuition and about 3 percent among students who study free of charge (MoES 2012; MoES data). Direct Allocations of Public Funds to Cover Study Process The amount of government funding to cover HEI study costs is calculated in accordance to a nationally predetermined formula (Cabinet of Ministers Regu- lations No. 994, 2006). The funding is only allocated to full-time study programs that are — almost exclusively — offered at public HEIs (although there are some exceptions which will be addressed later in this section). The amount of funding is calculated annually by applying a per capita formula that takes into account the costs of the study program by the field and level of studies. Specifically, the key components in the overarching formula are: (1) the number of state- funded study places determined annually by the Minister of Education and Scien- ce by March 1; (2) basic costs of a study place; (3) student social security and welfare costs; and (4) the coefficients by subject area. The basic costs of a study place reflect the lowest costs of a Bachelor and pro- fessional study program in the least expensive subject area in the respective year. As illustrated in Figure 16, this basic cost is multiplied by the minimum coefficient for the thematic area of studies and by the coefficient corresponding to the level of studies (of Bachelor, professional, Masters, or Doctoral study level). Cost coefficients determine the amount of allocation for each study area in rela- tion to the basic costs of a study place. The government regulations stipulate the maximum and minimum value of the cost coefficients by study area. This distinction, which was introduced along- side formula-based funding in 2002, is motivated by the need to accommodate state budget constraints while projecting a future annual increase in state alloca- tion to higher education. In 2002, an additional 10 percent (annually) to the mini- mum coefficient was planned until the funding reached the maximum value of subject area coefficients. Thus, the plan was to reach the maximum coefficient value in state budget allocation by subject area in 2012. In reality, however, the higher education sector experienced drastic cuts in public financing; particu- larly during the economic recession. REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 123 Figure 17 Components in the formula for state-budget allocation to cover the study process at a HEI Source: Authors, based on data provided by Cabinet of Minister Regulations 994, 2006 As a result, the allocation of public funds dropped below even the minimum coefficient value stipulated by the government. In 2013, it only constituted on average about 80 percent of the minimum coefficient value. At the same time, the delta between the stipulated and the actual amount of allocation differs be- tween supervising ministries under which the HEIs operate35. Public funding per study place to the HEIs of the Ministry of Education of Science was only 84 per- cent of the minimum. It was 90 percent at the HEIs under the supervision of the Ministry of Health and the Ministry of Culture. Optimum value of Minimum value of Table 23 Public funding the coefficient of the coefficient of coefficient values by subject No. Study directions the study costs the study costs36 area 1 Legal sciences 1.1 1.0 Source: Cabinet of Ministers Regulations No. 994, 2006 2 Humanities 1.4 1.0 3 Social and behavioral sciences 1.4 1.0 4 Information and communication sciences 1.4 1.0 5 Business and administration 1.4 1.0 6 Teacher education and education sciences 1.7 1.1 (except for the programs in row 21 of this table) 7 Private services 1.8 1.1 8 Transport services 1.8 1.1 9 Computer sciences 2.5 1.5 10 Mathematics and statistics 2.5 1.5 11 Construction 2.9 1.7 35Interview with MoES expert. 36Real allocation was on average 80 percent of the minimum in 2013 (however, there were differen- ces accross subject areas and apparently also type of institution); interview with MoES expert. 124 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Optimum value of Minimum value of the coefficient of the coefficient of No. Study directions the study costs the study costs36 12 Navigation 2.9 1.7 13 Engineering sciences 2.9 1.7 14 Agriculture, forestry and fishery 2.7 1.8 15 Manufacturing and processing 2.7 1.8 16 Organization and management of sport work 2.7 1.8 17 Natural sciences 3.2 1.9 18 Environmental protection 3.2 1.9 19 Architecture 3.5 3.1 20 Art (except for the programs in row 28 of this table) 3.5 3.1 21 Teacher education programs for the acquisition of 3.5 3.1 a qualification of a visual art or music teacher 22 Pharmacy 3.5 3.0 23 Health and social care 3.5 3.0 24 Veterinary sciences 5.0 4.0 25 Medical treatment 4.0 3.5 26 Civil defense 4.2 2.7 27 Music, choreography 4.5 3.9 28 Art programs – The Audio-visual Media Art and Design 4.5 3.9 29 Dental care 5.1 4.4 30 Military defense 6.0 6.0 While the number of publicly funded study places per program is revised every year, the methodology of calculating the basic costs of a study place and the values of coefficients of subject areas has remained largely fixed since 2002. How- ever, the modes of teaching and learning have changed, along with the actual costs of studies in various disciplines. In order to revise and update the methodology, the Ministry of Education and Science has commissioned research to evaluate the current methodology of calculating study costs and attributing coefficients to various subject areas37. 37 One approach which might be considered further is the full economic costing model (FEC), which was originally developed for research and which is calculated on a transparent basis using an exten- sion of the TRAC methodology, whereby costs are normally divided into four main types: (i) directly incurred costs, which are costs spent specifically to enable the research project to be carried out; (ii) directly allocated costs, which are a share of the costs of a resource used by a project whereby the same resource is also used by other activities; (iii) estates costs, associated with the use of university buildings, such as rents, repairs, maintenance and so forth; and (iv) indirect costs, which are miscellaneous costs that are otherwise not included as directly allocated costs (e.g. admini- strative support, office consumables; usually expressed as GBP per academic staff FTE). For more information, see http://www.worcester.ac.uk/researchportal/documents/A_short_guide_to_Full_Economic_Costs.pdf REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 125 As already mentioned, nearly all public funds for higher education studies are distributed to public HEIs. However, the regulations allow public funds to be allocated to private higher education institutions (Cabinet of Ministers Regulations No. 994, 2006). Ministries and other national public administration bodies are able to sign agreements concerning a certain number of students to be educated at private HEIs, in the following cases: (i) where private HEIs have study programs of higher quality than public HEIs (though it is not completely clear how this higher quality is demonstrated) (ii) when they offer a unique study program that is not offered by public HEIs, or (iii) when public HEIs are unable to educate the number of specialists required by the state in a given area. In 2014/15, under this agree- ment, the Ministry of Education and Science allocated 25 state-funded study places in hospitality services to the professional Bachelor degree program at the “Turiba” School of Business Administration. Public funding was also awarded for five Doctoral study places at the Riga International School of Economics and Business Administration, with a view to supporting collaboration between HEIs in carrying out joint study programs38. In years preceding the economic crises of 2009, there was an intention to extend public funding to private HEIs more fre- quently39. However, the public budget decreased due to the recession, and this subsequently did not happen40. The Process of Deciding on the Number of State Funded Students The number of study places at various HEIs and fields of studies is set on an annual basis by the Minister of Education and Science. While the final decision rests with the Minister, the prior process involves multiple stakeholders, including the twelve Sector Committees of the Latvian Employers’ Confederation, other pro- fessional organizations, ministries, and the Higher Education Council. The distribution of budget places across study programs implemented by HEIs is planned on the basis of HEIs performance indicators — the actual number of state-financed students, graduates, and drop-outs. The planning takes into account labor market forecasts by the Ministry of Economics as well as the amount of the public budget funds available for the respective calendar year41. While the MoES is able to determine how many specialists should be financed by the state for HEIs that operate under its supervision (within the scope of the res- pective budget allocation), it cannot make decisions with regards to HEIs that fall under the supervision of other ministries. In these instances, MoES essentially agrees to the recommendations of these ministries as to how many state budget places should be allocated to these tertiary institutions in the respective year42. This is due to the fact that the funding for these places comes from the budget of these particular line ministries. 38 Interview with MoES expert. 39 Ibid. 40 There is another minor exception in relation to allocating public funds to full-time studies only. In 2011/2012, there were 40 part-time students studying in the professional Bachelor’s degree study program “Boarder guard” at the regional Rezekne HEI (MoES, 2012). These students were admitted on the basis of a mutual agreement between the State Border Guard and the aforementioned public HEI (Kalv â ne, 2011, 10 July). 41 Note difference between fiscal (calendar) year and academic year. 42 Interview with MoES expert. 126 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Figure 18 Process of annual planning in state-funded study places at HEIs Source: Authors, based on information provided by MoES, 2013b The annual agreement on the number of state-funded study places concerns the new matriculation cohort, i.e., full-time students to be admitted for the first year in their study program. When planning for state-funded study places in 2014, the Ministers of Education and Science, Agriculture, and Health, as well as representatives of eight major HEIs, agreed on the following list of guiding prin- ciples: •The first guiding principle is to better take the needs of the labor market into account (MoES Protocol No. 1-27/289, Annex 1, 2013, December 20). •The second is that the budget subsidy for the institution in 2014 must remain the same as in 2013. However, the distribution of study places in study pro- gram must be reduced by 20 percent across social sciences and education (decrease of enrolment in 2014/15 academic year) and a respective increase of the number of study places in STEM fields, especially at the Master and Doctoral level. •The third guiding principle is strategic specialization. HEIs and the Ministers of Agriculture and Health have committed to revising the structure of study pro- grams and to introducing a curriculum that: corresponds better to labor market needs, promotes the specialization of the institution by defining its strategic focus, reduces the fragmentation of study programs by joining similar programs and supports the vertical development of programs (one program at various study levels) rather than horizontal development (various program at the same study level). It was envisaged that Daugavpils University, University of Liepaja, Rezekne HEI, Ventspils University College, and Vidzeme University of Applied Sciences would evolve as regional HEIs whose main purpose is to support the development of their region. •The fourth guiding principle refers to program sustainability, i.e., only those in demand and well-governed would be financed from the state budget. Programs that fail to maintain a sufficient number of students and that have high dropout and low graduation rates should either be consolidated with other similar programs within the institution or else closed. HEIs were encouraged to consider the development of joint study programs, especially at the Doctoral level. All these decisions regarding the curriculum and study programs should nevertheless be made by the respective HEIs themselves. REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 127 The changes applied in the scope of the aforementioned four principles require that HEIs consolidate their programs, and make strategic development decisions in order to maintain current levels of state budget funding for study places. Quality assurance in Latvia is regulated by the Law on Higher Education Institu- tions, as well as Cabinet Regulations No. 668 “Regulations on Accreditation of Higher Education Institutions, Colleges and Subject Area”. The current regulation, adopted on September 25, 2012, embodies the reform of the system of accredita- tion. Previously, the scope of accreditation was higher education institutions and study programs. Study programs had to undergo an accreditation within three years after receiving a license (permission to implement a study program). With the new regulations, accreditation is granted to the study direction as a whole and applies to all licensed study programs that belong to this area. Study programs included in the study direction are described in detail in the accreditation application submitted by the HEI. A study direction is accredited for six years; in case of a conditional accreditation for two years. Accreditation may be refused on the following grounds: 1. A substantiated joint report of the experts or individual opinion of an expert evaluating the study direction is negative. 2. The study program or study programs corresponding to the relevant study direction do not comply with the requirements of the Law and regulations. 3. The study and informative bases (including the library), material technical, financial base and the qualifications of the academic staff do not comply with the conditions for the implementation of the study program or study programs corresponding to the relevant study direction. 4. The study programs for the acquisition of a master’s or doctoral degree do not comply with the state of (scientific) advancement of research or similar. 5. The institution of higher education or college has not eliminated the deficien- cies detected during the previous accreditation of the study direction. The transition to the new system of accreditation of study direction was com- pleted by August 31, 2013. According to the most recent data on accreditation published by MoES on December 20, 2013, for higher education institutions taken as a whole there are currently 217 study direction accredited for six years, 28 study direction accredited for two years, 2 study direction for which accre- ditation was refused and three study direction where the accreditation is in pro- gress. The regulations foresee that accreditation is organized by the MoES or an institution authorized by MoES in an open tender. Currently, accreditation is organized by the Study Accreditation Committee chaired by MoES. In the long-run MoEs envisages the establishment of a national body for external quality assurance to be included in the European Quality Assurance Register for Higher Education. While the previous discussion on external quality assurance has focused on accreditation, it is, however, important to keep in mind that accreditation, by its nature, only establishes if the quality of higher education is sufficient above an established threshold; it does not provide further-reaching information on rele- 128 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding vance and attractiveness of programs. In order to gain a deeper understanding of the potential impact of the current level of funding on quality of provision, more research would be needed and possibly accompanying measures in terms of external quality assurance (like institutional evaluations). There is, however, anec- dotic evidence pointing at deeper quality issues; the topic of perceived insufficient labor-market relevance was, for example, raised in discussions by employer representatives. Direct Allocations of Public Funds to Cover Scientific Activities at HEIs From a national policy financial and governance perspective, higher education and research in Latvia are viewed as two different activity streams. There are two separate laws regulating the sector of higher education: the Law on Higher Edu- cation Establishments (Saeima, 1995); and the Law on Scientific Activity (Saeima, 2005), pertaining to research and scientific activity. The latter mostly takes place in research institutions distinct from HEIs. The Law on Scientific Activity stipulates that it is the duty of HEIs to perform research activities. There are two main sources of science funding in Latvia: the state budget and European Structural Funds. In 2012, state science funding constituted almost EUR 14.7 million, while EU contribution was 64.5 million euros (MoES, 2014). Additional funding for research can be generated through competitively-selected research and collaboration with enterprises. Funding from the state budget is available only to institutions registered in the Registry of Scientific Institutions. In 2013, all public HEIs (with the exception of the National Defense Academy) were represented in the Registry of Scientific Institutions either themselves or by some institution affiliated to some degree with the HEI. State budget financing is intended to provide base funding for research activities at public HEIs and research institutions, as well as to support basic and applied research. Base funding for public scientific institutions is calculated on the bases of formula which includes infrastructure maintenance costs, wages for scientific personnel, and a coefficient for the development of scientific institution (Cabinet of Ministers Regulations No. 1316, 2013). The coefficient for the development of the scientific institution incorporates performance based criteria which is the amount of research and development projects, the number of scientific publications and patents, and the number of Masters and Doctoral thesis defended with the guidance from the respective scientific institution. The infrastructure maintenance costs and the coefficient for scientific development are both adjusted for the area of studies with a coefficient 2 for natural sciences and 1.3 for social sciences and humanities. Similarly like in the case of decreased funding for studies, research institutions receive only 25 percent of the optimal annual base funding for science.43 Public funding for research is also available on competitive bases from the State Research Program, Commercially Oriented Research Program, and Fundamental and Applied Research Program. Funding from these sources is available on com- petitive bases to all institutions registered in the Registry of Scientific Institutions, which also includes privately founded scientific institutions (Cabinet of Ministers 43 Interview with MoES expert. REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 129 Regulations No. 1316, 2013; No. 227, 2011). Yet, like in all other instances, the amount of public funding available is determined by the general availability of resources in public budget. For the State Research Program, the Ministry of Education and Science invites proposals from scientific institutes, groups of scientists, commercial enterprises, non-governmental organizations as to what should be the subjects tackled in the scope of the research program (Cabinet of Ministers Regulations No. 443, 2006). These proposals are evaluated by a committee organized by MoES and represen- ting various ministries, experts of Latvian Council of Sciences, and the National Academy of Sciences against the criteria of national priorities in research, scienti- fic and applied importance of the topic, and the novelty of the topic. Once the rele- vant topic proposals for State Research Program are selected, a call for compe- titive research plan submissions which would meet the goals of the research pro- gram is organized. The lead researcher in this application should be a scientist employed at registered scientific institution which can also be a HEI. There can be several partners — public and private scientific institutions — engaged in the implementation of the research and receiving public funding. It is also possible for commercial enterprises registered as scientific institutions to take part in the execution of these research projects and provide their co-funding. Commercially Oriented Research Program is aimed to support research and busi- ness collaboration. Project applicant should be a scientific institution. The project should involve a commercial partner from the manufacturing sector who provides co-funding for the project. The distribution of public funding in the scope of this program is competitive, administered by the Ministry of Education and Science engaging experts in the areas of research proposals. Funds received in the scope of this program can only be used solely for the purposes designated in the alloca- tion of research funding. In 2013, however, there was no public funding allocated for Commercially Oriented Research Program (MoES, 2014a). Fundamental and Applied Research Program is funded by the state budget and administered by Latvian Council of Sciences. The purpose of Fundamental and Applied Research Program is to support the creation of new knowledge regardless of their relevance for the commercial use (Cabinet of Ministers Regula- tions No. 227, 2011). In order to ensure that all fields of sciences have access to this funding, Latvian Council of Sciences distributes the funding between the areas of science based on the hitherto results and scientific potential. Evalua- tion of projects submitted for each area of science is carried out by relevant experts. All registered scientific institutions, public and private, are entitled to apply for this funding. However, in the case of scientific institutions with some ownership of commercial enterprises a clause applies that the respective com- mercial institution holds no priority rights to the use of the research capacity and results funded by this program. In addition to three aforementioned competitive public grants where HEIs registe- red as scientific institutions are eligible to apply and base funding for research institutions, there is additional stipulation pertaining to allocating funding for scientific activities at the institutions of higher education specifically (Cabinet of Ministers Regulations No. 994, 2006). Regulations on the HEI funding provide a formula for calculating funds for the scientific development of the HEI. This for- mula differentiates funding allocation by the area of studies, except for colleges, as mentioned in the regulation. When calculating funding for equipment essen- 130 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding tial for the scientific development of the institution, a higher coefficient of 2.0 is applied for natural sciences, engineering, technology, health, agriculture, forest sciences, and veterinary sciences. This increased funding is applied in the case of HEIs but not colleges. All other fields of scientific activity receive funding based on their HEI profile, which includes the number of state funded students by the level of studies and other indicators like the number of graduates and faculty holding Doctoral degrees and professorship. Governmental regulations stipulate that annual funding for equipment relevant to ensuring the scientific development of a HEI should not be less than EUR 21,344 in the case of HEIs and EUR 7,115 in the case of colleges (Cabinet of Ministers Regulations No. 994, 2006). This funding to HEIs and colleges is allocated as a lump sum. Within institutions, these funds are allocated based on internal competition. It should be mentioned that from 2009 to 2014, there were no funds allocated to HEIs in the scope of this legislative framework due to severe public budget cuts.44 In the years prior to budget crises the distribution of this funding to HEIs was stipulated in the agree- ment protocol between MoES and HEI, similarly like it is done for study places. In 2014, the funding in the amount of 55,028 Euros was reinstituted for scientific activities in study programs of Latvian philology and Latvian history at universities based on the vote in the national Parliament (Ministry of Finance, 2014). The clause on funding scientific activities at HEI was used to distribute these funds to University of Latvia, Daugavpils University and Liepaja University.45 All in all, public institutions of higher education which are registered as scientific institutions receive base funding for science, can receive on competitive bases funding from public research programs, if there are funds they may receive fund- ing intended specifically for scientific activities at HEIs, and finally funding for Doctoral study programs, calculated according to the general procedure of state funding for study places is also considered as part of science funding at HEIs. The decrease in the state allocation to higher education in the past years has correlated with the decrease in the research expenditure of HEIs (MoES, 2013d). From 2009 to 2013, EU structural funds became the main source of funding for HEI scientific activities. While base funding for science from the public budget might be considered insufficient, this issue seems unlikely to be addressed as long as project-contingent science funding is the primary form of financial support for research. Research funding from structural funds is available for both developing scientific infrastructure as well as increasing human resource capacity in research. One tool for growing human resource capacity in research has been allocating scholar- ships to Masters and Doctoral students from the European Social Fund (ESF). Overall, 23 Masters degree scholarship projects have been supported to the amount of EUR 11.7 million, while 28 Doctoral degree scholarship projects have been supported to the amount of EUR 53 million (SEDA, 2014). ESF funding is also used to support young researchers by paying their wages in projects that have received funding on a competitive basis. EUR 75 million have been allocated for this purpose (ibid.). 44 Interview with MoES expert. 45 Ibid. REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 131 The infrastructure for ESF-research funding totals EUR 80 million (MoES/SEDA data). This is also distributed to institutions registered in the scientific registry, on a competitive basis. According to information provided by SEDA, about 90 per- cent of science funding from EU structural funds is received by the University of Latvia and its affiliated scientific institutions. Indirect Public Subsidies to Higher Education Indirect public subsidies to higher education are channeled via public support to the student loans system. Since 2001, government-subsidized student loans have been available to all residents of Latvia pursuing higher education who can meet loan co-signatory requirements (Cabinet of Ministers Regulations No. 220, 2001). In order to obtain a state-subsidized loan, the borrower needs to provide a primary guarantor in the form of one loan co-signatory with income deemed sufficient by the issuing bank46. As a guarantee for the loan, the student can also offer real estate or securities, provided that the bank acknowledges and accepts these. The government guarantees 90 percent of the student loan amount to all student borrowers. For orphans and children with no parent guardians, however, the go- vernment guarantees their loans 100 percent. Student loans are intended to cover tuition fees and support the costs of student living. The loan is principally provided by commercial banks that are selected through an annual tender procedure based on the most attractive interest rate offered. The governmental subsidy to the student loan is reflected in the subsidized interest rate, the grace period after completion of studies, debt forgiveness under certain conditions stipulated by the government, and the secondary loan guaran- tor provision offered by the government. The borrowing student is required to pay interest on the loan to the amount of five percent, even if the actual interest rate charged by the commercial bank is higher. This is the case regarding the loan issued to cover the student’s daily living expenses. The government covers the difference between the interest rate paid by the student and the one charged by the bank. The governmental subsidy accommodated in the interest rate is even higher on those loans covering tuition. Students do not accrue an interest rate on these types of loans while they are enrolled in their study program. The government covers these expenses entirely until the student graduates and must start repaying the loan. The government then continues to subsidize the difference in the interest rate between the annual 5 percent paid by the student and the total annual rate charged by the bank. Once students graduate, there is a grace period of one year during which stu- dents need not repay their loan. The expenses of the grace period related to with- holding the loan payments are also covered by the government vis-a ` -vis the com- mercial banks that are the principal lenders. The government-subsidized student loan is a mortgage type of loan under which students need to repay 1/10 of the amount per year so that the total repayment is completed within 10 years. 46A natural person of full-age with the capacity to act, who has a regular income, which is not less then the minimum monthly salary specified by the State. 132 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding If a student borrower drops out of the study program for which the loan was issu- ed, the loan repayment begins three months after ex-matriculation. Moreover, there are certain conditions under which the amount owed by the stu- dent can be reduced, such as birth of a child, work in a profession or field as spe- cified by the government, disability, or death. In these cases, the government steps in and repays the loan to the commercial bank for the respective forgiven loan proportion. Prior to this student loan scheme, the government had a policy of granting study and student loans from the state budget (Cabinet of Ministers Regulations No. 251, 1997; No. 86, 1999). These were loans that were generally available and did not require co-signatories. Although these loans are no longer available, there are still some outstanding debts today. However, they are in the process of collection. The overall budget of the indirect subsidy to higher education via the government- supported student loans scheme comprised LVL 2.7 million (EUR 3.8 million) in 2012 (Studiju un zin âtnes administrâcija, 2012). 1.F Resource diversification in higher education in Latvia Tertiary education institutions in Latvia which offer Bachelors and graduate degree studies are expected to deliver higher education as well as engage in research (Saeima, 1995). Public funding to higher education is split into a subsidy for studies and a subsidy for research. As described in the preceding section, public funding for studies to public HEIs is distributed on the bases of the number of stu- dents. Science funding, on the other hand, generally is awarded on the bases of research results and in public grant competitions. Overall, there are three main sources of revenue for covering costs of studies and scientific activities at HEIs: tuition, public funding, and EU structural funds. The proportion of these sources differs by public and private institutions. Private institutions primarily depend on tuition revenue. In 2012, private sector of higher education drew 78 percent of its total revenue from tuition fees (MoES, 2014). The remaining revenue in private sector of higher education came from public sources, EU structural funds, and income generated from institutional services. Public sector of higher education, on contrary, generated only 16 percent of its revenue from tuition fees. The most prominent sources of revenue in public edu- cation sector were state funding and EU structural funds. By the revenue distribution as displayed in the table below, the largest share of higher education funds, 88 percent, was concentrated in the public sector of higher education. This corresponds to the fact that public sector absorbs the lar- gest share of students in the country. Private sector of higher education received 12 percent of the total higher education budget. REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 133 Table 24 HE funding in Latvia, 2012 1 Total Revenue of HEIs and colleges EUR 311.2 million; 1.4 percent of GDP 1.1 Public universities and colleges EUR 237.3 million; 88% total HE revenue 1.2 Private universities and colleges EUR 38 million; 12% of total HE revenue 2 State budget funding EUR 110.6 million; 0.5% GDP) 2.2 Subsidy from the general revenue for universities EUR 95.9 million; 31% of total HE revenue and colleges, including 15 percent co-financing for EU structural funds 2.3 State budget funding for science, including EUR 14.7 million; 5% of total HE revenue 15 percent co-financing for EU structural funds 3 Private funds EUR 72.8 million; 0.3% GDP 3.1 Revenue from tuition fees in state (public) EUR 43.4 million; 14% of total HE revenue universities and colleges 3.2 Revenue from tuition fees in private universities EUR 29.4 million; 9% total HE revenue and colleges 4 Other funds EUR 127.8 million; 0.6% GDP 4.1 International funding for science and studies, EUR 64.5 million; 21% total HE revenue including 85 percent co-financing from EU structural funding 4.2 Revenue from scientific work not financed by EUR 12.5 million; 4% total HE revenue the state budget or international funding 4.3 Other revenue of universities and colleges EUR 50.8 million; 16% of total HE revenue Source: MoES, 2014 The greatest part of public higher education funding, which was 31 percent of total higher education revenue in 2012, was allocated towards study process in higher education. State funding for science comprised only five percent on the total higher education budget in 2012 (MoES, 2014). This difference between pub- lic investment in studies and science was mitigated by contributions from EU structural funds and other international sources, the third largest contributing source to higher education budget in Latvia in 2012. International funding for stu- dies and science, including EU structural funds, comprised 21 percent of the total higher education budget. It should be acknowledged that 15 percent of total higher education revenue in 2012 was generated by institutions of higher education via sources other than described above. These alternative revenue sources include income from educa- tional services provided by HEIs, revenue from renting facilities, and donations. While the presented general data on revenue in higher education sector informs about the general trends, the availability of more detailed data on the HEI revenue streams both in private and public sector is limited. Tertiary institutions are not required to publicly account for their balance sheets. The data on funding mix on the institutional level is more available for public institutions of higher education. 134 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding However, even in instances when consolidated budget reports of public HEIs are examined, there are concerns on the accuracy of data reported due to under- reported transfers between institutions of higher education, for instance (Civitta, 2014). Nevertheless, information that is available on public HEI budgets informs several observations on the diversification of income at public institutions of higher educa- tion. The aggregate data on the institutional revenue sources in the public sector of higher education reveals that the amount of income from the various income streams differs from one institution of higher education to the next. For some pub- lic HEIs in 2012, about 80 percent of their revenue came from general governmen- tal subsidy aimed to cover the costs of educating state funded students (MoES, 2014). In other instances, this proportion was about 20 percent and down to as little as two percent. Figure 19 Revenues of public institutions of higher education in 2012 Source: MoES, 2014 Depending on the institution, there were various combinations of revenue pro- portions for covering the study process. In all instances, tuition fee paid by full time and part time students presented a source of income. A source of revenue across all public institutions for financing study process was also international funding, including grants from the EU structural funds and international student mobility programs like ERASMUS. Several institutions reported revenue generated from educational services and intended to cover the costs of study process. The same variation in institutional revenue in 2012 is observed also in regards to revenue generated for research at public institutions of higher education (MoES, 2014). Institutions of higher education can receive public funding for research projects if they are registered as scientific institutes, which nearly all of them are. As described earlier, public funding to research has declined since 2009 and it has correlated with the decline in HEIs research spending. Still, funding for science for the most part does form a significant share in the institutional revenue streams made available through the state funds and EU structural funding. At the same time, data on public HEIs revenue streams reveal differences in the ability of institutions to tap into these funds. In 2012, six out of 16 public HEIs reported revenue for research in the amount of 15 to 48 percent of their total revenue (MoES, 2014). For eight institutions this revenue contributed 0.5 to 15 percent of the total budget. In two cases there was no income from science funding reporter in 2012. REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 135 Table 25 Revenues of public institutions of higher education in 2012 Co-funding State for International Other Total funding EU structural Tuition funding funding Science Other HEI funding for studies funds revenue for studies for studies funding revenues EUR (thousands) LU 81,432 14,600 92 14,298 8,157 992 18,159 25,226 RTU 58,665 18,675 1,476 5,987 9,994 0 18,088 5,921 LLU 28,376 8,924 832 2,888 5,235 0 8,028 3,301 DU 10,778 3,985 61 919 674 0 1,558 3,641 RSU 37,806 20,499 9 8,534 1,130 936 3,230 3,476 LiepU 4,431 2,096 0 744 199 0 928 464 LKuA 3,660 3,021 16 472 85 71 10 0 LMâA 4,037 3,293 37 97 213 380 28 26 LMûA 3,278 2,425 40 202 518 40 1 92 LSPA 2,661 1,443 46 788 330 0 38 61 LJA 2,493 635 17 956 390 0 4 508 RPIVA 4,024 1,197 7 2,265 215 134 127 87 RA 5,855 2,067 149 538 1,349 916 773 212 VeA 4,680 1,133 63 215 356 131 2,225 620 ViA 2,962 933 11 679 731 0 74 545 BA 3,364 90 0 2,429 359 40 0 447 Source: MoES, 2014 The ability of HEIs to attract funding for science from public and the EU structural funds depends on their position among all scientific institutions competing for research grants, which also include independent research bodies. In 2013, there were 88 institutions registered as scientific institutes; 46 of the publicly founded and 42 privately founded scientific institutes (Izgl î t î bas kvalitâtes valsts dienests, 2013). Among these institutions, 10 were public institutions of higher education and four were units of HEIs. At the same time many other research institutions, although legally independent bodies have historic ties and collaborate on various levels with HEIs. Thus, even if in research competition a public HEI is not the main applicant, there are partnerships formed which enable access to research funding for various institutions, including public HEIs. The authors argue that the ability of public HEIs to attract science funding also depends on their capacity in research. Most of the public funding for science is com- petitive. The element of competition in providing base funding for HEIs is involved in the assessment of their achieved research results. Access to other national grants for science is explicitly competitive. In order to access these revenue diversification opportunities, HEIs need to be able to achieve scientific accomplishments. 136 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding The national share of science funding revenue at the institutions of higher educa- tion is smaller when compared to the revenue generated from the EU structural funds for science and human capital in science. However, public budget for science is also enclosed in 15 percent co-funding for EU structural funds to HEIs receiving these funds. The remaining 85 percent are funded by the EU within the scope of structural funds projects. Overall, EU grants are the third most signifi- cant source of funding for higher education and science in Latvia. Table 26 EU structural funds Allocation European Social Fund European Regional Development Fund for higher education Higher Education LVL 51 million LVL 102 million and science, 2007–2013 (EUR 73 million) (EUR 146 million) Source: LIVA, 2010 Science LVL 40 million LVL 186 million (EUR 57 million) (EUR 266 million) Access to EU structural funds is done on a selective and competitive basis. The procedure for nationally distributing EU structural funds involves two types of tenders. One is an open call tender where any higher education institution can apply and submit its project. Project selection is done by assessing the relevance of the applicant to the minimum requirements set for participants in the tender, as well as by assessing the quality of the project. The second type of EU structu- ral fund tenders is a restricted call tender, where only HEIs pre-selected by the Ministry of Education and Science are eligible to submit their projects. Once the eligible HEIs have turned in their project proposals, the recipients of funding are determined in competition between the projects. More than 75 percent of the EU structural funds for education and science are distributed in restricted call tenders (SEDA, n.d.). Currently, EU funds provide a main leverage for retaining researchers in the Latvian higher education sector, namely by financing their research (SEDA, n.d.). Access to international funding for studies coming from European sources is important income for HEIs intended for improving the content of higher education curricula and developing graduate study programs (SEDA, n.d.). The increase in the number of Doctoral students as of 2008 is a direct result of the EU funds supporting Doc- toral study programs, which allocated scholarships to PhD candidates. In 2008, 2,025 or 2 percent of all students were pursuing Doctoral level studies both at public and private HEIs (MoES data). In 2012, this proportion had grown to 2,519 or 3 percent of all students (MoES, 2012). Next to the three main income sources for higher education institutions is a cate- gory of “Other revenue” reported by public institutions of higher education. In 2012, other revenues contributed 17 percent of total public HEIs budget, colle- ges excluded (MoES, 2014). An inquiry into the details of this income category shows various sources of income. The example of the University of Latvia, which reported about 30 percent of its budget as other revenue in 2012, shows signifi- cant share of this income from rent of facilities, services provided by university (University of Latvia, 2012). Daugavpils University, which also has about one third of its budget from other revenues in 2012, reports the greatest share coming from an international infrastructure project not related to studies or research, followed by revenues from rent and services, some other international grants, and dona- tions to the institution (Daugavpils University, 2014). A different case from two aforementioned is Ventspils University College which enjoys strong financial sup- REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 137 port of the local municipality (Sustainable Strategy of the City of Ventspils until 2030, 2013). In 2012, 13 percent of Ventspils University College budget was contributed by the local municipality on the bases of the mutual collaboration agreement (MoES, 2014). Vidzeme University of Applied Sciences, a regional HEI, also receives municipal support. In 2014, Valmiera municipality allocated EUR 22,500 for the HEI’s re- search grants program (Valmiera municipality, 2014). The purpose of this program is to support studies which engage young researchers, focus on issues relevant for Vidzeme region, and produce applicable results. Municipality of Valmiera finances this program since 2011. Prior to that equivalent funding was allocated to finance research of academic staff at Vidzeme University of Applied Sciences. In addition the research funding, Valmiera municipality supports the organization of an interna- tional summer school at Vidzeme University of Aplied Sciences. There is also a joint library for the city and HEI, funded by Valmiera municipality. To summarize: Public higher education sector has access to several sources of revenue both for covering study process as well as research activities. For study process, most revenue in the public sector is received from public budget and EU structural funds. Public HEIs also attempt to generate their own revenue from rent, services and other grants not related to studies and research. However, there are varia- tions by the amount of each of these revenue sources among institutions of public higher education. While access to public funding for study process is not compe- titive, the accessibility of public and international research funding is linked to the competitiveness of HEIs as research centers. Achievement record in studies and science of public HEIs is also important when applying for EU structural funds. Thus, ability of public HEIs to diversify the revenue is related to its position in higher education and research sector overall. 1.G Student financial assistance Free Study Places and Governmental Allowance to Students at Public HEIs Student financial aid in Latvia is provided in the form of both direct and indirect public subsidies, and private resources. These include loans and scholarships, as well as income tax rebates for educational expenditures. In addition to being a mechanism for allocating basic funding for higher education institutions, government-funded study places for a portion of students at public institutions of higher education might also be considered a form of student finan- cial assistance. In 2012, 37 percent of all higher education students in Latvia stu- died free of charge. Access to publicly-funded study places varies from program to program, based on MoES distribution of budget places to institutions and study programs. Thus, chances of being admitted to study free of charge for students depend both on the study program and the particular institution, since some institutions and areas of study receive more support than others. 138 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding As discussed above, admitting students to government-funded study slots is based on academic merit. Applicants with the best grades are admitted to study free of charge, in accordance with the principle of free-of-charge budget places, while others have to pay tuition fees. “Academic merit”, however, is not uniformly understood across study programs: in programs with a large pool of academically outstanding applicants and fewer government-funded study places, the grade threshold for free study places can sometimes be very high. In study programs with fewer applicants and a larger number of government-funded places, appli- cants with mediocre academic results stand a greater chance studying free of charge. In order to ensure that only the highest-performing students in the pro- gram enjoy free studies, higher education institutions have — on their own initia- tive — introduced a so-called student ‘rotation’ scheme, based on the results of exams usually taken twice a year. According to this policy, students who pay tuition can transfer to governmentally-sponsored study places, providing they out- perform (i.e. in these exams) students who were initially admitted to these free study places. With a few exceptions, only full-time students are admitted to study free of charge at public higher education institutions (Cabinet of Ministers Regula- tions No. 994, 2006). Most students on budget places are enrolled in academic and professional Bachelor degree programs. In 2012, this proportion was 85 percent of all govern- ment-sponsored full time students (MoES, 2012). Students who are admitted to free study places also qualify for government-funded monthly stipends, whose amount depends on the particular level of studies. For Bachelor and Masters students, the government monthly stipend is EUR 99.60 (Cabinet of Ministers Regulations Nr. 740, 2004). For Doctoral degree students it is EUR 113.83 per month for their coursework and 85.37 Euros per month for their Doctoral research. A portion of the stipends for Doctoral research are conditional grants that might, under certain conditions (i.e. if Doctoral candidates fail to complete their disserta- tion within five years), become repayable loans. Conditional stipends for Doctoral research are generally not available. The list of subject areas where these stipends are available is approved annually by the Minister of Education and Science. The stipends described above are financed from an institutional budget line of the government’s subsidy, calculated by multiplying the number of full-time equivalent study places by the equivalent of a full-time student on a per year basis (on Bachelor, Masters, or Doctoral level of studies). A small amount is also alloca- ted to generate funds for covering stipends to students on maternity leave (Cabi- net of Ministers Regulations No. 740, 2004). The size of the government subsidy does not always match the number of stu- dents studying in free budget places. Funding allocated towards the provision of stipends is typically insufficient to successfully accommodate all students in go- vernment-funded study slots, i.e. depending on the institution; there might be more budget-places than stipends for students which would normally be expected to match in their number the number of budget places provided. Only about 15 percent of all students studying in state budget places at public HEIs receive state scholarships (MoES, 2014). Based on government regulations, government-funded monthly stipends are awarded to the highest-achieving students in the program. Criteria such as need, disability and other socioeconomic factors are only taken into consideration REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 139 in cases where when two candidates have the same academic standing. Socio- economic factors are the primary criterion for single payment stipends for which students facing some extraordinary personal circumstances apply. For these stipends, the institution of higher education can spend no more than 5 percent of its annual governmentally-funded stipends’ budget line. A separate budget line of government stipends funded by the European Social Fund (ESF) is available to Doctoral students in the scope of their Doctoral studies. However, in cases where the student receives the ESF stipend, the national monthly stipend is then revoked. Doctoral stipends paid under the framework of ESF funding are nevertheless more generous, since they include funds for acti- vities such as academic conferences, and are competitively awarded to higher education institutions on the basis of developing their Doctoral study programs. A proportion of annual expenditure for all public higher education is allocated by the government for the purpose of covering student scholarships (Cabinet of Mini- sters Regulations No. 740, 2004). Additional scholarships by HEIs can be provi- ded from a special fund of private donations. In these instances, distribution of these funds is regulated by institutional policy. Figure 20 Financial aid to students, as percent of total public expenditure on higher education (ISCED 5-6), 2001–10 Source: Authors’ calculations, based on Eurostat database As shown in Figure 20, the level of financial aid to students as a percentage of total public expenditure of higher education in Latvia has decreased significantly between the years 2001–10 (12.8 percentage points)47. In 2001, the share of financial aid of higher education expenditure in Latvia was among the highest in Europe, exceeding the EU-27 average by 11.8 percentage points whereas in 2010, Latvia fell 6.2 percentage points below the EU-27 average. In 2010, the expenditure share of student financial aid in Latvia was slightly below (1.2 per- centage points) the level of aid in the other two Baltic countries. 47 Financial aid to students as currently defined in the UOE data collection on education statistics is referring only to direct public assistance to pupils or students in the form of scholarships, public loans and family allowances contingent on student status. This is not a full measure of the level of assistance students may receive as for instance, students may also get financial support like loans from private banks, other services (i.e., student welfare services such as for meals, transportation, health care or dormitories) or tax reductions. The financial aid to pupils/students varies as the educa- tion systems are different across countries (Eurostat). 140 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding In 2007, prior to the economic and financial crisis, the percentage of the higher education budget spent on student aid reached its lowest point of 5.1 percent, which was the fifth lowest among all EU-27 countries in that year. The relative share of public student aid financing in Latvia fell dramatically from 24.8 percent in 2001 to 5.1 percent in 2007 due to a reform in the student loan system. Until the year 2000, loans were granted from the State budget. However, from 2001 onwards, loans were granted by private banks appointed by the state, thereby dramatically reducing the share of student aid in total public expenditure on higher education. The transition was gradual — although the number of state- granted loans decreased immediately after 2001, the state continued to grant loans until almost 2007. Government-subsidized Student Loans As discussed extensively in the section on Indirect Public Subsidies to Higher Edu- cation, government-subsidized student loans are available to all Latvian residents who pursue higher education and are able to meet co-signatory loan require- ments (Cabinet of Ministers Regulations No. 220, 2001). There are two types of loans in this program. One is the so-called study loan meant to cover tuition fees. This loan is available to full-time and part-time students. The loan for covering tuition fees starts accumulating interest rate within just one year after the student has completed the studies and has to start repaying the loan. The maximum annual interest rate that student needs to pay for is 5 percent. If the total interest rate is more than that, the government compensates the difference to the com- mercial bank offering the loan. The second type of loan is that intended to cover student living expenses. Only full-time students are able to qualify for this loan, whose maximum is EUR 170 per month. This loan also carries the maximum annual interest rate of 5 percent for students. The difference, however, is that this interest rate becomes effective from the issuance date of the loan, and students must cover these costs. The repay- ment of the principal loan amount, however, is postponed until one year following the completion of studies. Both loans are also available for students seeking to study abroad. The maximum amount that students can borrow to finance their studies abroad for several consecutive programs is EUR 28,458 (Cabinet of Ministers Regulations No. 220, 2001). The government-guaranteed student loan is a mortgage-type loan with fixed monthly repayments over a maximum repayment term of 10 years. For students who successfully complete their studies, loan repayment begins one year follow- ing graduation, at a steady interest rate of 5 percent. For students who drop out, repayment of the interest rate on loans begins immediately after ex-matriculation, at a rate usually greater than 5 percent. Repayment of the principal loan for these students begins three months after ex-matriculation. There are, however, certain conditions under which the amount owed by the student can be reduced. For every child born or adopted, the student debt holder has 30 percent written off. If both parents have student debt, this provision only applies to one of them. The student loan debt is fully forgiven if the borrower becomes disabled or dies. Similarly, student debt is fully or partially written off if the graduate becomes a mili- tary officer and is employed by the military service. In addition, one tenth or one REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 141 fifth (each year) of the student debt is written off in instances where the graduate is employed by public sector (gradual loan forgiveness). The list of positions that qualify for this waiver is annually approved by the government. Prior to the current student loan scheme, the government had a policy whereby study and student loans were granted from the state budget (Cabinet of Ministers Regulations No. 251, 1997; No. 86, 1999). These were widely available and did not require co-signatories. Although these loans are no longer provided, repay- ments are still actively being collected. Private Student Financial Support Programs There are two main types of private student financial support programs: the first is student lending schemes implemented by commercial banks for commercial purposes, and the second involves philanthropists and businesses engaging in philanthropy. In the case of private loans, the largest commercial banks in Latvia offer some sort of student loan scheme. These are essentially commercial loans targeting stu- dents and offering funding to cover their higher education costs. Philanthropic support to students is also made available, in the form of scholar- ships provided by foundations to higher education institutions. For instances, the “University of Latvia Foundation” manages both monetary donations and income from handling in-kind donations, such as real estate bestowed to the university and pays stipends to students (Latvijas Universitâtes Fonds, 2014). In addition, there are foundations such as “Vitolu fonds”, which offer direct scho- larships to students. In terms of the selection criteria, scholarship recipients are usually chosen on account of both need and merit; however, there are sometimes also particular constraints with respect to the subject area. Student financial support initiatives are, further, offered by municipalities, where additional funding is leveraged via local businesses, philanthropists, and the muni- cipal budget. In these instances, grants typically tend to be offered on the assump- tion that recipients will return to the municipality following the completion of their studies, and thus contribute to the local community/economy. 142 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Appendix 2 List of Documents Reviewed — Development of Discussion on HE Funding Reform Below is a short overview of the main documents discussing and referring to the pros and cons of the existing HE funding model, proposals for reforms, and target indi- cators. Guidelines for the Development of Higher Education and Science Technologies 2002–2010, Ministry of Education and Science, 2001 Targets: •State budget funding to HE: 1.4 percent of GDP; state budget funding to science and research: 1 percent of GDP (from that 0.4 percent for science universities). •Attract private funding to HE: 1–1.4 percent of GDP; private funding for research 1–1.3 percent of GDP. •Funding for state-funded study places should cover 20 percent of the respective population aged 18–23. •Provide additional state budget funding for internationalization; support for stu- dent exchange programs (Erasmus, Socrates, Nordbalt, etc.). •Develop scholarship funds at HEIs from their own resources. •Integrate HE, science, and modern technology. •Increase state funding for science at universities for the development of docto- ral studies, support science disciplines, scientific research base, and infrastructure. •Attract international funding for the development of research and technology. National Concept of the Development of Higher Education and Higher Education Institutions until 2010, Higher Education Council, 2001 (approved by the Cabinet of Ministers on July 16, 2001) Targets: •State budget funding to HE has to be gradually increased (by 2006, plus LVL 3 million a year; by 2011, plus LVL 1.3 million a year). At the same time HEIs should bear responsibility for the effective use of public resources in the form of performance contracts between HEIs and MoES regarding the specific number of specialists to be prepared. •In the following 10 years, to increase the state funding to reach the optimum coefficients for studies in accordance with the existing normative basis. REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 143 •Revise the remuneration system of academic staff by harmonizing the lowest rates of salary for the different groups of academic personnel. Guidelines for the Development of Education 2007–2013, Ministry of Education and Science, 2006 (approved by the Cabinet of Ministers on September 27, 2006) Evaluation: In 2004/2005 the number of students per 1,000 members of the popu- lation is 556, which in comparison with the average number in EU of 371 is high. However, the number of students is not the indicator of quality. It can be explained by the low prestige of vocational education and limited possibilities in the labor mar- ket. Moreover, the number of students in STEM is insufficient, only 5.2 percent of the total number of students and 12.5 percent of state-funded students. Number of budget study places is not sufficient and does not promote accessibility. Targets: •Increase the amount of student loans (to reach LVL 120 a month) and increase the number of study loans, which are covered by the state budget. •Increase the number of state funded scholarships by 5 percent a year. Attract private funding for the formation of scholarship funds. •Increase the number of budget study places in STEM to reach at least 51 per- cent of all state-funded study places. •Attract EU funds for the preparation of the highest level specialists (Masters, Doctors). •Increase the coefficients of study costs by 1/10 a year to reach 83 percent of the optimal value in 2007 and 95 percent in 2010. •Increase funding to HE to reach 0.8 percent of GDP in 2007, 1.1 percent in 2008, 1.4 percent in 2009, and 1.5 percent in 2010. •At least 40 percent of state budget funding for science concentrated in universi- ties for research. Is anything wrong with higher education in Latvia?, 2009, paper by V.Dombrovskis, Stockholm School of Economics Evaluation: Existing system is geared to funding study places, which are a form of industrial policy in HE with government subsidizing certain professions. Scien- ce funding is largely independent of any performance indicators and is allocated to scientific institutions based on tradition. Present HE system is not as effective as the Soviet education in promoting innovativeness. Proposals for reform: •Research budget should be allocated on the basis of success: publications in internationally peer-reviewed journals and success in attracting European research grants. 144 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding •Allocation of subsidies for budget places should depend on the program full time faculty’s success in publishing in internationally recognized peer-reviewed journals. That is, a university with a more publishing full-time faculty in a relevant program of study would be entitled to a greater subsidy as compared to a uni- versity with a less publishing faculty. This would push universities to change their internal motivation systems to stimulate their faculty to produce research that would comply with the world standards. •The reform would not increase the total amount of financing for HE but would change the criteria by which universities receive public subsidies. •Government should offer additional financing contingent on introducing credible MA programs in English, and possibly provide matching grants linked to uni- versities’ success in attracting foreign students. •Government may provide targeted grants for training PhD students abroad and for attracting visiting faculty from top schools in the world. Information Note on the Necessary Structural Reforms in HE and Science to Enhance the International Competitiveness of Latvia, Ministry of Economics, 2010. (Information note was submitted to the Cabinet of Ministers to present the results of the working group on structural reforms in HE initiated by Prime Ministers upon the request of HE sector). Evaluation: In 2009 Latvia has low state budget funding for HE (less than 1 per- cent of GDP). Both public and private funding for HE has considerably decreased. Proposals for structural reforms in regard of HE and science funding: •Increase state budget funding to HE to reach 1.2 percent of GDP in 2015; for science, 1.5 percent of GDP in 2015. Increase to be achieved gradually, around 0.3–0.4 percent of GDP per year for HE and around 0.4–0.5 percent of GDP per year for science. •Improve the system of allocating state budget funds; introduce a transparent performance-based funding principle (“money follows quality”). Decrease the weight and impact of “input” indicators on the amount of allocated budget funding. •Introduce performance-based funding in science, and link funding with the re- sults of scientific activity — publications and patents — and their application to national economy. •Diversify HE resources; allow attracting additional funding from private sector (industry, entrepreneurship) and other sources. Make the HE funding system more transparent; clearly differentiate public and private finance to HE. •State funding for graduate studies (MA, PhD) to be concentrated in the HEIs with the quantitative and qualitative indicators to operate at the highest level studies and research. •MoES to evaluate the actual costs of a study place and plan adequate funding for it. REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 145 •Optimize study programs, especially those funded by the state, to reduce frag- mentation and doubling and to facilitate the development of joint programs. •MoES in cooperation with MoF to work out a performance-based HE and scien- ce funding model which takes into account the results of HEIs and scientific institutions in the previous three years, as well as sets the expected results (indicators) of the funding to be allocated. Financing Higher Education: A Model for Reform, May, 2011, by V.Dombrovskis, Strategic Analysis Commission Evaluation: The cornerstone of the HE financing in Latvia is the system of budget places, whereby the state provides predetermined per student subsidy in certain education programs. The state also decides on major parameters of this system, such as the size of the subsidy, the distribution of budget places by study pro- grams, as well as among universities. Arguments against: 1. The tax financed system distorts the incentives of both students and universi- ties, thereby producing economic inefficiencies. 2. The system is intrinsically regressive with regard to income distributions, as it entails redistribution from the poor to the affluent. 3. Given competing demands for public financing, the present system is unlikely to procure sufficient resources for HE. A fully tuition based system of financing, in which the students directly incur the costs of their education, is the opposite of tax financed system of HE. It is not associated with the problems discussed above, but it has its own issue. As compared with tax financed systems, tuition based systems put the student in the driver’s seat. Advantages: students have substantial incentives to invest in higher education. Tuition based systems are open ended in terms of finan- 146 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding cing. Drawbacks: low paying capacity of students; as a result, only those from wealthy families can afford HE. Pure tuition based systems might be inefficient and socially unfair. Proposed solution: Income contingent loans. Basic idea: students do not pay, but graduates do. •Abandon the system of budget places and the central planning that it entails. Introduce tuition fees for higher education with substantial autonomy for the uni- versities to formulate study programs and set the fees. •Introduce state provided loans for the students with interest rates tied to the government cost of borrowing. •Charge the State Revenue Service with collection of these loans from graduates, alongside the income tax. •Protect graduates with income contingent repayments by providing built-in insurance against inability to repay and excessive volatility. This would facilitate competition between universities and provide information to help students make more informed choices about their human capital investment. Action Plan for the Government 2011 (Prime minister Valdis Dombrovskis) (Parliamentary elections in 2010, Parliament was dissolved next year May 28, 2011) •Provide sufficient funding to HE taking into account performance and quality indicators, develop funding coefficients for regions. •Introduce performance based HE funding to ensure the consolidation and effec- tive use of HE and science resources. •Funding to be granted on the basis of a long-term national development pers- pective. The Proposal for Performance Based Funding of HE and Science, Ministry of Education and Science, 2011 (remains as a project version, further activities suspended by the incoming Minister of Education and Science Roberts Kilis) Proposal for performance-based funding: After analysis of the higher education and science financing model that exists in Latvia, it may be concluded that the higher education and science financing model in Latvia already comprises all three types of performance based higher education and science financing: (i) formula, (ii) target contract, and (iii) financing to be obtained according to tender procedure. A partially formula-based financial reference amount has been introduced in the higher education of Latvia since 2002, and it is supplemented by a performance- based (number of prepared specialists) contract among the institutions of higher education and ministries. REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 147 The formula is based on the clear and easily comprehensible criteria suggested by the World Bank experts. A formula financial reference amount has been also introduced in science from 2005, where the variable part depends on particular scientific results (number of publications, number of patents, etc.). Innovative financing or financing to be allocated according to tender procedure has also been introduced (financing of science according to tender procedure, ESF and ERDF financing for studies, scientific activity and innovations and for improvement of infrastructure). Therefore, it may be concluded that in order to comply with the task entrusted by the Cabinet, it is necessary to put more emphasis in the financing of the HE and science on the results by introducing additional performance indicators in accor- dance with the state policy for the area of higher education. Action Plan for the Government 2012 (Prime Minister Valdis Dombrovskis) A new HE funding model from 2014 to enhance accessibility, fairness, and inter- national competitiveness of HE based on a thorough analysis and evaluation by international experts. Aim: by the end of 2014 research on the funding model carried out, normative basis worked out, and the new model implemented. Action Plan for the Government 2014 (Prime Minister Laimdota Straujuma) Strategic specialization of HE, optimization of HE network, balanced development in regions. Enhancing the engagement of HEIs in the economic development in regions. Proposals for a new HE funding model to be prepared to enhance national development, accessibility of HE in regions, labor market connect, inter- national competitiveness. For the budget of 2015 evaluation of the actual costs of study place. Action Plan for the Development of Higher Education and Science 2013–2014 (approved by the Cabinet of Ministers) Target: To prepare for implementation a new model for higher education finan- cing ensuring quality higher education for everybody. •Research carried out in cooperation with the World Bank regarding the current financial model for higher education in Latvia, as well as the potential alternative financing models and their legal, economic, financial, social and other aspects (risk assessment) (01.10.2014). •Based on the results of the performed research, prepared proposals for establishment of optimal model for financing of higher education, assessed risks for implementation thereof, performed detailed assessment of initial impact and summarized opinion of the public and social partners on that model (01.11.2014). •Prepared normative basis for gradual introduction of the financing model (01.11.2014). 148 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Guidelines for the Development of Education 2014–2020 (project) (approved by the Cabinet of Ministers on December 16, 2013, parliamentary endorsement needed) New funding model of HE as central to reforms in HE to enhance international competitiveness and quality of studies. Aspects to take into consideration in the process of preparation of the new funding model: accessibility and fairness; inter- national competitiveness; legal, economic, financial, and social risks; possible scenarios of implementing the new model. Aim: by 2020 the new funding model is fully functioning and its impact on the strategic goals can be evaluated. REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 149 Appendix 3 Note on Availability of Performance Data Submission and processing of the data reflecting the activity of higher education institutions (both university type and non-university type institutions — colleges) in Latvia is governed by the Law on Higher Education Institutions, Official Sta- tistics Law, Regulations of the Cabinet of Ministers No. 922 “Procedures for the Approval of the State Statistics Reports and Forms”, Regulations of the Cabi- net of Ministers No. 348 “Procedures for the Submission of Information of Activity of Higher Education Institutions to the Ministry of Education and Science”, as well as the related Regulations of the Cabinet of Ministers No. 994 “Procedures for the Financing of Institutions of Higher Education and Colleges from the Funds of the State Budget”. The main players in the process of gathering and analyzing activity and performance in higher education48 are HEIs, Ministry of Education and Science, Central Statistical Bureau. To various extents the data are submitted to the Ministry of Education and Science (in some cases through other ministries) and Central Statistical Bureau, as well as published in the institution’s annual report and on the institution’s website. Official Statistics Law defines the role of Central Statistical Bureau as the main co-coordinator of the flow of statistical information at the national level, as well as the mutual harmonisation of statistical indicators to be included in State registers and other information systems. This includes gathering the data of activity and performance of higher education institutions, both state funded and private. Official Statistics Law states that the provision of the data required by the Central Statistical Bureau is obligatory. In light of the stipulations of the Statistics Law the Regulations of the Cabinet of Ministers No. 922 “Procedures for the Approval of the State Statistics Reports and Forms” specify the parameters (templates) to be used for the submission of data. Specifically, the Regulations No. 922 include a special form for HEIs to submit information on their activity at the begin- ning of each academic year — by October 15. Law on Higher Education Institutions (henceforth Law on HEIs) defines the gene- ral principle that HEIs monitor their performance by gathering and analyzing relevant data. Section 5 of the Law on HEIs lists the tasks of HEIs including the obligation to ensure that “information regarding student results, graduate employment, the satisfaction of students with the study program, the work effec- tiveness of academic staff, the study funds available and the disbursements thereof, essential indicators of the activities of an institution of higher education is compiled and analyzed”. Section 75 of Law on HEIs elaborates on the data to be published in the institution’s yearly report (year-book) and submitted to the Ministry of Education and Science as follows: (1) Each year, for the promotion of co-operation among institutions of higher education and colleges, State authorities and local government institutions and society, an institution of higher education and college shall prepare a report of the activities thereof in the reporting year (a year-book) which shall be pub- 48 “Performance data” are here less strictly defined and include both input and output indicator of HEIs. 150 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding lished as a separate issue and kept on the Internet home page of the institution of higher education and college. (2) In accordance with the procedures and the time period prescribed by the Cabinet, an institution of higher education and college shall submit informa- tion regarding the activities thereof to the Ministry of Education and Science, and this information shall include data about: 1) The structure of the institution of higher education and college; 2) The number and composition of students and other staff of the institution of higher education and college; 3) Options for study and the number and composition of enrolled students; 4) The offered study courses, study modules and study programs, as well as information regarding the subject areas; 5) The allocation and utilization of State budget funds; 6) Economic activity, own income and utilization thereof; 7) International relations; 8) Information regarding the subsequent course of work of graduates in the next three years after completion of the relevant study program of the institution of higher education or college. On the basis of the above stipulations in the Law on HEIs (and the Law and regu- lations governing statistics), the Cabinet of Ministers Regulations No. 348 “Proce- dures for the Submission of Information of Activity of Higher Education Institutions to the Ministry of Education and Science” (henceforth Regulations No. 348) detail the procedure and timeline for the submission of data to the Ministry. Annexes to the Regulations No. 348 specify the parameters according to which the above information should be structured. Moreover, the Regulations include reference to the parameters of information required by the Central Statistical Bureau. Regulations No. 348 provide that HEIs provide the following information to the Mi- nistry of Education and Science: (1) By September 5 of the current year: information on the structure of higher education institution or college (structural scheme of the institution); number and composition of enrolled students; number and characteristics of graduates (students who have obtained the academic, professional, scientific degree and professional qualification); and information on study opportunities. Data on the newly enrolled students are provided per study level and study pro- gram: title and level of study program; number of applicants per one state-funded study place; and number of newly enrolled students, including those enrolled as state-funded and those to pay tuition fee (Appendix 2, Table 1). Data on the gra- duates are also provided per study level and study program: title and level of study program; and number of students who have obtained a degree or qualifica- tion, including those whose studies were state-funded students and those who paid tuition fee (Appendix 2, Table 2). Information on study opportunities entails information regarding the tuition fee per study level and program in full-time and part-time studies (Appendix Table 3). REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 151 Appendix 2, Table 1 MoES parameters for the information on the number and composition of newly enrolled students in higher education institution/college in the respective academic year Applicants Number of Including Level and title of per state-funded enrolled study program study place students State-funded Paying Appendix 2, Table 2 MoES parameters for the information on the students who have obtained a degree or qualification in higher education institution/college in the respective academic year Including Level and title of Number of persons who have study program obtained a degree or qualification State-funded Paying Appendix 2, Table 3 MoES parameters for the information on the tuition fee for study program in higher education institution/college in the respective academic year Fee for part-time studies Level and title of Fee for full-time study program studies Attendance required49 Attendance not required (2) By October 15 of the current year: information on the number and composition of students (currently studying) and staff, the courses and study programs offe- red, as well as information on business operations (in accordance with the form specified by Central Statistical Bureau), international relations. This section of information is provided in parallel to the Central Statistical Bureau on the basis of the parameters specified by Central Statistical Bureau regarding the activity of HEIs — detailed information on the students and staff, study pro- grams, business operations (CSB form to be added). Along with that the Regula- tions No. 348 specify the information to be provided on international relations (Appendix 2, Tables 4, 5 and 6). Appendix 2, Table 4 MoES parameters for the information on the students of higher education institution/college studying abroad in the respective academic year Higher education Country institution/college Number of students Appendix 2, Table 5 MoES parameters for the information on the international con- tracts and participation in international projects and programs Higher education Country institution/college Number of contracts, projects 49 In Latvia part-time studies are further differentiated according to attendance requirements. 152 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Appendix 2, Table 6 MoES parameters for the information on the international exchange of academic staff (work, internship and other cooperation abroad) Higher education Field of science Number of Country institution/college (study program) persons 1) By 1 November of the current year: admission requirements. 2) By 1 April of the current year: distribution and use of state funds for the previous year’s budget, revenues and expenditure of the institution. The latter section of information has to be provided according to the parameters specified by the Ministry (Appendix Tables 7 and 8). Appendix 2, Table 7 MoES parameters for the revenue of higher education institu- tion/college No. Type of revenue Amount of revenue 1. Subsidy from the general state revenue incl. co-funding for the implementation of European Union structural funds projects 2. Revenue from tuition fee 3. Subsidy (grants) for scientific projects 4. Rest of budget funding for scientific projects (for instance, state programs, state commissioned research) 5. Revenue from the performance of scientific work not financed by the state budget 6. International funding (funds, programs), incl. international funding for research projects 7. Revenue from facilities rental 8. Other revenue Appendix 2, Table 8 MoES parameters for the expenditure of higher education institution/college Amount of expenditure No. Type of expenditure (percent) 1. Remuneration total incl. salary for academic and administrative staff 2. Social security costs for the employees 3. Business trips 4. Services 5. Materials, energy resources, heating, light, water, inventory, etc. 6. Books and magazines 7. Grants 8. Transport compensations 9. Capital expenditure, including movable property 10. Other expenditure REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 153 Performance indicators of budget study places Reporting on the use of budget funding is also described in other regulations. Regulations of the Cabinet of Ministers No. 994. “Procedures for the Financing of Institutions of Higher Education and Colleges from the Funds of the State Budget” stipulate that the Ministry of Education and Science and other ministries, which have institutions of higher education and colleges under their authority, enter into contracts with the State institutions of higher education and State colleges regar- ding the preparation of the definite number of specialists and the provision of development of scientific work. The Performance Contract defines the mutual liabilities of the institution and the Ministry in the use of the state budget funds for the preparation of specialists, the control of finance, reporting and exchange of information. The annexed Agreement Protocol which is updated yearly details the amount of state funds granted to the institution and its composition: total number of study places, total amount of funding granted for the relevant year, costs of study place, and number of specialists to be prepared. Institutions having received state budget places have to report at the beginning of each calendar year — by 1 February — on such things as fulfillment of budget places (actual number of budget students as compared to the planned), number of graduates, and number of students actually studying. In case of underperformance (not enough budget students and graduates), HEIs have to provide explanation. Thus, the data of higher education institutions are gathered annually by the Ministry of Education and Science, as well as the Central Statistical Bureau, and are gover- ned by several regulations. Some data are submitted in parallel to both institutions. The system appears to be opaque and causes duplication of data collection. A discussion to introduce a more effective exchange of statistical information is in progress towards a unified register of HEIs subject areas where the perfor- mance data are linked to the study program and consequently — to quality. The changes in the system would require considerable amendments in the current Regulations No. 348, as well as the Law on HEIs concerning the exchange of sta- tistical information, possibly consolidation of the existing normative basis. At pre- sent amendments are in progress to revise the positions of revenue and expenditu- re to ensure their consistency with the Cabinet of Ministers Regulations of Decem- ber 25, 2005 No.1031 “On the Classification of Budget Expenditure in accordance with the Economic Categories” and Regulations No. 1032 “On the Classification of Budget Revenue”. The planned amendments also include more detailed parame- ters on graduates to be provided by institutions on a regular basis. Analysis of performance data Central Statistical Bureau provides general statistics on higher education such as number of students, graduates, academic staff, and funding to higher education; however, the central statistics do not reflect the situation in specific institutions. The data received at the Ministry of Education and Science included in the Annual Survey on Higher Education Institutions reflect the situation in each institution in the respective year. The data are partially included in the internal database of the MoES to monitor the use of the budget funding, the dynamics of students’ numbers per program, and the actual numbers of graduates as opposed to the planned numbers (fulfillment of the requirements in the Performance contract and Agreement Protocols). 154 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Graduate Tracking Although the Law on HEIs explicitly states the obligation of HEIs to monitor the progress of graduates in the labor market, an appropriate monitoring methodolo- gy has not yet been developed. Apart from the data on persons having graduated (persons who obtained a degree or qualification), information on graduates is cur- rently limited to voluntarily feedback provided as a response to graduate surveys, interviews, or other outreach organized by HEIs. A systemic and unified approach to graduate tracking is yet to be developed. It is envisaged to develop cooperation with the State Revenue Service to analyze graduates’ success in the labor market on the basis of their income indicators (tax paid). A pilot project between the State Revenue Service and Riga Technical University has been conducted to gather data on graduates’ average income per subject areas. REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 155 Appendix 4 Stakeholder Consultations Workshop – December 2, 2013 Institution, organization Representative(s) Position Ministry of Education Iveta Graudina Councilor to the Minister and Science Liga Lejina Director of the Department of Political Initiatives and Development Inese Sture Deputy Director of the Department of Higher Education, Science and Innovations Marina Meksa Senior Expert of the Department of Higher Education, Science and Innovations Anatolijs Melnis Senior Expert of the Department of Higher Education, Science and Innovations Inta Svirksta Expert of the Department of Structural Funds and International Financial Instruments Laura Treimane Officer of Higher Education/Local Consultant State Education Development Dita Traidas Director Agency Stakeholder Roundtable – December 3, 2013 Institution, organization Representative(s) Position Higher Education Council Andris Teikmanis Associate Professor Latvia Students’ Union Inguna Zarina Member Asnate Ka oka Member Latvia Confederation of Anita Lîce Expert Employers Latvia Chamber of Commerce Karîna Zarina Director of Political Department and Industry Ministry of Economics Vita Skuja Official/Department of Economic Development and Labour Market Forecasts Riga Stradins University Toms Baumanis Prorector of Development un rektora J ânis Bern âts Legal Advisor Business Higher Education Aldis Baumanis Lecturer Institution, “Turîba” 156 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Institution, organization Representative(s) Position Latvia Academy of Arts Andris Teikmanis Associate Professor Ventspils University College Ligita Blumberga – Riga Graduate School of Law Kitija Freija Director University of Latvia Gundars Bçrzi òš Chancellor Riga Academy of Pedagogy Tija Zirina Associate professor, Manager of the Department and Education Management of the Organization of Studies Vidzeme University of Agnese Lapetrova Rector’s Assistant – Research Coordinator Applied Sciences Stockholm School of Rita Kaša Pro-Rector Economics in Riga B.Sc. Thesis Faculty Advisor Daugavpils University Participated. Liepaja University Riga Technical University Ventspils University of Applied Science Latvia University of Agriculture Stakeholder Interviews – February 5–7, 2014 Institution, organization Representative(s) Position Ministry of Culture Roventa Putnina Officer at Budget Department Barba Krisjane Head of Budget Department Latvia Academy of Arts Sandra Plota Director Gita Senka Deputy Director of International Cooperation and Development Latvia Academy of Culture Zane Silina Vice Rector Latvia Academy of Music Normunds Viksne Vice Rector of Academic Affairs Irena Baltabola Director of Study Programs Vita Daudisa Head of Finance Department Dace Markus Rector Riga Academy of Pedagogy and Education Management Daina Voita Vice Rector of Science Latvia Academy of Sports Svetlana Panova Chief Accountant Education Juris Grants Vice Rector of Science Janis Zidens Rector REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 157 Institution, organization Representative(s) Position Latvia Maritime Academy Andrejs Zvaigzne Vice Rector Janis Brunavs Professor Janis Berzins Rector BA Business School of Dr. Andris Sarnovics Rector Business and Finance Liga Peiseniece Vice Rector for Academic Affairs Ministry of Defense Ilona Drege Under State Secretary of Administrative and Legal Affairs Inese Kaive Deputy Director of Section of Military Education and Science of Department of Human Resources National Academy of Defense Georges Kerlins Vice Rector Daugavpils University Several participants Students, PhD students and PhD students from Institute of Systematic Biology Inese Kokina Vice Rector for Research Irena Kaminska Vice Rector for Studies Rectors’ Conference50 Janis Bernats Legal Expert Agnese Rusakova Expert Higher Education Council Several – representatives from the Higher Education Council Ministry of Interior Alda Strode Financial Specialist Laris Tumanana Director of Department of Financial Management Agnese Laure Office at Department of Financial Management, Section of Financial Policy and Methodology Gints Rozenbils Officer at Department of Human Resources Management Ministry of Agriculture Ilze Slokenberga Official of Department of International Affairs and Strategic Analysis Ministry of Environmental Edgars Paulovics Officer at Zemgale Planning Region Development Protection and Regional Department (counterpart of Latvia University of Development Agriculture) 50 Separate meeting with Andrejs Rauhvargers, Secretary General of Rectors Conference on February 18, 2014. 158 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Institution, organization Representative(s) Position Latvia University of Janis Sprukts Chancellor Agriculture Daira Treigute Head of Financing Department Dita Stefenhagena Rector’s Assistant State Police Natalija Dorozko Head of Financial Department Gunta Gregersone Head of HR Department, Section of Professional Competence Building State Police College Maris Riekstins Deputy Director State Border Guard Aivars Uzulnîks Deputy Director Velta Grecka Head of Finance Department Sandra Keisa Senior Specialist of Human Resources Department State Border Guarding Iveta Plasa Head of Department of Finance and Planning College Daiga Kupc âne State Border Guard Fire Safety and Civil Vilis Students Deputy Director Protection College Ministry of Health Inese Andersone Head of Department of Coordination of Financial Analysis and Investment Biruta Kleina Deputy Director of Health Care Department Ministry of Welfare Danute Jasjko Director of Department of Social Services Aldis Dudins Senior Expert of Department of Social Services Riga Stradins University Toms Baumanis Vice Rector of Development Janis Bernats Rector’s Legal Advisor Juris Lacis Vice Rector of Administration Red Cross Medical College Gastons Neimanis Director (of Riga Stradins University) Inara Urpena Deputy Director in Academic Affairs and Research Social Integration State Jana Pulkstene Deputy Director in Professional Rehabilitation Agency Inese Urpena Administrator of College Study Programs Business Higher Education Aldis Baumanis Associate Professor Institution “Turîba” Riga International School of Irina Sennikova Rector Economics and Business Administration Ilmars Kreituss Vice Rector of Academic Affairs Tatjana Vasiljeva Vice Rector of Science Ieva Brence Head of Department of Economics and Finance REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 159 Institution, organization Representative(s) Position Transport Irina Yatskiv Acting Rector and Communications Institute Igors Kabaskins President Igors Graurs Vice Rector of Academic Affairs Ministry of Economics Vita Skuja Officer of the Department of Economic Development and Labor Market Forecasts Ludis Neiders Head of Department of Structural Policy of National Economy, Economic Coordination Section Ruta Rimsa Officer at Department of Structural Policy of National Economy, Economic Coordination Section Ministry of Environmental Veronika Jurca Senior Expert of the Department of Regional Protection Development Planning Cross-Sectoral Coordination Elina Petrovska Consultant Center Latvia Confederation of Inga Sina National Coordinator in Professional Education Employers and Employment Latvia Chamber of Commerce Aldis Baumanis Associate Professor and Industry Latvia Students’ Union Inguna Zarina Member Liva Vikmane Member Vidzeme Planning Region Kristaps Rocans Project Manager Ministry of Finance Ilonda Stepanova Director of Budget Department Liga Sulca Head of Division Ministry of Education Inese Sture Deputy Director of the Department of Higher and Science Education, Science and Innovation Gunta Ar âja Deputy State Secretary – Director of the Department of Structural Funds and International Financial Instruments Marina Meksa Senior Expert, Department of Higher Education, Science and Innovation Anatolijs Melnis Senior Expert, Department of Higher Education, Science and Innovation Janis Paiders Officer, Department of Higher Education, Science and Innovation Reinis Lasmanis Officer, Department of Higher Education, Science and Innovation Kristîne Keièa Officer, Department of Higher Education, Science and Innovation Karîna Aleksandra Officer, Department of Higher Education, Science and Innovation Evita Sarma – 160 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Institution, organization Representative(s) Position University of Latvia J ânis Stonis Administrative Director Gundars Bçrzi òš Chancellor (supervises Department of Development and Planning, and Department of Finance and Accounting) Ventspils University College Gita Revalde Associate Professor and Rector Vidzeme University College Gatis Krumins Rector Iveta Putnina – Liepaja University J ânis Rimš âns Rector Riga Technical University Ingars Eriòš Chancellor, Associate Professor Prof. Uldis Sukovskis Vice-Rector for Academic Affairs T âlis Juhna Zin ât òu prorektors Prof. Ugis Bratuskins Dean of the Faculty of Architecture and Urban Planning Prof. Juris Smirnovs Dean of the Faculty of Building and Civil Engineering State Education Development Dita Traidas Director Agency Elita Zondaka Head of Department of Structural Funds Management and Monitoring Ansis Pekss Head of Science Project Monitoring Unit, Department of Structural Funds Management and Monitoring Ingus Zitmanis Head of European Social Fund Project Monitoring Unit, Department of Structural Fund Management and Monitoring Atvars Sauss Head of Infrastructure Project Monitoring Unit, ERDF Infrastructure Project Control Department Agnese Aivare Head of the ERDF Infrastructure Project Control Department REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 161 References hs and Weaknesses Arnhold, N. and Kwiek, M. 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Report 2 ASSESSMENT OF CURRENT FUNDING MODEL’S ‘STRATEGIC FIT’ WITH HIGHER EDUCATION POLICY OBJECTIVES 18 April 2014 Contents 168 Abbreviations 169 Executive Summary 172 Introduction 174 1 Strategic Priorities of Higher Education in Latvia 174 1.1 Strategic papers for the Latvian higher education sector 175 1.2 Clustering the strategic objectives into Thematic Goals 181 2 Assessment of the Fit between Funding and Thematic Goals 182 2.1 Increase the quality of education and its link with the national economy 185 2.2 Increase the quality and (international) competitiveness of research 187 2.3 Increase sector efficiency 189 2.4 Enhance technology, innovation, creativity, and entrepreneurship 190 2.5 Renew and develop the human resources of higher education institutions 191 2.6 Stimulate participation in and access to higher education 193 2.7 Stimulate internationalization in higher education 194 2.8 Enhance the funding base of higher education 195 2.9 Establish a new and transparent approach to quality assurance 196 2.10 Overview on strategic fit by Thematic Goals 198 3 Potential Further Alignment of Funding and Policy Objectives 199 3.1 Funding opportunities that may enhance quality of teaching 203 3.2 Funding opportunities that may enhance quality of research 206 3.3 Funding opportunities that may enhance sector efficiency 209 3.4 Funding opportunities that may enhance technology, innovation, creativity, and entrepreneurship 210 3.5 Funding opportunities that may enhance professional capacity of academics 211 3.6 Funding opportunities that may enhance access and participation 213 3.7 Funding opportunities that may enhance internationalization 214 3.8 Other opportunities to stimulate teaching and research 215 Appendices 215 Appendix 1 Description of National and Sectoral Policy Planning Documents 220 Appendix 2 Stated Policy Objectives and Targets in Higher Education, Science and Innovations 220 A. National Development Plan of Latvia for 2014–2020 222 B. Guidelines for the Development of Science, Technology and Innovation 2014–2020 223 C. Guidelines for the Development of Education 2014–2020 (project) 168 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Abbreviations EC European Credit(s) EU European Union ESF European Social Fund EUA European University Association HE Higher Education HEI Higher Education Institution MoES Ministry of Education and Science MoE Ministry of Economics RAS Reimbursable Advisory Services RTA Reimbursable Technical Assistance R&D Research and Development SEDA State Education Development Agency STEM Science, Technology, Engineering and Mathematics REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 169 Executive Summary Policy Objectives This report is the second in a series of three papers prepared by the World Bank’s Latvia Higher Education Team as part of its Reimbursable Advisory Services on Higher Education Financing in Latvia. The aim of this paper is to identify the main policy objectives for Latvia’s higher education system and then assess how the current funding model fits or aligns with those objec- tives. The assessment is based on a review of key strategic documents for Latvia’s national and sectoral development, international practices for higher education financing, and feedback from select stakeholders in Latvian higher education. Based on the team’s expertise and experience51 advising different higher education systems on this issue, the report assumes the alignment of strate- gic goals and funding mechanisms is a crucial success factor to promote na- tional strategies. Though other policy instruments provide considerable support, the national funding system can create incentives to steer the sector in a desired direction. For the purposes of this assessment, the strategic objectives for higher edu- cation identified in the key policy planning documents were clustered into the following nine thematic goals: 1. Increase the quality of education and link with the national economy 2. Increase the quality and (international) competitiveness of research 3. Increase sector efficiency 4. Enhance technology, innovation, creativity, and entrepreneurship 5. Renew and develop the human resources of higher education institutions 6. Stimulate participation in and access to higher education 7. Stimulate internationalization in higher education 8. Enhance funding base of higher education 9. Establish a new and transparent approach to quality assurance Consistent with the Bank’s first report, this paper also explores the current funding model for Latvian higher education through four components (instru- ments of state funding, diversification of financial resources, financial auto- nomy, and student funding) to determine how each aligns with the thematic goal. The following table summarizes the overall assessments regarding the stra- tegic fit of the four components of the funding system with each of the nine 51 The Bank’s Latvia Higher Education Financing team consists of World Bank staff as well as interna- tional and local experts bringing together expertise from a range of countries (Finland, Germany, the Netherlands, Latvia, the wider European area, and the United States) and contexts. 170 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Thematic Goals. The scores vary from a strong positive strategic fit (indicated with “++”) to a strong negative fit (indicated with “- -”). A neutral relationship is indica- ted with “0”. State Resource Financial Student Thematic goals Funding Diversification Autonomy Funding 1. Quality of education -- + + - 2. Quality of research -- + + + 3. Sector efficiency -- - + + 4. Technology, innovation, - -- 0 0 creativity and entrepreneurship 5. Human resource development - + + 0 6. Participation and access -- ++ 0 -- 7. Internationalization - 0 0 - 8. Funding base -- - 0 + 9. Transparent quality assurance + 0 0 0 As the table demonstrates, the overall funding model, particularly the basic funding for teaching and research, does not align well with the Thematic Goals for Latvian higher education. In general, this does not mean the policy objectives cannot be met, since other policy instruments can also be effective. However, the structural underfunding of the system together with the current model’s emphasis on inputs (i.e., enrollment), and its lack of a performance orien- tation actually appear to work against the spirit of quality education and research. Increases in state investment in higher education, in accordance with current legislation, could go hand-in-hand with the introduction of more performance- driven and innovation-oriented funding instruments that provide incentives for the system to move in the desired direction of enhanced teaching and research quality. Though the strong reliance on tuition fees and on EU structural funds should, in theory, steer higher education towards greater relevance to societal and economic needs, the incentives are not strong enough. Both tuition fees and EU funds are currently relied upon to maintain the functioning of the system and support the status quo, so they are unable to work effectively as instruments that guide towards greater quality, creativity, innovation, and entrepreneurship, especially in light of current economic and quality assurance realities. While financial autonomy is high in Latvia, some institutions have not utilized their full potential in this respect. Certain institutions are being creative in deve- loping alternative revenue sources, but the resultant funds are necessary to offset the low level of state investment in the system, so there is not much ability to rein- vest in new opportunities, partnerships, or innovation. Additionally, some other institutions do not appear to be fully aware of their autonomy. The system would benefit from financing instruments that allowed it to incentivize, for example, part- nerships with the private sector for revenue-generating research or training collaborations. REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 171 Finally, Latvia’s current approach to student funding appears to have a slight misalignment with the Thematic Goals, particularly as it relates to internatio- nalization and expanding access. Latvia would be well advised to reconsider how student financing could better align in a more supportive way with key policy objectives. With these Thematic Goals identified, the report also provides alternative ways to align the funding model and examples of how other countries utilize their funding instruments to support comparable policy objectives. These alternative approaches introduce a variety of alternatives the World Bank team will consider as it prepares recommendations for a reformed approach to finan- cing higher education in Latvia. The recommendations will be the foci of the third and final report expected to be delivered in the fall of 2014. This report is organized into three chapters with multiple appendices. Chap- ter 1 outlines the main policy documents reviewed as part of this process and illu- strates how the policy objectives for Latvian higher education were clustered into the nine Thematic Goals. Chapter 2 contains the assessment of whether or not the current funding mechanisms for Latvian higher education are aligned with the clustered policy objectives for the higher education system. Finally, Chapter 3 provides alternative approaches for how the funding mechanisms could better align with the policy objectives or themes, including some references to how other countries have utilized components of their funding model to support similar poli- cy objectives. 172 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Introduction The report at hand is the second in a series of three papers prepared by the World Bank’s Latvia Higher Education Team52 as part of its Reimbursable Advisory Services on Higher Education Financing in Latvia. The primary objec- tive of this paper is to assess to what degree the current higher education funding model aligns with or supports the strategic objectives of Latvia’s higher education system. Alignment is considered a highly desirable feature of higher education and research funding systems, since all levers (i.e., financial incentives, policy directives, etc.) are working to help the system realize its goals. This second report builds on several foundational elements included in the first report, Higher Education Financing in Latvia: Analysis of Strengths and Weak- nesses, 2014. The first report, inter alia, articulated the strengths and weaknesses of Latvia’s current approach to funding higher education in light of recent European trends and according to criteria for “good funding models” as agreed to with Latvia’s Ministry of Education and Science (MoES). This second report builds on the prior analysis by identifying the main policy objectives, with a focus on those that are mid- and long-term, for Latvian higher education and then assessing how the current funding model fits those objectives. The findings and observations of this assessment result from (a) a review of guidelines, priorities and goals contained within key strategic documents related to Latvia’s national development or its education sector, specifically seeking topics related to higher education; (b) the World Bank team’s international experience assessing or reforming systems of higher education financing; and (c) feedback from select stakeholders (e.g., rectors, academic staff, students, etc.) in Latvian higher education.53 This report is organized into three chapters with additional support in the Appendices. Chapter 1 provides a brief overview of the main policy documents reviewed and, for the sake of this assessment only, clusters the policy objectives for Latvian higher education referenced within those documents. A more extensive summary of the documents incorporated into this analysis and their specific higher education goals, guidelines, and objectives are included in the Appen- 52 Members of the World Bank’s Latvia Higher Education Team are Dr. Nina Arnhold, Senior Edu- cation Specialist and Task Team Leader, World Bank; Adjunct Professor Jussi Kivistö, University of Tampere, Finland; Professor Hans Vossensteyn, Director of the Center for Higher Education Policy (CHEPS), the Netherlands; Jason Weaver, Senior Education Specialist, World Bank; and Professor Frank Ziegele, Director of the Centre for Higher Education (CHE), Germany. 53 On 12 March, the World Bank and MoES hosted a workshop at the European Commission’s office in Riga for stakeholders in the higher education system. As part of the workshop, participants were divided into small groups to discuss how the current funding model aligns with different policy objec- tives and to brainstorm alternative ways in which better alignment could be achieved. REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 173 dices. Chapter 2 then contains the assessment of whether or not the current funding mechanisms for Latvian higher education are aligned with the objectives of the higher education system. As was done in the prior report, the mechanisms of funding for higher education in Latvia are explored according to the following four elements: state funding for teaching and research, diversification of finan- cial resources, financial autonomy, and student funding. The chapter includes an assessment of how these different elements of the funding model align with each of the nine thematic goals identified in Chapter 1. Finally, Chapter 3 provides alternative approaches or suggestions for how the funding mechanisms could better align with the policy objectives or themes, including some reference to how other countries have utilized components of their funding model to support similar policy objectives. Based on the team’s expertise and experience advising different higher edu- cation systems on this issue, the report assumes the alignment of strategic goals and funding mechanisms is a crucial success factor to promote natio- nal strategies. With a well-aligned funding model, policy objectives are more likely to become reality; whereas without reference to strategic goals, a funding system lacks orientation. However, it must also be stressed that funding is not the only instrument that determines the outcome of strategies. Funding can create incentives to steer the sector in a desired direction, but other policy instruments and elements must also provide support. 174 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding 1 Strategic Priorities of Higher Education in Latvia 1.1 Strategic papers for the Latvian higher education sector Although Latvia’s higher education sector is not currently governed by a compre- hensive strategic plan, several programs, guidelines, and plans offer a vision for the sector and medium- and long-term goals or objectives. The documents listed below, which account for both national and sectoral development strategies, were reviewed either for specific higher education strategic objectives or for context in interpreting the identified objectives. • Growth Model for Latvia: the Man in the First Place (adopted by the Parlia- ment of Latvia on October 26, 2005) • Sustainable Development Strategy of Latvia until 2030 (adopted by the Parlia- ment on June 10, 2010) • National Reform Programme of Latvia for the Implementation of Europe 2020 Strategy (endorsed by the Cabinet of Ministers on April 26, 2011) • National Development Plan of Latvia for 2014–2020 (adopted by the Parlia- ment on December 20, 2012) • Latvia Convergence Programme 2013 to 2016 (endorsed by the Cabinet of Ministers on April 29, 2013) • Information Note on the Development of the Smart Specialization Strategy (endorsed by the Cabinet of Ministers on December 17, 2013) • Partnership Agreement for the 2014–2020 EU Funds Programming Period (submitted to the European Commission on January 15, 2014) • Operational Programme “Growth and Employment” for the 2014–2020 EU Funds Programming Period (submitted to the European Commission on March 4, 2014) • Declaration of the Intended Activities of the Cabinet of Ministers headed by Laimdota Straujuma (endorsed by the Parliament on January 22, 2014) REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 175 • Guidelines for Development of Science, Technology and Innovation 2014–2020 (endorsed by the Cabinet of Ministers on December 28, 2013) • Guidelines for the Development of Education 2014–2020 (project) (endorsed by the Cabinet of Ministers on January 7, 2014) • Action Plan for the Development of Higher Education and Science for the Time Period from November 1, 2013 until December 31, 2014 (adopted by the Cabinet of Ministers on November 22, 2013) • The Concept of the Development of Higher Education and Higher Education Institutions for 2013 to 2020 (established in accordance with the Higher Educa- tion Law) • Law on Higher Education Institutions (in force since December 1, 1995) For more information on these documents, please refer to the Appendices of this report. 1.2 Clustering the strategic objectives into Thematic Goals For the purposes of this document, the strategic goals for higher education that were identified in the aforementioned documents were clustered into nine Thema- tic Goals. Importantly, this clustering of policy objectives is wholly the work of the World Bank’s team and done to facilitate a more succinct assessment of the degree to which the funding model aligns with Latvia’s broader strategic objectives for higher education. At the level of the Thematic Goals, occasional comparisons can subsequently be drawn to how other countries utilize their fund- ing model in support of similar objectives. In the following tables, each of the nine Thematic Goals is presented along with examples of the specific strategic objectives and their source document. The objectives clustered under Thematic Goals include aspirational targets, new initiatives, and areas of focus. Since the strategic objectives were largely identified from a review of key documents, it should be noted that this list is not intended to reflect any weighting or prioritization. Also, virtually all of these could have a relation to funding, but sometimes non-financial incentives and instruments may be just as or even more effective. 176 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding 1. Increase the quality of education and its link with the national economy • Transform the education system and improve its content to focus on employability (competencies, entrepreneurship, and creativity) • Increase role and availability of (good) internships to facilitate the transition to labor market and reduce unemployment (18 months after BA, MA, or PhD Example Objectives graduation reduce unemployment from 7.5% to 5.2% in 2020) for this Thematic Goal • Develop a register of graduates – a system for monitoring and assessing the graduates’ paths in the labor market • Stimulate excellence through sufficient “critical mass” or economies of scale to ensure intellectual collaboration and spillovers, resource consolidation, and efficiency National Development Plan 2014–2020 Information Note on the Development of the Smart Specialization Strategy Guidelines for the Development of Education 2014–2020 Source Documents Guidelines for the Development of Science, Technology and Innovation 2014–2020 Action Plan for the Development of Higher Education and Science 2013–2014 2. Increase the quality and (international) competitiveness of research • Improve quality of research, especially in areas of Smart Specialization, and strengthen its collaboration with business to generate new, innovative, and competitive products and services • Promote the development of a system of joint research-based and industry-oriented doctoral studies Example Objectives • Increase the number of doctoral students, encourage their involvement for this Thematic Goal in research projects • Establish joint doctoral study centres at universities and scientific institutions to focus on topical socioeconomic issues • Improve international competitiveness and participation in European Research Programmes and Infrastructures • Invest in modern research infrastructure National Reform Programme of Latvia for the Implementation of Europe 2020 Strategy National Development Plan 2014–2020 Source Documents Operational Programme “Growth and Employment” for the 2014–2020 EU Funds Programming Period Guidelines for the Development of Science, Technology, and Innovation 2014–2020 Action Plan for the Development of Higher Education and Science 2013–2014 REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 177 3. Increase sector efficiency • Strengthen the integration of higher education with science, research, and industry to help promote knowledge transfer • Encourage strategic specialization of HEIs through differentiation of institutional profiles Example Objectives • Improve education infrastructure through consolidation of study programmes, for this Thematic Goal reduce programme fragmentation and duplication, especially through regional collaboration • Stimulate institutional research excellence by resource efficiency and concentration to form critical masses National Reform Programme of Latvia for the Implementation of Europe 2020 Strategy Information Note on the Development of the Smart Specialization Strategy Operational Programme “Growth and Employment” for the 2014–2020 EU Funds Programming Period Declaration of the Intended Activities of the Cabinet of Ministers Headed by Source Documents Laimdota Straujuma Guidelines for the Development of Science, Technology, and Innovation 2014–2020 Action Plan for the Development of Higher Education and Science 2013–2014 Concept of the Development of Higher Education and Higher Education Institutions for 2013–2020 4. Enhance technology, innovation, creativity, and entrepreneurship • Strengthen position of STEM to reduce the disproportion of labour market (increase the proportion of state-funded places from 44% to 55% and proportion of graduates in STEM areas from 19% to 27% in 2020) • Increase proportion of college students in the system (from 18% to 24% in 2020) Example Objectives • Modernize infrastructure in the higher education institutions implementing for this Thematic Goal study programs in STEM areas, especially at college and doctoral level • Increase funding for science and innovation, including co-funding by private business • Stimulate market-oriented (societal relevant) research, enhance commercialization of research results National Development Plan 2014–2020 Guidelines for the Development of Education 2014–2020 Information Note on the Development of the Smart Specialization Strategy Operational Programme “Growth and Employment” for the 2014–2020 EU Funds Source Documents Programming Period Guidelines for the Development of Science, Technology and Innovation 2014–2020 Concept of the Development of Higher Education and Higher Education Institutions for 2013–2020 178 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding 5. Renew and develop the human resources of higher education institutions • Increase proportion of academic (university) staff with a doctorate from 54% to 65% in 2020 • Increase number and proportion of foreign staff (from 0.5% to 7% in 2020) • Attract younger staff (proportion of 30–49 year olds from 45% to 55% Example Objectives in 2020) for this Thematic Goal • Increase basic salary levels of academics, create transparent remuneration structures, and introduce performance incentives (bonuses and rewards) • Renew the principle of joint pedagogic and research work to facilitate the engagement of academic staff in research and vice versa National Development Plan 2014–2020 Partnership Agreement for the 2014–2020 EU Funds Programming Period Guidelines for the Development of Education 2014–2020 Source Documents Guidelines for the Development of Science, Technology, and Innovation 2014–2020 Action Plan for the Development of Higher Education and Science 2013–2014 6. Stimulate participation in and access to higher education • Attract more students from lower socioeconomic backgrounds by developing a support system, including increasing scholarships and grants • Provide more need-based student financial support as opposed to purely Example Objectives merit-based (e.g., introduce 3000 scholarships for students from lower for this Thematic Goal socioeconomic backgrounds) • Stimulate access of mature students, lifelong learning function • Increase proportion of 25–34 year olds holding a HE degree in the labor force from 37% to 40% in 2020 National Reform Programme for the Implementation of Europe 2020 Strategy Information Note on the Development of the Smart Specialization Strategy Operational Programme “Growth and Employment” for the 2014–2020 EU Funds Programming Period Source Documents Declaration of the Intended Activities of the Cabinet of Ministers Headed by Laimdota Straujuma Guidelines for the Development of Education 2014–2020 Guidelines for the Development of Science, Technology, and Innovation 2014–2020 REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 179 7. Stimulate internationalization in higher education • Increase proportion of credit mobility students coming to Latvia for a temporary study visit abroad to obtain some courses in the framework of their studies in the home-country (from 0.8% to 20% in 2020) • Increase proportion of degree mobility students coming to Latvia to obtain a full degree program (from 2.9% to 8% in 2020) • Increase number of graduates that have studied a period abroad (from 13.7% Example Objectives to 20%) in 2020 for this Thematic Goal • Increase number of internationally accredited study programs (from 0 to 20 in 2020) • Attract more foreign staff • Offer more quality study programs taught in official European Union languages (60 in 2020) • Promote international accreditation of study programmes (20 internationally accredited study programmes in 2020) National Development Plan 2014–2020 Operational Programme “Growth and Employment” for the 2014–2020 EU Funds Programming Period Partnership Agreement for the 2014–2020 EU Funds Programming Period Source Documents Declaration of the Intended Activities of the Cabinet of Ministers Headed by Laimdota Straujuma Guidelines for the Development of Education 2014–2020 Guidelines for the Development of Science, Technology, and Innovation 2014–2020 8. Enhance funding base of higher education • Increase higher education expenditure as proportion of GDP in accordance with the Law on Higher Education Institutions – annual increase of funding for state higher education institutions by a minimum of 0.25% of GDP Example Objectives to reach at least 2%. for this Thematic Goal • Revise the calculation of the costs of education (per study place, per subject area) • Implement performance oriented funding Guidelines for the Development of Education 2014–2020 Action Plan for the Development of Higher Education and Science 2013–2014 Source Documents Law on Higher Education Institutions Concept of the Development of Higher Education and Higher Education Institutions for 2013–2020 180 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding 9. Establish a new and transparent approach to quality assurance • Set up a database of accredited higher education study directions, programs, and institutions for external and internal assessment of quality • Set up a database of higher education study quality assessment experts • Ensure the availability of quality assessment and accreditation results to foster informed decisions as to the choice of the study programs Example Objectives and institutions for this Thematic Goal • Establish and maintain a national agency for higher education quality assessment • Establish Study Boards to ensure objective evaluation of the institutional and study quality, oversee the allocation and effectiveness of study places, and enhance strategic partnership with entrepreneurs Operational Programme “Growth and Employment” for the 2014–2020 EU Funds Programming Period Guidelines for the Development of Education 2014–2020 Source Documents Action Plan for the Development of Higher Education and Science 2013–2014 Concept of the Development of Higher Education and Higher Education Institutions for 2013–2020 REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 181 2 Assessment of the Fit between Funding and Thematic Goals Consistent with the organizing structure of the first report, each of the Thematic Goals will be assessed against four elements of Latvia’s current funding model for higher education: • State funding for teaching and research (allocation of state budget via study pla- ces and public research funding) • Diversification of financial sources for higher education institutions (EU funds, tuition fees, market revenues, external research income, transfer activities, etc.) • Financial autonomy of higher education institutions (lump-sum versus line-item allocations, freedom to spend money flexibly and build financial reserves, finan- cial regulations, discretion to set salaries, etc.) • Student funding and support (the individual financial situation of the student, loans, scholarships, etc.) The tables that follow are organized according to the Thematic Goals. The four ele- ments of Latvia’s funding model are then assessed to determine the degree to which the funding model aligns with the Thematic Goals. The question to be answered is: How do these four instrumental elements align with this specific Thematic Goal of Latvian higher education? For example, for the Thematic Goal ‘Increase the quality of education and link with the labor market’, the tables provide an assessment of the degree to which Latvia’s current instruments of state funding for teaching and research align with and support this objective. The same is analyzed for the diversifi- cation of financial sources, financial autonomy, and student funding. Sections 2.1 through 2.9 present a table for each of the Thematic Goals to assess the extent to which it is promoted by all components of the funding system. In section 2.10, a summary of the alignment will be shown the other way round: for each funding component, a short summary of the alignment with the overall with the different goals is provided. The assessment draws primarily from the description of Latvia’s current funding model as described in Appendix 1 of the first report, the Strengths and Weakness of the existing model provided in Chapter 4 of the first report, and feedback from representative higher education stakeholders who participated in a related exer- cise facilitated by the World Bank team during its March 12 workshop at the European Commission’s office in Riga. 182 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding For each of the four dimensions, an ‘overall alignment’ is provided based on the authors’ opinion for the reasons outlined beneath it. For the purposes of this report, a subjective weighting scheme was developed, so both the ‘overall alignment’ and the individual assessments reflect the authors’ opinion on how the funding model does or does not provide incentives to achieve the Thematic Goals. The relative “alignment scores” of the current funding mechanisms with the Thematic Goals are assessed on a five-point scale: “strongly aligned”, “aligned”, “neutral”, “misaligned”, and “strongly misaligned”. The “strongly” categories mean that (almost) all the arguments point in the same direction or that there are extremely strong issues. “Aligned” or “misaligned” suggests that there are argu- ments in both directions but one direction is regarded as stronger. “Neutral” suggests that either the alignment and misalignment are somehow balanced, or there are no effects at all. The plusses and minuses will also be used for each of the assessment statements in order to indicate the impression for each obser- vation on the relative alignment between the funding instruments and Thematic Goals. Strongly Strongly Misaligned Misaligned Neutral Aligned Aligned -- - 0 + ++ Alignment between goals and funding systems is an important success factor of funding. Therefore, where misalignment is identified, the funding system, in gene- ral, should be reconsidered to improve alignment. However, there are areas where it is difficult to reach alignment and other instruments (e.g., new policies) may be sufficient. At the end of the assessment for each Thematic Goal, a brief summary is provided to suggest ways in which changing the funding components could increase alignment is provided. 2.1 Increase the quality of education and its link with the national economy Dimension 1: State Funding for Teaching and Research Overall Alignment STRONGLY MISALIGNED Assessment • The current amount allocated per study places is significantly less than the cost of the education, which negatively affects the quality of education. (- -) • The study place system is input-oriented, so it does not incentivize the performance of HEIs. The use of output-oriented indicators, such as the number of graduates, in the current performance contracts does not produce sufficient incentives, because they are not stated explicitly and are not perceived to have considerable financial impacts. (- -) • Since new study places are a zero-sum game for the universities, the system lacks performance-based financial incentives to further stimulate the achievement of excellence. (- -) • A positive performance incentive is set on the side of the students who, because of the merit-based (rotation) system at some institutions, have a strong incentive to perform well. (+) REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 183 • The negotiation and planning of study places allow the MoES to consider ways to align with the labor market. Through stakeholder consultations, the MoES obtains a reasonable projection of labor market needs, so the number of places allocated is based on informed decisions. This helps to realign the distribution of study places by discipline with national labor market needs. Admittedly, future labor market projections are difficult, so there are limits to the amount of ‘labor force planning’ possible in the current system. (+) • Since adjustments in the allocation of study places are centrally planned, there is no real incentive for the universities to develop bottom-up initiatives to change program structures or develop innovative programs; in other words, there is little to no demand-orientation as part of the study place model. This is different, of course, for fee-paying students. (-) • Although a funding model is not meant to promote the development of a register of graduates, such a register can help inform the funding model. The development of a register of graduates is often a precondition to creating financial incentives towards labor-market orientation and employability. With a register of graduates, tracer studies are possible and are important instruments in assessing employability and informing student choice (by asking, for instance, how long it takes graduates to secure their first job or the unemployment rate as of a certain number of months after graduation). This allows the construction of labor market-oriented indicators to be used in financial incentive models. (- -) • The study-places model can also adjust to differences in “regional labor markets”. (+) Dimension 2: Diversification of Financial Resources Overall Alignment ALIGNED Assessment • Willingness to pay tuition fees by a high number of students leads to substantial revenues that support teaching quality. (++) • One can expect that students paying full fees will be more conscious about choosing studies with better labor market prospects. (+) • The existence of a considerable private higher education sector could, in principle, lead to professionally-oriented programs and stimulate diversity of study options. In many countries, private providers particularly offer relatively low-cost programs, so the quality assurance mechanisms must function well. (+) • Relying on two major sources of income (tuition fees and EU funds) instead of further diversifying, creates quality concerns, poses financial risks, and endangers long-term developments (particularly due the current demographic decline). (-) Dimension 3: Financial Autonomy Overall Alignment ALIGNED Assessment • Financial autonomy is a basic condition for quality of education, allowing the development of specific profiles, flexible realization of innovations, and reaction to market demands. (++) • Financial autonomy also allows institutions to better respond to changes in the labor market. (+) • The positive effect would become even stronger if all actors were aware of the autonomy they have. (+) 184 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Dimension 4: Student Funding Overall Alignment MISALIGNED Assessment • Because many students have to pay substantial tuition fees, there will be a (strong) voice demanding value for money which is likely to have a positive impact on quality. (+) • The limited number of scholarships available and the strict conditions for taking up loans (the guarantor condition) prevent many students from borrowing. Instead, they work to cover the cost of fees and living expenses and so reduce the time spent on study, which negatively affects quality. (-) • The competitive merit-based nature of the available scholarships stimulates study success and quality. However, since so few scholarships are available, the quality incentive will only affect the best 20% of students on state-funded places (maximum 10% of all students). (-) • Overall underfunding, which harms quality, also applies to fee-based places because some institutions/programs charge tuition fees at the level of state subsidies or lower. (- -) • The ongoing decline in the college-aged demographic decreases the tuition revenue base of HEIs, which may reduce the viability and quality of programs and institutions. (-) • Because a full complement of need-based student support is not offered, some well-qualified students from lower socioeconomic backgrounds may not enter higher education. (-) • Limited information about study choices may prevent students from entering higher education or lead to wrong study choices and drop out as a result. (- -) • Having student loans and graduate debt may make prospective students more conscious about their study choices, study success, and future labor market prospects. (+) From the analysis above, the following elements can be regarded as very impor- tant for the alignment of funding instruments with the goal of increasing educatio- nal quality and its relevance to the national economy: •Implementing the intended increase in public funding for higher education appears to be a crucial prerequisite to enhance higher education quality. •Introducing performance-orientation in the funding instruments can also sub- stantially enhance quality. •Creating financial space to invest in innovative initiatives can further enhance quality. •The diversification of resources should be expanded to also further diversify the quality “demands”. •Financial autonomy is strong, but some institutions could be made more aware of and active with their autonomy. •To increase alignment, student loans could include some more performance orientation; for example, instead of the current “grantor requirement” and bonu- ses on child birth and public jobs, one could think of remitting part of the debt in case of completion of studies within the nominal duration, or in case of being among the top-10% graduates, or cancelling the interest in such cases. REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 185 2.2 Increase the quality and (international) competitiveness of research Dimension 1: State Funding for Teaching and Research Overall Alignment STRONGLY MISALIGNED Assessment • Quality of research benefits from an integrated funding system of university and non-university research, leading in general to competition within the whole research sector (which is not very intensive due to incremental allocation of funds). On the other hand, collaboration between universities and research-performing institutions is not incentivized. (- -) • While the recent research evaluation has identified units with international competitive potential, per-capita funding is spread out in an ‘egalitarian’ manner across research units. Funding is, thus, not used strategically to support promising research initiatives. (- -) • As is the case of the study place model, performance indicators are used “implicitly” for research and without substantial effects on distribution of funds. Again, basic funding and performance oriented components are implemented in a mixed way, supporting stability at the expense of performance orientation. (-) • Supporting research with EU funds can have a positive impact, as the funds have helped support young researchers, increase the number of doctoral students, and modernize infrastructure. They are, however, the only source at the moment actively promoting international competitiveness and research excellence. As a non-permanent funding source, they can only be planned to have short- to mid-term impacts. There is also no coherent coordination between state and EU funding, leading to what is likely a suboptimal use of research infrastructure. (0) • The current allocation criteria for research funds from the EU structural funds are not fully transparent and lead to a relatively equal distribution of funds. This leads to suboptimal competition and performance orientation. (-) • Instruments to fund important elements of research strategies, such as funding of post doc positions, are missing. The problem of underfunding also negatively impacts research in quantity and quality (more than in the case of teaching it is also a matter if there is any chance to conduct research activities, since at some universities almost no research is done). (- -) • A research strategy also needs ideas about specific research priority areas, identified in a joint process with bottom-up and top-down inputs by the government and the universities. In the strategic documents reviewed, such a research strategy cannot be identified (if there is no strategic research portfolio then there can be no strategic fit with funding). (- -) Dimension 2: Diversification of Financial Resources Overall Alignment ALIGNED Assessment • EU structural funds were most relevant to sustaining and developing research quality during the last years. In general, diversification of research funds is an important precondition for competitiveness in research. (++) • It appears, however, that EU structural funds have, in a way, replaced part of the basic state funding for research. (-) • Relying on two major sources of income (including EU structural funds related to research) instead of further diversifying (e.g., from industry or EU research funds such as Framework Programs, ERC, etc.), creates quality concerns, poses financial risks, and endangers long-term developments. (-) 186 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Dimension 3: Financial Autonomy Overall Alignment ALIGNED Assessment • Financial autonomy is a basic pre-condition for quality of research, allowing the development of specific profiles, flexible realization of innovations, and reaction to market demands. (++) • Financial autonomy can also stimulate institutions to collaborate with other research partners, to create critical mass, and to attract funds from private sources like industry. This opportunity, however, appears under-leveraged thus far. (+) • Again, the positive effect would become even stronger if all actors were aware of the autonomy they have. (-) Dimension 4: Student Funding Overall Alignment ALIGNED Assessment • Student financing for bachelor and master students has little to do with research. (0) • The support available to PhD students, particularly through the EU structural funds programs PhD students are offered tuition-free student places and scholarships for living expenses. As such, these scholarships provide a substantial contribution to attracting young talented academics into academia which supports the longer term research base and research quality as well. (++) • The substantial number of fee paying students may in some cases lead to cross-subsidies from teaching resources to research and thus support research quality. Due to the structural underfunding and often not fully cost-covering tuition fees, this “research quality impact” will be very limited. (0) From the analysis above, the following elements can be regarded as very impor- tant for the alignment of funding instruments with the goal of enhancing research quality: •For research, the intended increase in public funding for higher education also appears to be crucial. •Integrating explicit performance-orientation in the funding instruments can also substantially enhance research quality. •The diversification of resources should be expanded and stimulated beyond the EU structural funds components, particularly to integrate with industry. •Financial autonomy is very good but could be used more proactively. REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 187 2.3 Increase sector efficiency Dimension 1: State Funding for Teaching and Research Overall Alignment STRONGLY MISALIGNED Assessment • The study place model and research funding do not contain clear and transparent incentives for differentiation of institutional profiles. (- -) • The allocation of study places is partially fragmented and in some cases appears to run counter to the wish for consolidation of programs/institutions. (-) • There is no mechanism to analyze and carefully promote desirable forms of sector consolidation for study programs, taking into account the trade-off between efficiency (e.g., economies of scale) through centralization and access and competition through decentralization. While a reduction in the number of programs is no goal in itself, the analysis of the trade-off is not sufficiently promoted in the current system. (- -) • State research funding does not promote 1) collaboration between research organizations or with external partners (e.g., industry), 2) realization of critical mass, or 3) research excellence. (- -) • The totally divided funding streams for teaching and research impede an integration of the university’s core missions of teaching and research. (- -) Dimension 2: Diversification of Financial Resources Overall Alignment MISALIGNED Assessment • There are some logical links between the consolidation issue and diversification. First, diversification in terms of tuition fee revenues may lead to more competition rather than to a reduction of programs, especially in the context of private-public competition. Sufficient numbers of full-tuition paying students will enable to maintain a situation of program duplication. (-) • Second, diversification of research income in a more local context could lead to a situation of fragmented research instead of critical mass. However, diversification through attracting EU funds requires international competitiveness and critical mass in the respective research topic which could only come from (inter-)national collaborations. (-) • The fact that research funds are broadly allocated across institutions (vs. pooled according to performance criteria) together with the fact that institutions have substantial tuition revenues, enables them to sustain quite a number of small study programs and research groups. (-) Dimension 3: Financial Autonomy Overall Alignment ALIGNED Assessment • Financial autonomy is a basic precondition for strategic specialization of HEIs and thus, for the creation of scale efficiencies and the construction of critical mass; autonomy alone, however, will not be sufficient in achieving these aspects without adequate incentives). (++) • However, financial autonomy may also maintain a situation of a suboptimal and fragmented research system. (-) 188 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Dimension 4: Student Funding Overall Alignment ALIGNED Assessment • The potential for enrolling students on a full-fee paying basis and supporting them with student loans allows institutions to enroll more students than on the basis of state-subsidized places only. This situation affords them the opportunity to optimize the size and capacity of their study programs. (++) • On the one hand, a reliance on fee-paying students can stimulate institutions to offer interesting (niche) programs that distinguish them from their competitors, which further supports the benefit of program diversity. However, the absence of a significant financial support system for low-income students may lead fee-paying students to prefer (and thus institutions to offer) low-cost programs, which could lead to an unproductive fragmentation of similar programs. (+) • Having a substantial number of full-fee paying students induces a market mechanism in the HE system whereby students “vote with their feet”. In the longer run, this can create more efficiency in the system. While in principle this is a good element, it occasionally requires interventions to correct undesired market outcomes (e.g., students preferring low-quality programs or programs with fewer requirements due to ease of studies or lower costs). (+) • Because students want to study more efficiently to keep costs down, they will stimulate an internal dynamic that also creates more efficient study processes within the study programs and institutions. (+) From the analysis above, the following elements can be regarded as very impor- tant for the alignment of funding instruments with the goal of increasing sector efficiency: •To increase sector efficiency, incentives should be considered that base consoli- dation decisions on an analysis of trade-offs between critical masses and compe- tition (instead of fragmentation or not sufficiently analyzed reductions of pro- grams). •The integration of teaching and research funding criteria is a promising approach to better integrate planning for the core missions of the university. •Tuition fees provide institutions some extra financial space, but one has to be careful the competition for fee-paying students does not to lead to a fragmented market. •Financial autonomy is important to initiate external collaborations or to consoli- date activities as well. REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 189 2.4 Enhance technology, innovation, creativity, and entrepreneurship Dimension 1: State Funding for Teaching and Research Overall Alignment MISALIGNED Assessment • The study place model in general is a good approach to increase STEM study places, as the Ministry could just decide to focus study places on desired fields. It also allows steering towards an increase in the proportion of college students by providing relatively more free places there. However, there is concern among stakeholders regarding the preparedness of prospective STEM students and drop-out tendencies in STEM studies in general. (0) • There is no funding mechanism to support creative and innovative curriculum of new study programs. (-) • There are no targeted incentives and funding systems to promote innovation and market-oriented research. (-) Dimension 2: Diversification of Financial Resources Overall Alignment STRONGLY MISALIGNED Assessment • The higher education market may not be able to provide sufficient STEM study places or students adequately prepared to fill all vacant places. Public intervention is required. (- -) • There are no “innovation funds” granted to invest in promising innovative study programs or research priorities. (- -) • Income from private sources, such as industry or local communities, is underdeveloped, leading to a situation where the potential to promote market-oriented research and academic entrepreneurship may not be sufficiently utilized. (-) Dimension 3: Financial Autonomy Overall Alignment NEUTRAL Assessment • Financial autonomy could lead to situations where specific governmental targets are not sufficiently taken into account. For instance, the intended increase of STEM studies and the relative shift to the college sector could not be guaranteed by just granting financial autonomy; interventions for very specific decisions by setting frameworks could be necessary. (-) • On the other hand, creativity and market orientation are promoted by financial autonomy. Interventions need to ensure that the advantages of autonomy are preserved. (+) Dimension 4: Student Funding Overall Alignment NEUTRAL Assessment • The ability to enroll students on a full fee-paying basis beyond the limited number of state-funded study places allows more students to enter higher education. In other words, a larger portion of the population is educated without state support, which, in theory, allows more resources to be available for innovative programs. In reality, however, the fee-paying model is mostly used to fill the teaching capacity in regular programs, so this rather indirect effect on innovation is not exploited. (0) • The fact that fees differ according to the costs of study leads to higher fees for STEM which would allow a stronger position for STEM. However, the fact that relatively few fee-paying students are in STEM programs, this potential impact is very small. (0) 190 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding From the analysis above, the following elements can be regarded as very impor- tant for the alignment of funding instruments with the goal to enhance technology, creativity, innovation, and entrepreneurship: •The ability to allocate state-subsidized study places to various disciplines is a strong instrument to secure participation in STEM. •More should be done to attract and retain sufficient numbers of well-qualified students to fill these places. •To stimulate innovation, creativity, and entrepreneurship, public-private partner- ships could be better stimulated, perhaps through something like innovation funds, but while still maintaining a high level of financial autonomy for institutions. •The fee-paying mechanism appears to have limited impact on innovation, though one could study what happens in private higher education in this respect. 2.5 Renew and develop the human resources of higher education institutions Dimension 1: State Funding for Teaching and Research Overall Alignment MISALIGNED Assessment • There are no funding incentives to attract staff with doctorates or foreign staff or incentives to train staff to obtain their doctorate degrees. (- -) • The current remuneration system with strong variation between institutions and individual academics is not transparent. There is a general perception that many academics are underpaid which runs counter to the idea of the thematic objective. (- -) • The recent initiatives to attract young talented academic staff with EU structural funds are good, and similar initiatives should examine the high dropout rates among young PhD candidates. (+) Dimension 2: Diversification of Financial Resources Overall Alignment ALIGNED Assessment • EU structural funds are used to enhance professional capacity, especially to attract younger staff. They make a substantial contribution to increasing the number of PhDs in Latvia, especially by offering scholarships. (++) • EU structural funds are not used to attract foreign academic staff. (0) Dimension 3: Financial Autonomy Overall Alignment ALIGNED Assessment • Financial autonomy does not always align with such policy goals as the desired proportion of staff with a PhD or foreign academic credentials. In this case, policy objectives and regulations exist that relate to institutional autonomy (e.g., required percentages of staff with PhD as clear policy target) without presenting conflict. Also, the minimum compensation for academic staff is regulated; the ability to meet this objective is likely more a matter of funding level and not of autonomy. (+) REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 191 Dimension 4: Student Funding Overall Alignment NEUTRAL Assessment • Student financing has no immediate impact on the professional capacity of teachers and researchers. (0) • However, by increasing the funding base through full-fee paying students, institutions may, in theory, have better opportunities to attract additional (young or international) academics or to increase wages (which is again a rather weak and indirect aspect).(0) From the analysis above, the following elements can be regarded as very impor- tant for the alignment of funding instruments with the goal to develop the human resources of higher education institutions: •There could be more policy attention paid to attracting staff with doctorates or foreign staff utilizing state funding. •Utilization of the EU structural funds to attract and retain young talented researchers is a very good initiative in this respect. •Institutional autonomy could help here, but one has to realize that the academic labour market should be transparent to be attractive to young scholars. 2.6 Stimulate participation in and access to higher education Dimension 1: State Funding for Teaching and Research Overall Alignment STRONGLY MISALIGNED Assessment • Experiences from European countries show that the provision of free study places to students on merit-based criteria implies the risk that primarily students from higher socioeconomic backgrounds benefit, whereas many students from lower socioeconomic backgrounds have to pay high tuition fees. This results from the tendency of students from higher socioeconomic backgrounds to achieve better marks at school.54 (- -) • Leaving out part-time students in the study place model discriminates against and impedes access of mature students and low-income students who have to work to pay for the costs. (- -) • The rotation system may lead to higher dropout rates among students from disadvantaged backgrounds who fail to stay on previously earned state-subsidized study places (as they have to work and can spend less time on their studies). (- -) 54 Vossensteyn, J.J. (2009), Challenges in student financing: State financial support to students — a worldwide perspective, in: Higher Education in Europe, Vol. 34, No. 2, pp. 183–199. 192 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Dimension 2: Diversification of Financial Resources Overall Alignment STRONGLY ALIGNED Assessment • The substantial number of full fee-paying students in public HEIs and the substantial private higher education sector increases choice for students and provides access opportunities beyond the scope of public budgets. (++) Dimension 3: Financial Autonomy Overall Alignment ALIGNED Assessment • There is little to no systematic influence of autonomy on this goal area, except that HEIs themselves select students for scholarships and student loans. (+) • The decentral system of allocating scholarships makes it less transparent to prospective students whether or not they are eligible. This may hinder some students from entering higher education. (-) • HEIs can decide freely on tuition fees. Though some institutions have kept their fees low to ensure access, autonomy in deciding on fees has ensured greater access for many students who are not entitled to state-subsidized study places. (+) Dimension 4: Student Funding Overall Alignment STRONGLY MISALIGNED Assessment • The widespread use of tuition fees in a country with wide income disparities may have a negative impact on access. The dual track system with merit based selection of students for state-funded study places is likely to subsidize students from better socioeconomic backgrounds. Therefore, students from lower socioeconomic backgrounds are more likely to pay full tuition fees (see above). The perceived unfairness of this system is likely to negatively impact access and participation in higher education. (- -) • The limited availability of scholarships does not have a positive impact on access. In particular, the merit-based allocation makes scholarships most likely to benefit high-achieving upper-middle students who would most likely attend higher education without student support. However, the scholarships will hardly benefit those who most need them: students from lower socioeconomic backgrounds. This stimulates a perception of unfairness and thus negatively impacts access. (- -) • Debt aversion and the guarantor restriction make student loans less available to students from lower socioeconomic backgrounds and have a negative impact on access. (- -) • Altogether, the limited availability of scholarships and student loans for students who need them most from a financial perspective may leave quite some talent under leveraged. (-) From the analysis above, the following elements can be regarded as very impor- tant for the alignment of funding instruments with the goal to stimulate participa- tion in and access to higher education: •The strong risk that the study place model supports students from already advantaged backgrounds should be mitigated. •However, the dual track system provides higher education opportunities for stu- dents who are less academically prepared students. •Student financial support programs should be available to students in need, either as a way to complement or replace the funding available to the most aca- demically prepared talented students. REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 193 2.7 Stimulate internationalization in higher education Dimension 1: State Funding for Teaching and Research Overall Alignment MISALIGNED Assessment • There are no incentives for internationalization, though it is also not hampered by the system). (-) Dimension 2: Diversification of Financial Resources Overall Alignment NEUTRAL Assessment • In general, diversification offers the potential to increase income from abroad and therefore contribute to internationalization. Because there are no requirements with regard to internationalization connected to the application for or use of EU structural funds, this potential appears under-utilized. (-) • Latvian higher education does not strongly use its position as a low-tuition country for non-EU students compared to many Western European countries (e.g., with Sweden and Finland also recently introducing fees for non-EU students). (0) Dimension 3: Financial Autonomy Overall Alignment NEUTRAL Assessment • There is little to no systematic influence of autonomy on this goal area, although institutions can take up their own initiatives to become a stronger international player. (0) Dimension 4: Student Funding Overall Alignment MISALIGNED Assessment • The wide reliance on tuition fees in Latvian higher education may stimulate some students to go abroad and study in countries without tuition fees. This may stimulate internationalization in terms of outbound student mobility. However, other costs related to international mobility are very likely to compensate for the differences in tuition costs. The perception of quality is an even more plausible reason to go abroad rather than differences in tuition fee levels. (-) • The reliance on tuition fees in Latvian higher education may prevent some foreign students to study in Latvia, particularly those from countries with tuition free higher education. For non-EU students, however, the Latvian fees are low compared to studying in, for example, the UK, the Netherlands, and some Scandinavian countries. (-) • The fact that higher education institutions administer the scholarships and loans means that Latvian students who want to study abroad cannot use Latvian student support for degree mobility. (- -) • However, Latvian students who spend only a period abroad for studies in the framework of their own program (credit mobility), can use their scholarships and loans to study abroad and may also apply for Erasmus grants. This has a positive impact on internationalization. (++) 194 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding From the analysis above, the following elements can be regarded as very impor- tant for the alignment of funding instruments with the goal to stimulate internatio- nalization in higher education: •Though it is difficult to stimulate internationalization through basic funding, it could be incentivized in the form of innovation funds or in formula funding. •The relatively low tuition fees in Latvia could be used to attract foreign students who now may have to pay higher tuition fees in other European countries. •Student grants and loans allow short term study abroad but do not further stimu- late internationalization. 2.8 Enhance the funding base of higher education Dimension 1: State Funding for Teaching and Research Overall Alignment STRONGLY MISALIGNED Assessment • As this objective is directly related to intended changes in the funding system, the assessment has to be negative – teaching and research are underfunded, cost calculations are outdated, and performance oriented funding is not (or only implicitly) implemented. (- -) • The promised public funding increase, even stipulated by law, has not been implemented in 2013–2014. (- -) Dimension 2: Diversification of Financial Resources Overall Alignment MISALIGNED Assessment • Revenues from tuition fees and EU structural funds substantially help to keep higher education and research investments at least at a minimum level. (+) • However, basic state funding should not be replaced by these types of revenue as this would endanger the objectives of a solid long term funding basis. (- -) • Income from private sources such as industry or community services appears to be underdeveloped. (-) Dimension 3: Financial Autonomy Overall Alignment NEUTRAL Assessment • The goals mentioned here are not related to autonomy, though HEIs are allowed to attract various funding sources and spend the revenues according to their own discretion. (0) Dimension 4: Student Funding Overall Alignment ALIGNED Assessment • The strong reliance on full-fee paying students has substantially increased the funding basis for HEIs as well as overall investment in higher education compared to a situation in which HE would only be available to students on state-funded places. (++) • The strong reliance on tuition fees together with the practice to charge tuition paying students the same amount as the state subsidy may stimulate HEIs to push collectively for more realistic funding levels to be paid by both the government and students. (+) REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 195 From the analysis, above the following elements can be regarded as very impor- tant for the alignment of funding instruments with the goal to enhance the funding base of higher education: •It is very desirable to have the Latvian government really achieve its ambitions and prove itself to be a reliable partner that makes the promised higher educa- tion and research investments. •Linking the promised investments to requirements that institutions invest in inno- vation and collaboration with science, society, and industry may further enhance the funding base of higher education. This new, targeted financing strategy may be something in which the government is interested in investing. •The tuition revenues are currently a good source of supplemental income, but the declining demographic projections for Latvia call for new strategies to main- tain high-levels of (paid) participation as a key revenue source. 2.9 Establish a new and transparent approach to quality assurance Dimension 1: State Funding for Teaching and Research Overall Alignment ALIGNED Assessment • There is no direct relationship between funding and quality assurance in the system. However, study programs and institutions need to be accredited in order to be eligible for state-funded study places and for awarding official degrees. This guarantees a minimum quality standard for state-funded study places and a push to have a well-functioning quality assurance system. (+) Dimension 2: Diversification of Financial Resources Overall Alignment NEUTRAL Assessment • There is no direct relationship to quality assurance mechanisms. Indirectly one can expect that tuition paying students will require a well-functioning quality assurance system to guarantee they get “value for money”. Such pressure does not appear at present (yet). (0) Dimension 3: Financial Autonomy Overall Alignment NEUTRAL Assessment • There is little to no systematic influence of autonomy on this goal area. (0) Dimension 4: Student Funding Overall Alignment NEUTRAL Assessment • Student financing has no linkage to the quality assurance system, except through the effects mentioned above. (0) 196 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding From the analysis, above the following elements can be regarded as very impor- tant for the alignment of funding instruments with the goal to establish a new and transparent approach to quality assurance: •Financial instruments are yet relatively unrelated to quality assurance (and there is not much to do about this). However, to stimulate more competition, one could consider that a more transparent quality assurance system can substan- tially contribute to where fee-paying students would like to study. 2.10 Overview on strategic fit by Thematic Goals The following table summarizes the overall assessments regarding the strategic fit of the four elements of the funding system with the nine Thematic Goals. The scores vary from a strong positive strategic fit (indicated with “++”) to a strong negative fit (indicated with “- -”). A neutral relationship is indicated with “0”. State Resource Financial Student Thematic goals Funding Diversification Autonomy Funding 1. Quality of education -- + + - 2. Quality of research -- + + + 3. Sector efficiency -- - + + 4. Technology, innovation, - -- 0 0 creativity and entrepreneurship 5. Human resource development - + + 0 6. Participation and access -- ++ 0 -- 7. Internationalization - 0 0 - 8. Funding base -- - 0 + 9. Transparent quality assurance + 0 0 0 As the table demonstrates, the overall funding model, particularly the basic funding for teaching and research, does not align well with the Thematic Goals for Latvian higher education. In general, this does not mean the policy objectives cannot be met, since other policy instruments can also be effective. However, the structural underfunding of the system together with the current model’s emphasis on inputs (i.e., enrollment), and its lack of a performance orientation actually appear to work against the spirit of quality education and research. Increases in state investment in higher education, in accordance with current legislation, could go hand-in-hand with the introduction of more performance- driven and innovation-oriented funding instruments that provide incentives for the system to move in the desired direction of enhanced teaching and research quality. Though the strong reliance on tuition fees on EU structural funds should, in theo- ry, steer higher education towards greater relevance to societal and economic needs, the incentives are not strong enough. Both tuition fees and EU funds are REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 197 currently relied upon to maintain the functioning of the system and support the status, so they are unable to work effectively as instruments that guide towards greater quality, creativity, innovation, and entrepreneurship, especially in light of current economic and quality assurance realities. While financial autonomy is high in Latvia, some institutions have not utilized their full potential in this respect. Though some institutions are being creative in deve- loping alternative revenue sources, the resultant funds are necessary to offset the low level of state investment in the system, so there is not much ability to reinvest in new opportunities, partnerships, or innovation. Other institutions do not appear to be fully aware of their autonomy. The system and its institutions would benefit from financing instruments that allowed it to either reward or invest in part- nerships with the private sector, as an example, for revenue-generating research or training collaborations. Finally, Latvia’s current approach to student funding appears to have a slight misalignment with the Thematic Goals, particularly as it relates to internationaliza- tion and expanding access. Latvia would be well advised to reconsider how student financing could better align in a more supportive way with the policy objectives. 198 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding 3 Potential Further Alignment of Funding and Policy Objectives In Chapter 2, it became clear that — despite some of the strengths of the current system — there are many areas where the strategic fit is not given, or even where there could be negative impact on strategic goals. The focus now is what can be done to improve “strategic fit”, and this surfaces two underlying questions: 1. Which are the target areas where funding models could help the most or the least? Not all of the targets mentioned in the policy planning papers can or should be equally addressed by funding instruments. The objective of the development of quality assurance and accreditation cannot be easily promoted by funding instruments. The basic link in the study place mo- del is already there. Further links, such as the integration of evaluation outcomes in performance-oriented funding, are not recommended. Program evaluations are an instrument of internal learning and self-steering and should remain a separate complementary element to funding mechanisms. However, one could include some quality related issues in performance agreements with higher education institutions (e.g., the implementation of course evaluation or the implementation of “teacher qualifications” for academic teaching staff). Also, research evaluations can be linked to funding models with targeted funding having the potential to pro- mote high quality research; this is addressed in the research quality goal area. The other objective that plays a special role is “to stimulate the funding base of higher education”. The goals mentioned there do not imply an output, outcome, or a specific reform that is influenced by funding, but they do imply targets for the funding models themselves. The very direct consequence from this goal area is to increase the funding level, revise the cost calculation for study place prices, and introduce performance-oriented funding instruments. Therefore, the following analysis focuses on the other seven objectives discussed above. They could be addressed by funding arrangements in multiple ways. 2. Which are the funding instruments (based on European experiences) from which we could expect positive contributions to the strategic objective? This chapter explores a number of different funding practices utilized in various European countries. In sum, these alternatives present a menu of funding approaches Latvia could consider to support its own higher education system and policy objec- tives. At this stage in the project, the alternative models presented are only intended to stimulate thinking and debate about possible funding options for Latvia. REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 199 The approaches presented have been selected because they have proven or are regarded to be positive or successful in advancing certain objectives within their respective higher education systems, even though international analyses that try to link system or institutional performances to funding reforms, often cannot find direct effects, neither positive nor negative. This often is the case because system performance generally is related to a multitude of factors, developments, and poli- cies that can be measured in different ways (e.g., quality, completion, research outputs, etc.).55 In the third report of this project, the World Bank’s project team will further ela- borate on some of the mechanisms that appear to be attractive alternatives for Latvian higher education. To be clear, this paper does not argue at this stage which instruments should be adopted by Latvian higher education.56 It also does not suggest that all instruments should be implemented at once as this may lead to too radical changes (or some instruments could have a quite similar function). The paper addresses a number of alternative funding possibilities per strategic objective and proposes opportunities for state funding for teaching and research, resource diversification, autonomy, and student financing under each heading. When presenting alternative financing instruments, the paper primarily looks at the conceptual opportunities but also indicates some examples from international practice (in text boxes) regarded as good practice. 3.1 Funding opportunities that may enhance quality of teaching The current funding mechanism in Latvian higher education for teaching is predo- minantly input- or process- oriented, namely based on the number of allocated state funded study places with different prices attached per discipline. State funding • Funding formula with competitive and performance oriented elements One alternative would be based on a funding formula for teaching that includes one or multiple competitive elements as drivers. This would possibly make the funding per institution more dynamic than the current fixed number of student places against a particular price that is annually negotiated between the Ministry and the individual HEIs. Under a funding formula, the amount of funding per institution depends on the relative share of the total number of students or new entrants they absorb, usually with different weights attached for various disciplines. One could also integrate performances or outputs of HEIs (and/or programs) in the formula, such as the number successfully completed study credits or bachelor’s and master’s degrees. Focusing on 55 Jongbloed, B., H. De Boer, J. Enders and J. File (eds.) (2010), Progress in higher education reform in Europe, Funding Reform, Volume 1: Executive summary and Main report, Report for the European Commission, Enschede: CHEPS, IoE, Technopolis. 56 The World Bank team will provide recommendations for reforming Latvia’s funding model for higher education in its final report, which is scheduled for delivery in the fall of 2014. 200 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding outputs provides incentives to care about the reduction of drop-outs. Examples of this type of funding can be found all over Europe. The Netherlands: Performance based funding Since January 1, 2011, the funding model for teaching in universities and universities of applied sciences is similar and comprises two parts: one part related to the number of students and degrees conferred and one called “education provision”. • Number of students and degrees conferred: This part of the funding, which defines 65% of the teaching budget, is the product of a weighted student price and weighted number of enrolments (within the nominal duration of a program) and diplomas. The weighted student price is determined as the total budget divided by the total number of weighted enrolments and diplomas. The weights are 1, 1.5, and 3 for low, high, and top studies — humanities & social sciences, science & engineering, and medicine respectively. These weights are the same for bachelor and master students. • Education provision: This part is further divided into two sections. First, the government provides a basic budget to each university, which in total makes up about 7% of all teaching funds available. This is based on the quality of teaching, for specific programs or facilities. Second, the remaining funds are distributed among higher education institutions according to institution-specific percentages. Previously, the Dutch funding model also included the number of new entrants recruited by institutions. This could add another incentive component: whereas output indicators incentivize efficient studies, this indicator makes institutions compete for attracting first-year students to increase market shares. • Capacity funding In this option, the funding of teaching is (also) based on an agreed number of students, graduates, or successfully completed study credits rather than study places. This would stimulate institutions to focus on study success rather than on the teaching process. This is partially done in Latvia, however, there could also be a performance dimension in such a model, which could also potentially reward or sanction the fact that the agreements are (not) fulfilled. This brings more uncertainty and performance incentives for the institutions. Such a model is partially applied in Sweden. Sweden: Capacity funding Direct government funding, in terms of operational grants for education, takes the form of state block grants. The allocations are based on per capita amounts per student (full-time equivalents or FTE) and the performances achieved by students. These amounts per student and per study result in different tariffs for different disciplines/study fields. The study performances are calculated in terms of annual performance equivalents for the students in terms of the numbers of credits obtained (1 FTE student = 60 EC). Every year the Parliament decides on the budget ceiling of each HEI, of which 30% is allocated based on performance. The HEI reports at the beginning of the fiscal year (January or February) how many FTE students and FTE study achievements they realized by December 31 of the previous fiscal year. In addition, the HEI’s monitor their student numbers and study achievements throughout the year, and based on the moni- toring results, they report an intermediary estimate of their total budget required (shortages versus surpluses) three times per year. They also forecast this for the coming few years to enable longer term planning of the budgetary requirements for the coming 3 years. Funding amounts per FTE student and per FTE study result vary between different educational disciplines/areas. There are 15 funding levels, of which some comprise two or more subject areas. The humanities and social sciences have the lowest revenue levels, while the fine arts has the highest (media studies has a weight a 14 times that of humanities). The centrally determined funding cap per higher education institution is an absolute limit and therefore the Swedish funding mechanism can be regarded as capacity funding. Within the framework of the funding process, each HE institution engages annually in a dialogue with the Ministry of Education and Research. In this dialogue, each HEI agrees with the ministry on its targets or aims in terms of realized student numbers and study achievements that will be rewarded. There is a maximum budget which constitutes the highest aggregate compensation of FTE students and annual performance equivalents permitted for the fiscal year. REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 201 When the budget is allocated to the HEI, then the HEI itself decides on the distribution of funds among faculties and other units. Universities and university colleges receive provisional funds at the beginning of each budget year and the final amount is determined at the end of the year taking into account student numbers and accomplishments presented in the annual report for the previous budget year. If an institution does not reach its funding ceiling because of fewer enrolled students and/or their performance outcomes not achieving agreed targets, it does not receive the full funding. If an institution enrols a greater number of students than indicated as the agreed ceiling amount, no additional compensation is paid. Thus fluctuations in the number of students directly affect the funding of the institution, even in the same year. Practice shows that each institution has to deal with some fluctuations and they cannot exactly predict the total volume of students and study results. Annual budgetary changes are normal. In order to mitigate these effects, institutions are allowed to carry over 10% of the ceiling amount to the following years, in case they then attain less or more than the ceiling amount. That means that institutions that do not meet the budgetary ceiling can use their previous surpluses to cover the deficit. The same is valid if a HEI has had students enrolled which sums up to less than the ceiling amount. In future years the HEI might then use previous deficits in years when it exceeds the ceiling amount. In 2010, 8 higher education institutions (out of 35) had to return some of their budget to the ministry (exceeding 10% of their ceiling amounts respectively and reflecting in total 0.25% of the total ceiling amount for all HEIs). Capacity funding is quite similar to “voucher models”, where all eligible students (e.g., all with a higher education entrance qualification or above threshold scores in a central entrance exam) will receive a number of “credits” or “vouchers” which they can trade in for specified units of education (a course, a module, a year or a full program) at any accredited higher educa- tion institution or program. As soon as they run out of vouchers, they will have to pay full-cost covering tuition fees. If institutions do not deliver “value for money”, students will move to other programs or HEIs. The added value of the voucher system is related to the transparency and cost-awareness on the student side. This type of model is applied in Australia, through the learning entitlements system. Of course, a voucher system can vary on many dimen- sions, including who is eligible, the number of subsidized educational units, the period in which they can be used, and the potential requirement of top-up fees from students. An overview of a voucher system is provided later under the policy objective for sector efficiency. Resource diversification There are not many direct links between resource diversification and quality of teaching (or offering other types of programs, like short cycle programs) except for introducing general tuition fees. • General tuition fees An option is to charge tuition fees to all students. This would complement the current funding base of HEIs with an additional income. This can be used to invest in various ways that enhance the quality of teaching, including up- grade teaching infrastructure, professionalization of staff, better reward staff to attract better academics, attract more teaching staff, and provide academics with more research time. General tuition fees usually do not imply full-cost tuition as in the dual track model, but lead to certain percentages of public- private cost-sharing. Students’ contributions should not lead to diminished public investments. In various German Länder, general tuition fees were imple- mented in the period between 2007 and 2013, connected with a guarantee that public funding will not be reduced, and helped to improve teaching infrastruc- tures considerably. However, increasing a system’s reliance on tuition and fees often carries with it political challenges and implementation risks. 202 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Financial autonomy Quality of teaching can be stimulated through output/performance funding, quality assurance and, potentially, performance agreements, but not by limiting autono- my. Spending autonomy stimulates institutions to use resources where they are most needed and effective at a given moment in time. So there are no relevant options to change the state of autonomy. Student funding Student financing can be related to the quality of teaching. There are a couple of options. • General tuition fees A first option is to charge tuition fees to all students (see above). • Link scholarships to study progress and achievements Current scholarships in Latvia are already strongly merit based. Students who do not perform at the highest level will not be awarded any further scholar- ships. If the Latvian government decides to also introduce need-based scholar- ships for students from lower socioeconomic backgrounds, one could imagine linking such scholarships to study success (e.g., transferring grants into loans if particular performance requirements are not met). Such systems are used in Norway and the Netherlands. The Netherlands: Performance-related grants Every student enrolled in an accredited full-time study program in higher education who satisfies the applicable conditions is entitled to financial assistance. Under the current system, financial assistance includes a basic grant, a means-tested supplementary grant (for the 30% most needy students based on parental income), a tuition fee loan, and a voluntary loan. The basic grant and supplementary grant are initially paid out in the form of a loan. If the student graduates within ten years, the loan is converted into a non-repayable grant. Therefore these grant parts are called a performance-related grant. Students receive performance-related grants for the nominal duration of their study program and may take up a loan until 36 months after the nominal duration of their program. • Link student loans to performance Instead of linking eligibility for student loans to family wealth, such as through the grantor requirement, student loans could be made available for students which demonstrate sufficient academic results. Also, instead of waiving student debt in case of becoming a parent or a securing a “useful job”, debt could be waived (in full or part) for students who are among the best performing graduates or who graduate within a nominal duration of studies. This practice is, for example, being applied in the German BAFöG loans and the Estonian student loans. REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 203 3.2 Funding opportunities that may enhance quality of research The current funding mechanism in Latvian higher education for research is to a large extent based on historic allocations and input oriented. The study places funding model is also assumed to support research, though to a rather limited extent. Research funding and the study place system are separated instruments. In addition to that, the national Science Council allocates some funds. State funding • Funding formula with competitive and performance oriented elements In this option, the funding model is based on a funding formula for research that includes one or more competitive elements. This would make the funding per institution a bit more dynamic than the current history-based model. In addition, the model can be altered to be more input based or more per- formance oriented. In an input oriented funding formula, one could include the number of FTE researchers, whereas an output oriented model distribute funds based on the relative share of the total number of PhD degrees conferred or other research outputs (e.g., refereed journal articles, books, grants won in competitions such as from Research Councils and EU funds like ERC grants, Horizon 2020 grants, Erasmus+ grants, etc.). Of course different weights can be attached to inputs and outputs attached for various disciplines. The advantages of using a funding formula for research is that it makes the re- search funding more transparent by demonstrating how universities can earn money. It can also bring more dynamics and such is an incentive for orienta- tion towards high quality research. However, this approach may provide less stability for the institutions and potentially for individual research units within them. Such systems are used for example in Norway and the Netherlands. As this rationale of a funding formula is the same as in the case of teaching quality, it becomes clear that a funding formula could integrate state funding with teaching and research criteria within one system. Such an integration, especially in funding formula systems, is a widely used approach and usually is seen as a contribution to flexibility and quality. The Finnish system is a good example for an integrated approach. It also allows explicit weights between teaching and research incentives as an effect of strategic goals. 204 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Finland: University funding From 2013 onwards Finnish universities are funded including several performance criteria for teaching and research. This is expressed in the picture below. • Program funding for research In this option one could think of a funding model that provides funds for parti- cular national research priority lines on the basis of competition. • Research excellence programs Many European countries set up financial programs to promote research excellence during the last years. The main idea always is to focus investments in research. To build research excellence on an internationally competitive level funding could not be spread over the whole sector but clusters have to be found which have the potential to compete and get extra funding for this. Such programs, again to be sorted into the third pillar of state funding, usually are related to (international) peer review-based evaluation processes. They differ REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 205 in terms of funding volumes, duration and specific targets. Usually one of the major criteria to succeed is collaboration with academic and private sector partners and critical mass, so such programs could directly contribute to sec- tor efficiency. Germany, Denmark, France: Excellence initiatives German set up a huge research program during the last years, the “excellence initiative”. It funds research excellence in the forms of graduate schools, research cluster and institutional plans to promote excellence. Especially the research cluster part strongly promotes collaboration between universities, but also between universities and the non-university research sector. The clusters are selected in highly competitive international peer reviews. A problem is the unclear perspective how long the funding would last: There are two five-year periods of funding, and institutions hope that it will be continued, but it is not sure. In a similar program Denmark treated this issue differently: it was clear from the beginning that funding will be limited to several years and will then be stopped. Part of the selection process and of the interaction university- ministry was a business plan how to ensure financial sustainability after the state funding period. In France the program to create research excellence was closely connected to build the “poles”, which are regional research clusters of institutions within a specific region. • Research assessment exercise In this option, research funds are linked to the outcomes of the national research evaluation exercise. In such a system, research organizations within or out- side universities can be awarded research funding if their research quality is perceived to be above a certain level. The research evaluation could include various quality indicators, like relative amount of research output, perceived quality (by peers), societal relevance and impact, success in attracting third party funding and/or from international resources or from acknowledged research councils. One example is the English Research Assessment Exercise and the 2014 Research Excellence Framework (http://www.ref.ac.uk/). Resource diversification • Stimulate university-industry collaboration In this option, one could think of a central research fund to which research organizations can apply for funding if they propose scientific research in which private companies or non-profit organizations (including governmental orga- nization) are also willing to invest (e.g., cost sharing 25% or 50% of the total research costs). • Premiums for attracting EU-funds, matching funds In this option, a central research fund provides research organizations with a premium if they successfully attract funds from industry support or some other no EU funds source. This could be in the form of a small proportion of the volume of the total sum awarded by the external sponsor, or one could provide a fixed amount per FTE-research time funded through the project (e.g., a top-up of €2,500 or €5,000 per annum). 206 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Autonomy Quality of research can be stimulated by providing sufficient levels of autonomy to research organizations and units in order to use resources where and the way they are most needed and effective at a given moment in time. Student financing There are relatively no links between research funding and student financing, except that HEIs could use revenues from tuition fees, for example, to also sup- port their research infrastructure and research activities. 3.3 Funding opportunities that may enhance sector efficiency State funding for teaching and research • Target agreements Target agreements are an adequate instrument to link the objective of stra- tegic specialization with performance-oriented funding. If ministries negotiate and sign target agreements with HEIs, the agreement could be similar to the following: The ministry commits funding and expects in return that the universi- ty and the ministry agree on the objectives that have highest priority according to the university profile. These targets are measured and controlled by perfor- mance indicators. The difference compared with a funding formula is that the indicators are measured ex ante and could be set individually for each HEI, according to the specific profile. Target agreements usually are multi-period arrangements, after their expiration the attainment of the targets is measured and rewarded or sanctioned. Target agreements could include objectives for all kinds of HEI’s missions. Hence they could create a funding component which integrates state funding for teaching and research. They are applicable in the first pillar of a funding model (justifying a basic funding component) or especially in the third pillar to pre-fund profile-oriented developments.57 An important implication of target agreements could be the promotion of horizontal diversity. The sector’s culture tends to see a vertical reputational difference between “research excellent” universities and universities with other priorities in missions, for example in the regional context or interaction with industry. Target agreements of the described kind send the message that an excellent higher education sector needs research excellence as well as other profiles, so there is a horizontal differentiation of profiles with equal importance for society. 57 For practical purposes, this report adopts the categorization of Ziegele (2013) who has identified three typical pillars of funding models: (i) basic funding; (ii) performance funding; and (iii) innova- tion-/profile- oriented funding. Regardless of the diversity throughout higher education systems and funding models in Europe, these three pillars can, to a certain extent, be identified in most systems. REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 207 Target agreements are mentioned here, as they are an instrument closely related to institutional profiling. But it has to be stressed that target agreements could be used quite flexibly for all kinds of objectives, also teaching and research quality, internationalization, innovation, international research collaboration, etc. The principle of providing ex ante funding of future performance within the third pillar of public funding could be very flexibly applied for different purposes. It always creates a balance to the ex post mechanisms of formula funding. Examples of a relationship between target agreements and public funding of universities can be found in: •Hong Kong (where 10% of funding allocated through the Performance and Role-related Funding Scheme), •The Netherlands (where 7% of teaching funds is based on quality-oriented performance agreements on developments in completion rates, didactical qualifications of teachers, student satisfaction, etc.), •Australia (where universities and the ministry agree in the Mission Based Compacts what contribution HEIs will make towards national priorities, like equity targets, quality targets, student satisfaction, etc.), •New Zealand with three-year profile funding and •Germany with the target agreements applied in many German states (see box below). In such agreements, agreements can be made on various issues, including performance levels or performance development (to adjust for different starting positions and conditions of different HEIs). Germany: Target agreements in North Rhine-Westphalia Like in a couple of other German states, North Rhine-Westphalia has introduced target agreements in the third pillar of the state funding model. The ministry, the universities, and the universities of applied sciences negotiate on 3-year-agreements. The ministry makes clear which targets should appear in the agreements from their perspective, but the HEIs could prioritize and add specific targets, taking into account their intended profile. There have to be measurable indicators. The agreements are linked to funding from an innovation pool. The ministry uses a template for target agreements, indicating chapters and aspects that have to be included in a standardized way, but the format leaves substantial leeway for the HEIs to develop their own texts. The specific goals and performance indicators are suggested by the HEI first and then negotiated with the ministry. • Sector consolidation programs Governments could promote sector consolidation by financial incentives. Competi- tive funding could be provided which is given to HEIs that have plans to merge, to build joint units or to collaborate to increase sector efficiency. The idea would be a bottom-up development of models for collaboration and consolidation, stimulated by financial incentives. The assumed advantage of this strategy — compared to a consolidation planned and organized by the ministry — is the creation of owner- ship: HEIs realize their own plans and are not forced by external decisions. One could also expect that such decentralized decisions about consolidation are triggered by a careful analysis of potential efficiency gains, avoiding consolidation for consolidations’ sake. 208 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Denmark: Comprehensive sector consolidation The Danish government had the clear idea that the Danish higher education and research sector (universities and non-university research institutions) was too fragmented, and they wanted it to be reorganized by forming critical mass and merging institutions. The political message was very clear, but the government did not regulate which institutions should merge. A financial pool to support merger processes was provided, the institutions came up with plans and the ministry approved. So it was a mixture of clear political will and autonomy/ownership of HEIs in terms of operationalization and realization, supported by financial incentives. The outcome is a major restructuring of the sector by mergers, plus substantial internal restructuring of the newly built units (for instance the University of Aarhus which is well-known in Europe for the com- prehensive change process induced by the mergers). Resource diversification Financial diversification can, in some instances, lead institutions to pursue unique specializations or profiles that align with new or expanded funding opportunities. The development of a regional profile could, for example, be related to regional income sources. Autonomy • Planned sector reorganization Strategic specialization could of course also be done with a centrally planned process, reducing autonomy. Strategic specialization of HEIs could be orga- nized by defining a typology of HEIs, mergers could be imposed by the go- vernment, and the reduction of study program duplication could be realized using the study place system in this way, again balancing it with the sustain- ability of competition and the need to serve the regions with study options. Experiences have shown that consolidation efforts could work as a one-time focused intervention (as long as it is a participative process taking the HEIs on board). A ministry could make decisions to reorganize the sector at a certain point in time, outside of state funding systems, and then get back to financial and decision-making autonomy of the HEIs. The risk is that this will be seen as externally imposed and motivation to work within the new structures will be low for some time (because of a lack of “ownership” of the reforms within the HEIs). Quite problematic is the permanent use of funding systems to conti- nuously influence sector structures, because this would reduce autonomy through permanent micro-steering and create dangers for the positive effects of autonomy. Germany: Consolidation process in Lower-Saxony The German state of Lower Saxony runs a three-pillar state funding model, with stable basic funding connected to target agreements, a funding formula and various specialized pools in the third pillar. Financial autonomy is high. Nevertheless some years ago the ministry started a one-time process with the objective to reduce duplications and increase efficiency. The ministry collected comprehensive quantitative and qualitative data (the latter especially from a state-wide process of research evaluation). Based on the data there were intensive talks and negotiations with all HEIs, the institutions could make proposals. In the end the ministry decided on an overall plan to consolidate, which was still tough for some institutions, but had a basic acceptance because of the participative process and because it was clear that this was just a one-time restructuring and not a permanent restriction of autonomy. REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 209 Student financing There is no real potential to promote sector consolidation and efficient reorgani- zation by student funding instruments. It should rather be taken into account that the reduction of duplications in study programs could lead to reduced competi- tion, also reducing the efficiency incentives from a competitive, fee-based system. All instruments used in the context of state funding should avoid the creation of monopolies and the effect that instead of creating competitive units the competi- tion is being destroyed. 3.4 Funding opportunities that may enhance technology, innovation, creativity, and entrepreneurship State funding • Innovation fund: third pillar funding In a balanced funding model, next to stable basic funding and competition, performance and quality oriented funding systems also require space for inno- vation and creativity. New initiatives that are perceived as a value added to the teaching or research system and that are regarded financially viable from a mid- to long-term perspective, often require seed money. An innovation fund can provide the financial space for such initiatives, of course on the basis of sound project and business plans and in competition with other creative and innovative ideas. • Targeted STEM funding In order to support STEM, a technology and innovation fund could be esta- blished that particularly supports a selective number of innovative projects in science and engineering disciplines. In the same direction, the model could offer similar funding for teaching and research programs in disciplines or subject areas that are not very popular but anyhow regarded as a national (cultural, eco- nomic, etc.) priority. Resource diversification • Program funding for research or special funds but in collaboration with private sponsors The options under state funding can also be extended with elements that reward only projects that also involve societal partners, being for profit or non- profit organizations. 210 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding • Knowledge and innovation vouchers This option concerns a program that stimulates industry or SME’s to get engaged with knowledge institutions, like higher education and research organizations. This can be stimulated with vouchers that allow them to “buy” a limited amount of knowledge or advice in the hope that — or under the con- dition that — they will invest to a larger extent themselves in such knowledge collaboration. One example is mentioned in the following text box. The Netherlands: Knowledge vouchers Dutch higher education institutions have a legal obligation to be engaged regionally, particularly when it comes to producing graduates for the labour market and to develop innovative collaborations with industry. One policy initiative is to stimulate regional collaboration between public authorities, business and higher education through concentrating resources on excellent research that can be applied and commercialised in innovative areas. Since 1997, Knowledge Vouchers are available to Small and Medium Sized companies (SMEs) in order to purchase free advice or services from large knowledge intensive organisations like companies, research or teaching institutions, including universities and UAS. Knowledge Vouchers are paid by public authorities (ministries, provinces or regions) or through the EU Interreg III program (http://www.kennisvoucher.nl/?p=&t=en). Autonomy In order to take innovative initiatives, like setting up new study programs or re- search lines (in STEM domains), institutions at least need the autonomy to alloca- te funds to such projects or initiatives and to take it from other areas. In addition, keeping regulations at as low as possible is also important to create space for an innovative atmosphere — whether it is in STEM or any other discipline. Student financing There are no links between student financing and innovation, except that HEIs could use revenues from tuition fees to also support their innovative initiatives — e.g., to establish new study programs — or to (cross-) subsidize the more expensive investments required for activities in the STEM domains, entrepreneu- rial activities, and the like. But one should acknowledge that currently the Latvian fee-income is at maximum similar to public funding of teaching and thus cannot bring in substantial investment funds, particularly now demographic decline pushes down expected tuition revenues. 3.5 Funding opportunities that may enhance professional capacity of academics Enhancing the professional capacity of Latvian HE is regarded as increasing the number of academic staff with a doctorate and the proportion of foreign staff, attracting younger staff, and improving salary conditions. REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 211 State funding State funding can contribute to the above mentioned objectives by either creating new funds that are dedicated to such issues or through an increase in basic funds under the condition of meeting particular targets. Resource diversification In the area of resource diversification, involving industry in (jointly) funding PhD positions could be a valuable instrument. Autonomy Also in this area, a high degree of autonomy can help achieve the envisaged objectives. However, the funds need to be made available for this specific purpose. With full spending autonomy and conflicting demands, the HEIs may not immediately spend their money for this purpose. Student financing Student financing is not related to the professional capacity and development of academic staff, except for the fact that additional revenues from tuition fees can be used to improve salary conditions, to attract foreign staff, to attract new young staff members and to create additional PhD positions. 3.6 Funding opportunities that may enhance access and participation State funding • Funding formula based on new entrants In this option one could think of a funding formula that is particularly focused on attracting large numbers of new entrants. This will stimulate HEIs to recruit new students and thus also to better target previously underserved groups, such as students from disadvantaged backgrounds, etc. However, beyond attracting them, there may not be enough incentives to really educate and help them towards graduation after a few years. 212 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Resource diversification • Establish a fund for widening participation Similar to the UK, one can imagine either the government or institutions to set aside a particular proportion of funding or tuition revenues to be used for attracting students from underprivileged groups through scholarships, loans and tuition waivers. Many British universities have their own widening participation offices that provide support to various disadvantaged students who would like to enter the institutions. Autonomy No link with access, except for setting selection criteria and using tuition revenues to provide financial support to underprivileged students. Student financing • Provide need-based scholarships A first instrument to support access and participation, particularly from lower socioeconomic backgrounds is to offer means-tested need-based scholarships to students from lower income families. There are many examples in Europe and beyond with such scholarship programs; e.g., the German Bundesaus- bildungsförderungsgesetz (BaFöG), the English National Scholarships Pro- gramme, the Dutch Supplementary grants, the Australian Commonwealth Grants Scheme and the New Zealand Student Allowance Scheme. Such need- based grants can also be performance related as has been done in the Nether- lands and Norway. In both countries, student financial support is paid out as a loan, but can be (partially) converted into a grant afterwards if certain conditions are met, such as getting a degree within a limited period of time (like in the Netherlands), or if the student passed all exams and her/his gra- duate income is below a certain threshold (Norway). • Provide need-based student loans A second instrument to support access and participation, particularly from lower socioeconomic backgrounds is to offer means-tested need-based loans to students from lower income families. An additional characteristic could be to make debt repayment also dependent on graduate income. This would mean that only graduates earning an above social-minimum salary would repay their debt (i.e., a form of income-contingent loans). REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 213 3.7 Funding opportunities that may enhance internationalization State funding It is not common practice to put internationalization indicators into a funding formula. This would burden a funding formula too much with “temporary” issues and make funding formulas too complex. In general, it is better to have them rela- tively simple. This implies that internationalization is one of the topics that can be better addressed with temporary stimulation funds of in performance/target agreements. • Internationalization fund In case of an internationalization fund, one can think of “temporary” stimulation subsidies that encourage HEIs to implement internationalization strategies. These could be used, for example to develop an internationalization strategy, establish an international office and/or a welcoming center for foreign staff and students; establish additional student residencies, provide scholarships enabling students to study abroad; provide subsidies/scholarships for incom- ing teachers, researchers and students, subsidize international sabbaticals for own academic staff, etc. Such a fund could be related to target agreements. Resource diversification One can think of a limited stimulation fund, maybe linked to the one above, for academic staff to subsidize travel and accommodation in case one collabora- tes with foreign partner academics to jointly apply for international funding such as EU grants. Autonomy Like before, sufficient levels of autonomy that HEIs can develop their own interna- tionalization strategies and activities. Student financing • Portability of scholarships and loans for study abroad To stimulate internationalization one can make loans and scholarships portable for study abroad. This can apply to credit mobility or degree mobility. In Latvia, stimulating outgoing degree mobility might not be considered desirable and it may be complex to organize because the HEIs administer and allocate the current scholarships for students. However, international student mobility often requires some degree of reciprocity between participating institutions, because one-way mobility streams often lead to a gradual disappearance of student exchange practices. However, the situation is different concerning administra- 214 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding tion of loans. With regards to loans, one only has to arrange that debt will be repaid in case mobile students stay abroad for a professional career. • Targeted scholarships for incoming students A second option can be scholarships that can cover part of the tuition fees and living costs of incoming students; e.g., master students in particular areas with labor market shortages in Latvia. 3.8 Other opportunities to stimulate teaching and research As discussed before, not all ambitions can be stimulated with money alone. This could make the funding process too complex and difficult to understand. There- fore, many countries often choose to include only a few core parameters in the funding for teaching and research to stimulate HEIs to concentrate predominantly on those areas; e.g., graduates, PhDs, and successful students. Other instruments to make HEIs more responsive to the needs of society include the following items: •System wide strategies based on mutual agreements about the direction a sys- tem should go with regard to specific policy areas, such as staff development, research priority areas, internationalization, public-private partnerships, etc. •Underpinning such strategic priorities, specific targeted funds — as discussed above — can be a powerful instrument to make HEIs and other stakeholders move in the desired direction. •Another strong and more frequently used instrument concerns performance or target agreements in which ministries and individual HEIs agree on a number of issues that are considered of strategic importance to the system and the insti- tutions. It is presented as a funding option above, but it could also remain unrelated to funds and work as an instrument within the strategic process. •Implement a tough but fair quality assurance system for teaching and research. There usually are separate quality assurance systems for teaching and research. In conclusion, this paper is not intended to argue which alternative financing instruments should be adopted by Latvian higher education to align with the natio- nal strategic objectives for higher education. Instead, the paper has identified those important policy directions for Latvian higher education and assessed how aligned the current funding model is with those objectives. In the final section of this report, alternative funding instrument were described and references to other countries with respected approaches were provided for consideration. In the third report of this project, which is tentatively scheduled for delivery in the fall of 2014, the World Bank’s project team will recommend what, from the World Bank team’s perspective appears to be attractive alternatives for Latvian higher education. REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 215 Appendices Appendix 1 Description of National and Sectoral Policy Planning Documents The policies for higher education along with science and innovations are formula- ted in a number of official documents, as well as project documents that form the strategic framework for its development. Higher education funding reform should pursue the goals, objectives and targets defined in these documents. The docu- ments listed below, which account for both national and sectoral development strategies, were reviewed either for specific higher education strategic objectives or for context in interpreting those identified objectives. Growth Model for Latvia: the Man in the First Place (adopted by the Parliament of Latvia on October 26, 2005) The long-term conceptual document Growth Model for Latvia establishes the ge- neral principles for Latvia’s development in the following 20–30 years with an emphasis on knowledge and wisdom transformed into skills as a resource for economic growth. The driving force of growth is educated society. Accumulation, transfer and application of knowledge are the process at the basis of social and economic development and the warrant of labor force quality, use of the capital and development of technology. Sustainable Development Strategy of Latvia until 2030 (adopted by the Parliament on June 10, 2010) The long-term national development planning document Latvia 2030 recognizes the need for a paradigm change in education. Life-long education oriented to- wards creativity that responds to global competition and demographic challenges is one of the pre-requisites for changing the economic model. The areas for long- term policy include increasing accessibility of education and introducing changes in the organization of the educational process, efficient use of financial and hu- man resources in education, a closer link of the education system with the econo- mic and public processes, as well as a link between the formal education and further education for adults. 216 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding National Reform Programme of Latvia for the Implementation of Europe 2020 Strategy (endorsed by the Cabinet of Ministers on April 26, 2011) The National Reform Programme is a part of economic policy coordination and surveillance at the European Union level in the framework of the European Seme- ster. It defines the objectives and measures for national development in the con- text of Europe 2020 Strategy including modernization of higher education by improving the study and research efficiency, quality and international competitive- ness, as well as by ensuring conformity of the obtained qualification and skills to the labor market requirements, modernization of the material-technical base of higher education institutions and raising the efficiency of resources use, ensuring equity of higher education. National Development Plan of Latvia for 2014–2020 (adopted by the Parliament on December 20, 2012) National Development Plan 2014–2020 (NDP2020) is the national medium-term planning document that sets the vision of Latvia in 2020 “Economic Breakthrough — for the Greater Well-being of Latvia” and defines the priorities for the growth of national economy, human security, and regional development. NDP2020 lays emphasis on advanced research, innovation and higher education to be achieved by establishing a culture of innovation supported by a specially tailored and effec- tive system of innovation. This system integrates legislative, educational, scienti- fic, research-related and financial conditions for a successful commercialization of research results and a continuous collaboration between science and industry sectors, and one that secures an increase in private investment in science and research funding. Latvia Convergence Programme 2013 to 2016 (endorsed by the Cabinet of Ministers on April 29, 2013) In order to achieve the overall objectives of the government budget, while ensuring the conditions for economic growth in the medium term, the Latvian government defines its objectives to continue the implementation of structural reforms, including those in education and science. The document emphasizes the need to ensure the accessibility of basic and secondary education, structural changes in vocational education, higher education modernization and increasing the number of gradua- tes, attracting foreign students and consolidating public research institutions. Information Note on the Development of the Smart Specialization Strategy (endorsed by the Cabinet of Ministers on December 17, 2013) A conceptually new and complex strategy is being developed that entails a balan- ced and complementary set of instruments to support economic transformation and knowledge-driven growth. The strategy aims at not only enhancing the deve- lopment of technological innovation, but also that of non-technical innovation, entrepreneurship and creativity in economics and society. Such a strategy is rela- ted with certain challenges, among which there is the current system of education which does not meet the labour market needs, as well as the low capacity of research and underdeveloped scientific and research infrastructure. Thus, among REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 217 the priorities of the implementation of Smart Specialization Strategy is modern education system that promotes the development of competencies, entrepreneur- ship and creativity at all levels, as well as developed knowledge base and human capital in fields of science in which Latvia has a comparative advantage and which are significant for the economic transformation. Based on the decision of the Cabinet of Ministers currently the Action Plan for the Implementation of the Smart Specialization Strategy is in progress. Partnership Agreement for the 2014–2020 EU Funds Programming Period (submitted to the European Commission on January 15, 2014) The objective of the EU funds investment is to strengthen the economic, territorial and social cohesion in Latvia, to promote the rural development and the develop- ment of agriculture, forestry and fishery with smart specialization, sustainable and inclusive growth that is based on balanced macroeconomic and fiscal policy. The EU funds investment strategy is based on the national development axes, defined needs and challenges that are outlined in the Latvia 2030, NRP and NDP2020 strategies, taking into account the EP recommendations to Latvia within the framework of the guidelines on economy and employment policy, as well as the general Baltic Sea region development directions proposed in the EU Strategy for the Baltic Sea Region. Investment in higher education envisages the improve- ment of study quality in cooperation with employers, offering study programmes in EU languages to attract EU students, consolidation and concentration of higher education and science resources, modernization of higher education and science infrastructure, especially in STEM areas. Operational Programme “Growth and Employment” for the EU Funds Programming Period 2014–2020 (submitted to the European Commission on March 4, 2014) Operational Programme sets out the strategy of EU funds investment for smart, sustainable and inclusive growth. It provides a detailed description and argumen- tation for investment priorities as a response to the challenges Latvia’s economy faces. The defined priorities include effective education system integrated with high quality science, research and innovations. In light of the national Smart Spe- cialization Strategy which emphasizes the concentration of resources of science and research and European Council recommendation on the implementation of effective research and innovation policy, the objectives stated in the Programme include improvement of education system to reduce the disproportion of labour market, concentration and consolidation of intellectual and material resources in HE and science to reduce fragmentation, especially in STEM, modernization of the material basis and infrastructure, especially at the college and doctoral level, development of joint thematic doctoral centres at universities and scientific institu- tions to focus on topical social and economic issues. Declaration of the Intended Activities of the Cabinet of Ministers headed by Laimdota Straujuma (endorsed by the Parliament on January 22, 2014) The current Government’s priorities and policy measures until the parliamentary elections in October 2014 include the development of the model of an institutional 218 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding network in higher education by implementing the principle of strategic specializa- tion of the state founded higher education institutions, preventing duplication of programs within one region and motivating the regional higher education insti- tutions to participate in ensuring regional development. The Government’s pro- gram envisages introducing proposals for the development of a higher education funding model that promotes, inter alia, accessibility of higher education in re- gions of Latvia, labor market needs, and competitiveness at the international level. Guidelines for Development of Science, Technology and Innovation 2014–2020 (endorsed by the Cabinet of Ministers on December 28, 2013) Guidelines for the Development of Science, Technology and Innovation form a part of the Smart Specialization Strategies and contribute to the achievement of objectives stipulated in the national long-term and medium-term policy planning documents. Smart Specialization Strategies anticipate the transformation of Latvia’s economy by investing in three strategically important directions: (i) pro- duction and export structure change in the traditional sectors of the economy, (ii) growth in sectors creating products and services with high added value, and (iii) industries with significant horizontal impact and contribution to economic transformation, as well as by identifying seven priorities which include high value- added products, productive innovation system, energy efficiency, modern ICT, modern education, knowledge base, and polycentric development. Guidelines for the Development of Education 2014–2020 (project) (endorsed by the Cabinet of Ministers on January 7, 2014) Endorsed by the Cabinet of Ministers and submitted to the Parliamentary Commit- tee of Education, Culture and Science, the status of the document is still that of a project under discussion. Nevertheless, the Guidelines serve as the main medium-term policy planning document stating the principles of education deve- lopment and viewing education system as a whole with higher education being an integral part of the education circle. The measures and targets in education are grouped under three main policy directions: (i) to increase the quality of education environment by improvement of contents and development of appropriate infra- structure; (ii) to facilitate value-education based development of an individual’s professional and social skills for life and competitiveness in the work environment; and (iii) to improve the efficiency of resource management through development of institutional excellence of education institutions and consolidation of resources. Action Plan for the Development of Higher Education and Science for the Time Period from November 1, 2013 until December 31, 2014 (adopted by the Cabinet of Ministers on November 22, 2013) Action Plan for the Development of Higher Education and Science stipulates the short-term policy perspective on higher education and science and measures to be implemented by the end of 2014. The document states the main goal — to ensure quality, internationally competitive and science-based higher educa- tion implemented by efficiently managed institutions with consolidated resources — and envisages the relevant measures and targets grouped under three main policy directions: improvement of quality of studies and scientific activity; efficient REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 219 use of the resources of higher education and science sector and integration thereof with science; and internationalization and increase of international compe- titiveness of higher education and science. The National Concept of the Development of Higher Education and Higher Education Institutions for 2013 to 2020 (established in accordance with the Higher Education Law) The National Concept for the Development of Higher Education and Institutions of Higher Education of Latvia for 2013–2020 have been developed by the Council of Higher Education pursuant to the Law on Institutions of Higher Education. The framework of the National Concept defines the strategic goal of higher edu- cation in Latvia — the development of a system of higher education that ensures competitive development of Latvia, national economy, and higher education sys- tem in the common European area based on the cooperation among public, private, and academic environments. Law on Higher Education Institutions (in force since December 1, 1995) As the main law regulating higher education sector, the Law on Higher Education Institutions serves as the basis for higher education development policy. It stipula- tes the principles of autonomy of higher education institutions and their co-opera- tion with the state institutions for the interest of society and the state. As an impor- tant objective it stipulates the gradual increase of the expenditure on state-funded higher education institutions as a proportion of the GDP. 220 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Appendix 2 Stated Policy Objectives and Targets in Higher Education, Science and Innovations A. National Development Plan of Latvia for 2014–2020 The vision of Latvia in 2020 “Economic Breakthrough — for the Greater Well-being of Latvia” […] Latvia has internationally competitive colleges and universities employing internationally recognized and qualified academic staff. Higher education has become a widely coveted export service of Latvia. Study programs are provi- ded in accordance with the language policy of Latvia as a national state: pri- marily in Latvian and in one of the official languages of the European Union. The graduates of Latvian colleges and universities demonstrate a competitive advantage both in domestic and foreign labor markets. Furthermore, a grow- ing number of graduates continue their careers in research in Latvia. Latvian science is concentrated in research institutes that are competitive globally. A significant proportion of the research is co-founded by private businesses; academia and the private sector work together to create new and globally competitive products. It is the collaboration of science and busi- ness that continues to generate new, innovative and creative products and services that are competitive in the world markets […]. Priority: Growth of the National Economy Strategic objective: Advanced Research, Innovation and Higher Education Goal 1: Increase investment in research and development to 1.5% of the gross domestic product in 2020, with targeted efforts to attract human resources, deve- lop innovative ideas, improve the research infrastructure, facilitate cooperation between higher education, science and the private sector, as well as the transfer of research and innovation to business. Base value Measurable Outcomes for the Goal (year) 2014 2017 2020 2030 Private sector investment in research and development in 2020 reaches at least 48% of the total investment 37 in research and development 42 46 48 51 (2010) (private sector investment in research and development, as a percentage of the total investment) Number of researchers employed 16.2 in the private sector, as a percentage 18 21 23 27 (2010) of the total, full-time equivalent REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 221 Base value Measurable Outcomes for the Goal (year) 2014 2017 2020 2030 Number of students obtaining degrees 24.8 or qualifications at universities 23.9 24.1 24.6 28.6 (2011) and colleges, thousands Higher education (percentage of 36 the population aged 30 to 34 37 38 40 >40 (2012) with higher education) European patents granted, applied for 11 13 18 26 35 by researchers residing in Latvia (2011) Goal 2: Through the commercialization of knowledge, promote the creation of innovative and internationally competitive products with high added value as well as their introduction into production, increasing the share of output of such products in the national economy. Base value Measurable Outcomes for the Goal (year) 2014 2017 2020 2030 Turnover of innovative products 5.9 8 9 11 >14 (as a percentage of the total turnover) (2008) Proportion of innovative businesses 20.1 22 25 30 >40 (as a percentage of all companies) (2008) The individual measures to be applied within the Strategic Objective “Advanced Research, Innovation and Higher Education” in regard of higher education (and science) include: •Qualitative and quantitative renewal of science and implementation of funda- mental and applied research projects, particularly in the priority research field. •Ensuring access to higher education. •Establishment and development of the cooperation platform for higher educa- tion, science and the private sector of the Baltic countries in the following areas: (i) biopharmaceuticals and organic chemistry, (ii) nano-structured materials and high-energy radiation, (iii) smart technologies and engineering. •Measures to support higher education export (combining of outstanding pro- grams and creation of joint programs in other EU languages in no fewer than 10 fields of study; international publicity of the programs and development of support centers for foreign students; recruitment of foreign instructors). •Competitiveness and consolidation of higher education, development of material and technological provision (equipment), improvement of the internal quality sys- tem, encouraging a higher rate of scientific publication by university staff, launching of international journals, increased effectiveness of the governance system. Responsible institution: MoES; indicative sources of financing: Cohesion Policy funds and private and state budget funding. 222 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding B. Guidelines for the Development of Science, Technology and Innovation 2014–2020 In the context of National Development Plan 2020 the Guidelines for Development of Science, Technology and Innovation place a strong emphasis of the integration of education with science, ensuring the transfer of knowledge created by educa- tion into the industry for the development products of high added value. Thus, one of its stated priorities is the transformation of education system to serve as the foundation of the national competitiveness — modern education system that complies with the labor market needs and facilitates the development of compe- tences, entrepreneurship and creativity at all levels of education. This entails mo- dernization and integration of education sector with research by increasing its capacity to respond to the future challenges in research, technology development and innovations, and by increasing the mobility of education. The policy directions and measures for the integrated development of higher edu- cation, science, technology and innovation to be implemented by 2020 include: Integration of education, science, technology and innovation •Fostering the cooperation of higher education institutions, research centers and entrepreneurship and attraction of young scientists to research. •Development of technology transfer centers at higher education institutions and formation of creative center of innovations. •Development of a model of institutional integration to ensure internships for higher education students in state and municipality enterprises. •Formation of innovation grants for students and academic staff, especially in STEM, to strengthen the cooperation with industry and support excellence in studies and research; and development of innovative solutions for the industry. Support for research in higher education and increase the contribution of higher education institutions in science •Development of regulations on funding principles and establishment of criteria that foster the investments of higher education institutions in research and moti- vate the HEIs to commercialize the knowledge and invest in research. •Defining the criteria according to which higher education institutions plan invest- ments in scientific research upon the accreditation and licensing of higher edu- cation study directions and programs. •Renewal of remuneration principles for the engagement of academic staff in re- search. Introducing the principle of joint pedagogic and research work according to which academic staff is engaged in research while scientists working at scienti- fic institutions are engaged in pedagogic work in higher education institutions. REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 223 Improvement of doctoral studies and promotion system •Improvement of promotion process. •Involvement of the doctoral students in scientific projects. •Establishing scholarships for excellent doctoral students with high research po- tential. •Preparation of Master students and Doctoral students for specific industrial part- ners; allocate the state budget subsidy for respective Master and Doctoral stu- dies as priority areas. •Moving towards a joint system of doctoral studies (common quality principles). •Strengthening the link between doctoral studies and research and industry, forma- tion of doctoral centers in Latvia, support for the renovation of infrastructure, etc. C. Guidelines for the Development of Education 2014–2020 (project) In the context of the National Development Plan 2014–2020 and in light of the Guide- lines for the Development of Science, Technology and Innovations 2014–2020, the Guidelines for the Development of Education 2014–2020 stipulate a number of policy directions with specific indicators and measurable targets in regard of higher education (and science) to be reached by 2017 and 2020. Policy Direction: Improvement of Education Contents focused on Competences required by Knowledge Society and Facilitating Creativity, Innovative and Healthy Lifestyle Base value Policy result Performance indicator (year) 2017 2020 Proportion of study places financed by Restructured state the state budget in STEM (%) of 44% support to HE 50% 55% the total number of study places (2013) and science sectors financed by the state budget (study directions) according to Proportion of students in the 1st level medium-term labor 18% professional higher education programs 21% 24% market forecasts (2013) (college level programs) (%) Level of unemployment of graduates (Bachelors, Masters and Doctors) 18 months after graduation, 7.5% Ensured education 6.5% 5.2% as a percentage of the level of (2013) process according to unemployment of graduates of the changing all education institutions requirements of labor market Proportion of graduates (ISCED-5/6) 19% in the STEM areas of the total number 4028 25% 27% of graduates (%) (2012) 224 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Policy Direction: Increase of the Motivation and Professional Capacity of Teachers and Academic Staff Base value Policy result Performance indicator (year) 2017 2020 Improved professional competence of teachers Proportion of academic staff 54% and academic staff (excluding colleges) with a doctoral 60% 65% (2012) according to modern degree (%) education requirements Increased capacity of Proportion of the number of foreign 0.5% human resources teaching staff at the ISCED 5-6 level of 5% 7% (2012) in education the total number of academic staff (%) Age structure of academic staff 45% (proportion of those of 30–49 of age 50% 55% (2012/2013) (% of the total academic staff) Proportion of academic staff having obtained a doctoral degree (%) of 1% 2% 3% the total number of those having (2012/2013) Increased professional a degree or qualification competitiveness of academic staff The proportion of the lowest salary level of professors of institutions of higher education to the amount of average monthly work remuneration of 1.5 2.5 2.8 employees in the country during the year (2012) before last, published in the official statistical report of the CBS, multiplied by a certain coefficient Policy Direction: Ensuring Education Environment and Education Process Compliant with the 21st Century Base value Policy result Performance indicator (year) 2017 2020 Number of doctoral students 138 200 405 in the joint doctoral study programs (2012) Increased number of students Improved infrastructure in the STEM programs of the first 5270 5480 6060 of institutions of higher level vocational higher education (2012) education for the in colleges implementation of modern study process Proportion of institutions of higher education (%) of the total number, 45% where the equipment and technical (December 31, 10% 50% infrastructure have been modernized 2012) using EFRD resources REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 225 Policy Direction: Improvement of the Monitoring System of Education Quality Base value Policy result Performance indicator (year) 2017 2020 Established and maintained a unified database (study program database, 0 expert database, etc.) necessary for 1 1 (2013) the assessment of external and internal quality of higher education Established a system for monitoring the Improved state 0 professional experience of graduates of 1 1 information systems (2013) institutions of higher education Established unified higher education information system, which includes 0 registers of academic an scientific staff, 1 1 (2013) student, diploma registers, as well as the database required for accreditation Established national Established and maintained national study quality 0 agency for higher education quality 1 1 assessment agency (2013) assessment registered with EQAR Policy Direction: Efficient Management of Education Financial Resources Base value Policy result Performance indicator (year) 2017 2020 ISCED-0 0.8% Increased investments ISCED-1 1.4% Annual state expenditure for of financial resources ISCED-2-4 1.9% 3.7% 5% education as % of GDP in education ISCED-5-6 0.6% (2010) Amendments to the technical Developed regulation in the Law on Institutions – 1 1 and implemented of Higher Education and other a new model for regulatory enactments financing of higher Sustainable model for financing education higher education allowing to attain – 1 1 the goals of NDP 2020 Support to improvement of HEIs study direction management, including in colleges, and to establishment/ development of the system for monitoring Established and operating study the introduction of – 20 40 direction councils efficient HEIs policy and ensuring education quality, which is aimed at the development of policy analysis capacity in HEIs and scientific institutions 226 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Policy Direction: Adjustment of the Network of Education Institutions Base value Policy result Performance indicator (year) 2017 2020 Higher education (percentage of Increased accessibility 37.2% the population aged 30 to 34 38% 40% of education services (2012) with higher education) Provided support for acquiring higher education to socially Total number of recipients of financial less protected groups of – 1500 3000 aid inhabitants, including scholarships and grants for covering tuition fee Policy Direction: International Competitiveness of Education Base value Policy result Performance indicator (year) 2017 2020 Proportion of foreign students 0.8% (within the framework of mobility) 736/94474 1.5% 2% of the total number of students (%) (2012) Ensured internationally competitive higher Proportion of foreign students education environment 2.9% studying for obtaining a degree, 2757/94474 6% 8% qualification of the total number of (2012) students (%) Ensured possibility to be involved Number of study programs that have in the internationally acquired documents proving quality n/a 10 20 recognized at international level (international accreditation of higher accreditation) education Attracted foreign Number of scholarships provided to 80 150 150 students foreign students, per annum (2012) Ensured professional perfection and international exchange Number of academic staff that have of experience of 1035 1035 1345 participated in the mobility activities teachers, academic staff, adult education personnel Number of students of HEIs that have 1960 1960 2548 participated in the mobility activities Ensured international practice for learning Proportion (%) of graduates of HEIs and studies who have studied or have had 13.7% 15% 20% internships abroad of the total (2012) number of graduates Report 3 HIGHER EDUCATION FINANCING IN LATVIA: FINAL REPORT 19 September 2014 Contents 232 Abbreviations 233 Executive Summary 236 1 Introduction 238 2 Addressing the Main Challenges of Latvia’s Current Financing Model 245 3 Revisiting Criteria for Good Funding Models 249 4 Reforming the Funding Model for Latvian HEIs 249 4.1 Funding models considered 253 4.2 Positioning Latvia within European trends 257 4.3 The proposed model 267 4.4 How does the new model address the main challenges of the current model? 270 4.5 Impact on different stakeholders 272 5 From Conceptualization to Implementation 272 5.1 Alternative scenarios 275 5.2 Implementation roadmap 281 Appendices 281 Appendix 1 Sample Performance Agreement 281 Appendix 1.A Guidelines for a performance agreement 284 Appendix 1.B Example structure performance agreement 288 Appendix 2 Stakeholder Reactions 288 Appendix 3 Stakeholder Consultations 300 References Boxes Tables 241 Box 1 Executive Summary from “Higher 239 Table 1 Overview of main challenges Education Financing in Latvia: Analysis of 242 Table 2 Strengths and weaknesses of the Latvian Strengths and Weaknesses” higher education and research funding system 243 Box 2 Executive Summary from “Assessment of 244 Table 3 Strategic fit of the four components of Current Funding Model’s ‘Strategic Fit’ the funding system with the nine Thematic with Higher Education Policy Objectives” Goals 245 Box 3 Models of public funding 246 Table 4 The importance of input- versus 251 Box 4 Higher education as public and private output-related drivers of HEIs operational grants good 248 Table 5 Overview of assessment criteria 253 Box 5 Latvia’s position vis-a ` -vis European trends 250 Table 6 “Good-Practice” models highlighted in the evaluation that address challenges similar to those in Latvia Figures 251 Table 7 Potential private and public benefits from higher education 246 Figure 1 Relative importance of indicators used 253 Table 8 Models of public funding — European in funding formulae in European higher trends and Latvia education systems 254 Table 9 Resource diversification — European 259 Figure 2 Three-pillar model of state funding trends and Latvia 278 Figure 3 Possible development of funding pillars 255 Table 10 Financial autonomy — European trends under scenarios A, B, and C and Latvia 256 Table 11 Student funding — European trends and Latvia 256 Table 12 Overview — European trends and position of Latvia 268 Table 13 Overview of how new model addresses current challenges and meets criteria 276 Table 14 Cabinet Regulation No. 994 232 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Abbreviations EU European Union ESF European Social Fund EUA European University Association HE Higher Education HEI Higher Education Institution MoES Ministry of Education and Science MoE Ministry of Economics RAS Reimbursable Advisory Services RTA Reimbursable Technical Assistance R&D Research and Development SEDA State Education Development Agency STEM Science, Technology, Engineering and Mathematics REPORT 3: Higher Education Financing in Latvia: Final Report | 233 Executive Summary n Latvia: Final Report This report is the last in a three-paper series prepared by the World Bank Latvia Higher Education Financing Team between December 2013 and Sep- tember 2014. The first paper, delivered on 18 March 2014, analyzed the strengths and weaknesses of Latvia’s existing funding system, in accordance with criteria derived from good practice in European and international trends. The second paper, dated 18 April 2014, focused on how well the current funding model aligns with the strategic policy objectives specified by the Ministry of Education and Science (MoES). The findings from both of these papers pointed towards a misalignment between levels of public funding and the stated objectives of the government. Building on these insights, this report aims to develop a pro- posal for a new higher education financing model in Latvia. It outlines and evaluates this reform model against the same criteria used in the first report, taking into consideration existing data, feedback from the MoES, and stakeholder consultations. Evaluating and developing a funding model requires a mutual understanding of what features, or criteria, constitute a “good” funding model. These criteria, which were initially used to evaluate the strengths and weaknesses of the current approach to higher education financing in the first report, now constitute the re- quirements or expectations around which a new funding model is elaborated. Examples of the criteria for a “good” funding model include: the strategic orien- tation of the system, and its ability to promote institutional profiles or national strategies; its incentive orientation, to the extent that the system provides clear performance rewards and sanctions to create a competitive environment; its sustainability, and whether it enables long-term planning for institutions or continuity in the system; legitimization, to the extent that there are unam- biguous, balanced and transparent funding structures; autonomy and freedom, and whether institutions are able to make autonomous decisions about internal resource allocation; and practical feasibility, including administrative efficiency and coherence with funding levels and approaches. These criteria and the primary challenges associated with Latvia’s current approach to financing higher education and research provide the basis for developing a new funding model. Among the many strengths and weaknesses identified, two primary challenges emerge. First, the system is significantly underfunded, compared not only to other European countries but, importantly, also vis-a ` -vis the government objec- tives, and legally-set targets — as a proportion of public spending and per study-place. Overall funding levels are very low (and the lowest in all Baltic sta- tes), and Latvia is well below European peers in terms of public funding for higher education. 234 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Second, the current model’s emphasis on inputs (i.e., enrollment) and its lack of a performance orientation actually appear to work against the spirit of quality education and research, especially given recent levels of funding for higher education as a sector. The current funding model provides limited incen- tives to promote national higher education strategies or strengthen institutional profiles. In addition to these two primary challenges, the current dual track system, with its heavy emphasis on merit-based selection, is presumed to have negative conse- quences on widening access to higher education (e.g. for students from dis- advantaged backgrounds) without some corresponding offering of means-tested financial aid. The World Bank proposes a “three-pillar” funding model designed to provide a balance of stability, performance, and innovation orientation. •For continuity, the first pillar would mainly consist of a modified version of the study-place model, as its input-oriented approach remains an important element of the state-funding system. It also includes a per-capita funding com- ponent based on the number of professors or academic staff to enhance the available funding for basic research and to align further the teaching and re- search funding. •The second, performance-oriented pillar, contains a small number of indicators derived from national strategies and of general relevance for all Higher Educa- tion Institutions. Part of the allocation under the second pillar is reserved for insti- tutional performance indicators which are university-specific and related to the profile and strategic development of the institution. This leads to a situation where specific performance criteria do not have equal importance for every insti- tution and fosters institutional diversity. Considering these nuances, the formula should contain an element with institutional performance indicators (specific for each university and agreed upon in the performance agreement). A university’s performance, for example, could be measured using up to three specific indica- tors with institution-specific weights. This part of the formula needs a different algorithm: as the indicators per institution differ, a formula is needed that makes the outcomes comparable and the distribution calculable. •The third, innovation-oriented pillar, provides funding for activities that contribute to the targets set in a university target or performance agreement. This pillar also contains the funding of research centers of excellence, accounting for research evaluation outcomes and a national strategy for research priorities. The targets incorporate national priorities, and operationalize university profiles and stra- tegies. Although the performance-oriented (Pillar 2) component of the perfor- mance agreement is focused on selecting a few relevant indicators that are specific to the institution’s mission, the third pillar is assessing more broadly how the institution will contribute strategically to Latvia’s higher education vision, mission, and objectives. The priorities must naturally address teaching and re- search, but they should also extend to all kinds of third mission and knowledge transfer activities. The performance agreement also defines innovative measures to be taken to achieve these goals if there is a need for pre-funding of actions. This funding comes from a pool of money and is defined per action. REPORT 3: Higher Education Financing in Latvia: Final Report | 235 In such a model, stable funding is combined with a performance-oriented component, using a formula with performance indicators, and an innovation- oriented component allocated via performance agreements. The performance partly rewards and sanctions past performance (ex-post funding), whereas the innovation-oriented component provides financial support for the attainment of future objectives determined by a negotiation between individual universities and the ministry (taking into account state goals and institutional profiles). To comple- ment the three-pillar model, the report also addresses the issue of cost-sharing and emphasizes that means-tested or need-based financial support can widen access and address equity concerns. On the basis of the three-pillar state-funding model, three scenarios emerge in which a new funding model for higher education in Latvia could potentially operate. These scenarios are determined by the extent to which the system could garner additional funding from the state (and, to a lesser extent, funding from private entities), and indicate the priority components for implementation in each instance. The report provides overall direction for Latvia’s future higher education funding model; however, its adoption and subsequent implementation lie with the Government of Latvia and the sector. Similar to the process employed to develop this proposal, the implementation of a new funding model and student financing should be conducted in close collaboration between the government, ministries, higher education institutions, and various other stakeholders. A high- level implementation roadmap outlines the strucutre and next steps should Latvia proceed with the recommended reforms. 236 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding 1 Introduction This is the third and final report in a series of three papers produced under the World Bank Reimbursable Advisory Service on Higher Education Finan- cing in Latvia between December 2013 and September 2014.58 The World Bank was invited, as an external partner, to develop a proposal for a new higher educa- tion financing model in Latvia that takes into account jointly developed criteria and feedback from the Ministry of Education and Science (MoES), good international practice, and stakeholder consultations.59 The topic of higher education financing in connection with envisaged quality enhancement has been on the agenda for a long time in Latvia, spurring disagree- ments between key actors. Interest in the development of a new funding model was further fueled by the European Commission’s 2012 and 2013 Country Specific Recommendations for Latvia. The design of an adequate funding model is crucial for the development of higher education and research, as it determines the performance and competitiveness of higher education institutions. To accomplish its objectives, the project was planned in three stages, each with corresponding deliverables. The first stage in the project’s methodology was an analysis of the strengths and weaknesses of Latvia’s current approach to higher education financing based on European and international good practice. The outcomes (including a description of the status quo of higher education finan- cing) of this phase are detailed in a report dated 18 March 2014. The first report discussed prominently the significant structural underfunding of the Latvian higher education system and the lack of further-reaching performance orientation and incentives for agreed strategic goals, which also emerged as a major finding in the second report. In addition, the first report discussed the existing dual track system of student fees (with relatively high fees for many full fee-paying students as opposed to free higher education for students on state- subsidized study places). The second stage of the project, which focused on how well the current funding model aligns with the policy objectives specified by the MoES, resulted in the World Bank’s report dated 18 April 2014. This third and final paper builds upon these previous two by exploring options for the way forward. 58 The term ‘higher education’ is used in this report in a comprehensive and inclusive manner; i.e., it is used to describe any form of tertiary education at the post-secondary level, if not specified otherwise. 59 Members of the World Bank’s Latvia Higher Education Team are Dr. Nina Arnhold, Senior Educa- tion Specialist and Task Team Leader, World Bank; Adjunct Professor Jussi Kivistö, University of Tampere, Finland; Professor Hans Vossensteyn, Director of the Center for Higher Education Policy (CHEPS), the Netherlands; Jason Weaver, Senior Education Specialist, World Bank; and Professor Frank Ziegele, Director of the Centre for Higher Education (CHE), Germany. REPORT 3: Higher Education Financing in Latvia: Final Report | 237 Readers of the final report are encouraged to refer to the first two reports with questions regarding the team’s assessment of the strengths and weak- nesses of the current higher education funding model, related data, and dis- cussions on the fit of the current model with the strategic objectives of the government. Although excerpts from the prior two reports are contained within this final report, the three reports and their respective conclusions are to be seen as a unit. As with the prior reports, the findings and recommendations contained within this report are based primarily on the correlation of existing data, document review, international experience, and multiple rounds of interviews, round-table discussions, and workshops. These stakeholder consultations played a vital role in the project methodo- logy and, thus, in the preparation of this final report. The World Bank team would like to express its gratitude to the MoES and SEDA as well as to the many stakeholders (see Appendix 3) who provided valuable feedback throughout the engagement. In fact, the World Bank team would also like to encourage MoES to disseminate this report together with stakeholder reactions, which could form part of the report (e.g., Appendix 2). Before turning to the recommendations, it should be noted that the implementa- tion of recommended reforms, though a critical step, is not part of Latvia’s existing agreement with the World Bank. Implementation activities, which, for example, might focus on (i) structural aspects of the model proposed, (ii) pro- cedural and legal aspects of introducing the new financing model, and (iii) capa- city building, are the responsibility of the Government of Latvia. The nature of the World Bank team’s task was to prepare a proposal. The de- cision to accept and implement the proposal will, however, lie with the Govern- ment of Latvia and the sector. 238 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding 2 Addressing the Main Challenges of Latvia’s Current Financing Model This section summarizes the primary challenges associated with Latvia’s current approach to financing higher education and research according to the World Bank assessment in prior reports “Analysis of strengths and weaknes- ses of higher education financing in Latvia” and “Assessment of current funding model’s ‘Strategic Fit’ with higher education policy objectives” (Table 1).60 These challenges are then reinterpreted as requirements for the new model. Consistent with the organizing structure of the World Bank’s prior reports, the observations are organized by the four elements that are identified as crucial of a funding mo- del in Latvia in this assignment, specifically for the operating budget (as opposed to capital investments) for higher education: •State funding for teaching and research (allocation of state budget via study pla- ces and public research funding) •Diversification of financial sources for higher education institutions (EU funds, tuition fees, market revenues, external research income, etc.) •Financial autonomy of higher education institutions (lump-sum versus line-item allocations, freedom to spend money flexibly and build financial reserves, finan- cial regulations, discretion to set salaries, etc.) •Student funding and support (tuition fees, individual financial situation of stu- dents, loans, scholarships, etc.) 60For more information, refer to “Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives” dated 18 April 2014. REPORT 3: Higher Education Financing in Latvia: Final Report | 239 Main Challenge Requirement for Table 1 Overview of main Category for Current Model New Model challenges State funding Latvian higher education To create a “package deal” by (teaching is underfunded, in terms of both public modernizing the financial model and research) and private funding, in comparison and strengthening its link with policy to most other European countries and objectives, which should make for to its own governmental objectives. a strong case to increase the level of It is likely that structural underfunding public funding. The new model needs to leads to performance constrains create added value in terms of and quality problems in all respects stimulating use of strategic orientation (teaching, research and service), and national objectives in order as well as to problems with to justify possible increases of public international competitiveness of funds. the sector. The study place model and state To introduce teaching and research research funding model are not related performance-based funding creating meaningful and appropriate elements in order to create financial performance incentives for HEIs. incentives for higher education The model does not offer significant institutions to produce desired outputs incentives for improving teaching and outcomes. and research quality, employability of graduates, research productivity and internationalization. The study place model and research To offer clear and transparent funding streams (including EU incentives for diversifying institutional Structural Funds) can be profiles, consolidation activities, administratively burdensome incentives to promote collaboration and do not always contain clear between HEIs, research organizations and transparent incentives for and external partners. diversifying institutional profiles, To create a model that minimizes consolidation activities between HEIs, the administrative burden as much as collaboration between research possible. organizations or with external partners (specifically industry). The funding model lacks alignment of To lead to a closer alignment of basic funding of teaching and research. teaching and research streams Divided funding streams for teaching in overall architecture of state funding. and research hinder an alignment of the HEIs core missions of teaching and research. The state funding model is rather To make a transition towards “one-dimensional” and static as a “three-pillar model” consisting of a whole, as it offers HEIs only limited pillars (1) basic funding, incentives for promoting national (2) performance-oriented funding, higher education strategies and (3) innovation-/profile-oriented and strengthening institutional profiles. funding for achieving greater balance More specifically, it is lacking two between stability, important pillars of funding, namely performance-orientation, ex-post performance-oriented funding and and ex-ante incentives. innovation-/profile-oriented funding. 240 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Main Challenge Requirement for Category for Current Model New Model Diversification of The high reliance on tuition revenues To support further and more balanced financial resources (education) and EU Structural Funds resource diversification (both public (research) is likely to harm and private resources) that reduce the long-term financial viability of HEIs. too high and potentially harmful At the same time, income from private resource dependencies of HEIs. sources such as industry or community To provide long-term funding for services appears to be relatively long-term activities. underdeveloped. Financial autonomy Latvian HEIs enjoy significant financial To enable state and institutional of HEIs autonomy and, as such, can flexibly, decision-makers to make full use of efficiently and effectively spend the potential of autonomy. Supporting their resources and act as competitive greater accountability by emphasizing organizations. HEIs do not always fully performance measurement with regard use the autonomy they have. to the volume and quality of teaching This great level of autonomy is not and research. However, increased use always accompanied by a high level of of accountability measures should accountability towards external not negatively affect the level stakeholders (both public and private). and scope of HEIs’ financial autonomy. Student financing The dual track system (i.e., state To ensure access and participation by supported study places and tuition fee introducing more need-based elements funded study places) with merit-based in the student funding system selection of students for state-funded (including state supported study study places is likely to subsidize places, scholarships, loans, and other full-time students from better-off subsidies). To enhance transparency socioeconomic backgrounds. and equity, the allocation of student The current student support system support needs stronger central is highly decentralized, and its strong coordination. merit-based emphasis (including the requirement to find a loan guarantor) is likely to have a negative impact on higher education access and participation for students from disadvantaged backgrounds and, to some extent, part-time students. For additional context on the main challenges of Latvia’s current funding model, the executive summaries from the World Bank team’s two prior reports are excerpted below in Box 1 and Box 2: REPORT 3: Higher Education Financing in Latvia: Final Report | 241 Box 1 Executive Summary from “Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses” Higher education is an increasingly important topic on national policy agendas for many countries. As a significant driver of national economic competitiveness in an increasingly knowledge-driven global economy, higher education policy issues have received increased attention. Alongside the increased policy importance of higher education, many systems also face serious challenges maintaining their quality and relevance and in increasing the efficiency and securing equity in the field of higher education. New higher education financing models are being developed in many European countries as policy responses to these challenges. The Latvian higher education system has been underfunded for years. Overall funding levels are very low (and the lowest in all Baltic states); however, in terms of public funding for higher education, Latvia figures at the bottom across European comparisons, with an allocation of 0.8 percent of GDP as compared to 1.27 in Lithuania; 1.23 in Estonia and an EU27 average of 1.26.a Although the report at hand will largely focus on funding mechanisms as opposed to funding levels, it is important to keep this point in mind when the current Latvian funding system’s strengths and weaknesses are discussed. The topic of higher education financing often spurns controversy, in Latvia as elsewhere, with the discussion focusing on the question of whether higher education is a public or a private good, whether it should be funded from public resources or students’ contributions – with related policy implications for public and private funding. The report argues that the outcomes of higher education have characteristics of both public and private goods, and that acknowledging economic arguments might help to avoid political reform blockades. Student funding – that is, student contributions (mainly tuition fees or other fees paid by the students) and student financial support systems (mainly grants and loans) – is clearly among the most controversial issues in the sphere of financing higher education. Approaches that place fees and loans at the center tend to meet criticism all across Europe on the grounds of their expected negative effects on equity. However, tuition fees – combined with adequate and well-targeted student support schemes – generate additional revenues for HEIs, thus enabling increases in participation rates. They are also regarded as more equitable by some, since they transfer part of the instruction costs to those who will directly (and disproportionately) benefit from higher education. Latvia’s Funding System in the Light of European Developments Compared to other European countries, Latvia scores high in the area of financial autonomy. It is ranked 4th among the 28 European higher education systems in EUA’s “University Autonomy Scorecard”. Providing a higher level of institutional autonomy is often expected to improve the performance of higher education institutions (HEIs) and higher education systems as a whole. It is assumed that the more autono- mous HEIs are, the better equipped they are to generate additional resources through fund-raising or efficiency measures, with the freedom to orient their strategy towards available funds, focusing potentially on their specific research strengths or shifting the balance between education and research. Based on this assumption, many governmental authorities among European countries have granted HEIs more freedom to manage their resources and develop new income-generation policies. Contrary to many other European systems, the current funding model in Latvia does not offer significant incentives for greater performance- and output-orientation. The main purpose of performance-based funding is to create financial incentives for higher education institutions to produce outcomes in certain areas of their activities which want to be encouraged by the funder. There are different ways in which to cluster allocation models in the funding of higher education institutions. Three typical pillars of funding models concern basic funding, per- formance funding, and innovation-/profile-oriented funding. The innovation-/profile-oriented funding component in Latvia is currently composed of a number of different types of smaller and larger third-party funding streams (including EU Structural Funds) but not included in the system of state funding. In contrast to the tendency of many European higher education systems to adopt more performance-based elements in their funding mechanisms, the Latvian model has remained predominantly input-related and formula-based. The elements that are said to be performance- oriented, such as the European structural funds as well as the national competitive research programs, are not perceived by the authors to use transparent competitive criteria. This implies the system does not fully exploit its competitive capacity and strife for excellence. Latvia has a dual-track tuition fee system with – in some cases – relatively high fees and relatively many fee-paying students. The Latvian higher education system offers mainly merit-based support in the form of state funded study places, and relies more on government-subsidized, mortgage-style loans offered by commercial banks, rather than grants. While there are concerns amongst stakeholders that ‘the best students migrate to countries where students do not pay fees’, this causal chain appears in fact unlikely, given that these students study for free in Latvia. To the extent that such migration of particularly gifted students takes place at the tertiary level – and more research would certainly need to be done on this issue – it would most likely be fueled by quality concerns and more general economic considerations as opposed to the current fee structure in Latvia. There is no general European trend in this area: some European countries that have previously introduced tuition fees later decided to abolish them either entirely or partly. At the same time, other European countries have decided to increase the share of private investment by allowing public HEIs to introduce fees or charge higher fees while at the same time promoting equity of access by restruc- turing their student support systems. Need-based grants are the most frequently used modes of student support across European higher educa- tion systems. Strengths and weaknesses of the Latvian funding model Derived from European trends and international practice, Table 2 provides an overview of the strengths and weaknesses of the Latvian higher education and research funding system according to the aforementioned categories of criteria. It distinguishes between the context of the funding system and the features of the funding system itself. Many of these issues relate to more than one criteria dimension. 242 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Table 2 Strengths and weaknesses of the Latvian higher education and research funding system Strengths Weaknesses Context: Strategic orientation • Diverse system of HE (many institutions, niche players, different • Apparently low political priority given to HE and science profiles, public-private) (regarding low spending on HE and R&D) • Substantial number of private HEIs • Inconsistent policy measures and political reform blockade • Start-up of quality assurance for study programs and research because of polarized discussions (public vs. private good) institutes • Many relatively small study programs • Research institutes with more mass and focus • Tendency to study abroad • High percentage of young people who qualify for HE • Opaque HR structures in HE, with opportunities to have more than • High employment rate and high rate of return on HE one job • A functioning data monitoring system (including performance • High teaching loads for staff; little time for research and financial data) • Quality assurance for teaching and research only in start-up phase • High adaptability of system and HEIs demonstrated in times of • Many graduates seeking employment abroad economic crisis • No clear way to consolidation vs. competition yet • MoES and line ministries are multiple voices for the interests of HEIs Financing: Incentive Orientation • Study places allow national planning according to labor market • One-pillar model of state funding instead of several pillars needs with balanced functions • Study places offered on basis of merit including rotation • No real performance orientation in state funding (hence also weak possibilities stimulate competition links to national or institutional strategies) • EU structural funds for research allocated with some form of • No funding for innovative initiatives competition • No clear approach to the role of state money for private HEIs • Attract many fee paying students (willingness to pay/additional • No funding options for research-related developments such as resources for HEIs) post-docs, knowledge transfer activities, etc. • Existence of performance contracts between HEIs and ministry Financing: Sustainability • Study places funding provides cost-oriented stability • Underfunding of the HE and research system compared to most in the system, but with a “money follows student” element other European countries and to own governmental objectives • Availability of substantial EU structural funds for HE and R&D • Promised funding increase not yet effectuated (reason for survival in economic crisis) • Lower funding tariffs for HE students compared to primary and secondary education • Cost basis for subsidized study places outdated Financing: Legitimization • Availability of student loans for many students with attractive • Many competing needs in case of budget increases (more quality repayment conditions in teaching, PhD schools, post-doc careers, triple helix, etc.) • Full-fee paying option creates access opportunities • Opaqueness and subjectivity in allocation of subsidized study places, planning problems through yearly interventions • Subsidized study places particularly benefit students from better socio-economic backgrounds • No subsidized study places for part-time students • Student loans not attractive to some groups, e.g., the “guarantor requirement” forms a big hurdle • Hardly any need-based support nor means-testing mechanism for students from low-income families REPORT 3: Higher Education Financing in Latvia: Final Report | 243 Strengths Weaknesses Financing: Autonomy and freedom • Large degree of (financial) autonomy for HEIs • Heavy reliance on EU structural funds for R&D, which may not be • Financial autonomy allows entrepreneurial freedom a sustainable long-term situation (plus co-funding problem • Substantial level and good framework conditions of resource in case of matching funds) diversification • Relatively low funding from industry/ companies Financing: Practical feasibility • Substantial outward international student mobility (many systems • Decentralized system for student loans and scholarships have problems to send students abroad). This means other (efficiency risks and problems for HEI with needs assessment) countries pay for the instruction costs. • Debt cancellation mechanisms too generous • Mismatch between academic year and fiscal year Latvia has a diversified higher education sector including capital, regional, public and private higher education institutions. Universities enjoy a significant amount of financial autonomy which allows for resource diversification. The funding model based on study-places provides some basic stability for the sector and is related to sector-level planning geared towards labor market needs. In addition, Latvia has a high number of full cost-covering fee paying students and a significant share of research funding coming from EU funds. However, as mentioned above, the system is significantly underfunded in comparison to not only other European countries but, impor- tantly, also vis-a ` -vis the government objectives and legally-set targets, both as a proportion of public spending and per study- place. While, in principle, public funds are allocated according to study places, i.e., educational needs, this is de-facto nearly the only public funding instrument, and thus has to accommodate many competing needs (partially related to research and wider institutional missions) of universities. The small performance-oriented elements, such as small competitive research funds, use criteria which are not trans- parent to the stakeholders and thus miss the desired effects. In practice, the system is partially opaque and leaves room to subjectivity, both with relation to the allocation of study places and research funds. Also, there are planning problems due to annual interventions (while MoES has a different fiscal year from higher education institutions). The cost basis for the study places in legislation is outdated while universities only receive 80 percent of the defined minimum costs. The current strong merit-based approach to budget places and grants raises questions about equity, as subsidized study places and scholarships are available to the “best students” and thus are most likely to particularly benefit students from better socio-economic back- grounds. It can be questioned if this really stimulates academic excellence within the whole system. The decentralized loan system appears to be generous, but in reality creates practical problems and appears not to be attractive to those who might need it most. There is very little needs- based support or means-testing mechanisms for students from low-income families. The current public funding model appears as a largely input based ‘one-pillar’ model which, overall, does not represent a balance between stability, performance, and innovation orientation. This also means weaker links between public funding and national and institu- tional strategies. In addition, the system relies heavily on EU funds, in particular for research and development which might not be a long-term solution to stable research funding while also funding from industry and other private sources appears to be underdeveloped. Note: a. http://ec.europa.eu/eurostat/web/education-and-training Box 2 Executive Summary from “Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives” For the purposes of this assessment, the strategic objectives for higher education identified in the key policy planning documents were clustered into the following nine thematic goals: 1. Increase the quality of education and link with the national economy 2. Increase the quality and (international) competitiveness of research 3. Increase sector efficiency 4. Enhance technology, innovation, creativity, and entrepreneurship 5. Renew and develop the human resources of higher education institutions 244 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding 6. Stimulate participation in and access to higher education 7. Stimulate internationalization in higher education 8. Enhance funding base of higher education 9. Establish a new and transparent approach to quality assurance Consistent with the Bank’s first report, this paper also explores the current funding model for Latvian higher education through four components (instruments of state funding, diversification of financial resources, financial autonomy, and student funding) to determine how each aligns with the thematic goal. Table 3 below summarizes the overall assessments regarding the strategic fit of the four components of the funding system with each of the nine Thematic Goals. The scores vary from a strong positive strategic fit (indicated with “++”) to a strong negative fit (indicated with “- -”). A neutral relationship is indicated with “0”. Table 3 Strategic fit of the four components of the funding system with the nine Thematic Goals State Resource Financial Student Thematic goals Funding Diversification Autonomy Funding 1. Quality of education -- + + - 2. Quality of research -- + + + 3. Sector efficiency -- - + + 4. Technology, innovation, creativity and entrepreneurship - -- 0 0 5. Human resource development - + + 0 6. Participation and access -- ++ 0 -- 7. Internationalization - 0 0 - 8. Funding base -- - 0 + 9. Transparent quality assurance + 0 0 0 As the table demonstrates, the overall funding model, particularly the basic funding for teaching and research, does not align well with the Thematic Goals for Latvian higher education. In general, this does not mean the policy objectives cannot be met, since other policy instruments can also be effective. However, the structural underfunding of the system together with the current model’s emphasis on inputs (i.e., enrollment), and its lack of a performance orientation actually appear to work against the spirit of quality education and research. Increases in state investment in higher education, in accordance with current legislation, could go hand-in-hand with the introduction of more perfor- mance-driven and innovation-oriented funding instruments that provide incentives for the system to move in the desired direction of enhanced teaching and research quality. Though the strong reliance on tuition fees and on EU structural funds should, in theory, steer higher education towards greater relevance to societal and economic needs, the incentives are not strong enough. Both tuition fees and EU funds are currently relied upon to maintain the functioning of the system and support the status quo, so they are unable to work effectively as instruments that guide towards greater quality, creativity, innovation, and entrepreneurship, especially in light of current economic and quality assurance realities. While financial autonomy is high in Latvia, some institutions have not utilized their full potential in this respect. Certain institutions are being creative in developing alternative revenue sources, but the resultant funds are necessary to offset the low level of state investment in the system, so there is not much ability to reinvest in new opportunities, partnerships, or innovation. Additionally, some other institutions do not appear to be fully aware of their autonomy. The system would benefit from financing instruments that allowed it to incentivize, for example, partnerships with the private sector for revenue-generating research or training collaborations. Finally, Latvia’s current approach to student funding appears to have a slight misalignment with the Thematic Goals, particularly as it relates to internationalization and expanding access. Latvia would be well advised to reconsider how student financing could better align in a more supportive way with key policy objectives. REPORT 3: Higher Education Financing in Latvia: Final Report | 245 3 Revisiting Criteria for Good Funding Models In order to analyze the strengths and weaknesses of the current higher edu- cation funding system in Latvia and recommend adequate reform strategies, one must start with a clear understanding of what is meant by a funding mo- del and then consider normative criteria representing the features of a “good” higher education funding model. In other words, any recommendations should be based on and justified by mutually agreed criteria. To start, Box 3 clarifies what is meant by the funding model and provides examples of different types of funding models commonly employed throughout Europe: Box 3 Models of public funding There are a number of different ways in which to categorize or cluster alternative allocation models in the funding of higher education institutions. A frequently applied categorization distinguishes between negotiated, incremental, formula, and competitive funding (e.g., Eurydice, 2008; Jongbloed et al., 2010). For practical purposes, this report adopts the categorization of Ziegele (2013) who has identified three typical pillars of funding models: (i) basic funding; (ii) performance funding; and (iii) innovation-/profile- oriented funding.61 Regardless of the diversity throughout higher education systems and funding models in Europe, these three pillars can, to a certain extent, be identified in most systems. Negotiated, incremental, formula and competitive funding are instruments that could be applied within the three specific pillars. Basic funding can be described as an amount of public funding that remains largely stable over a specific period of time. The purpose of basic funding is to provide predictable and reliable financing that covers the main part of operational costs, thereby enabling HEIs to perform their core tasks of teaching and research (Ziegele, 2013, pp. 73–74). As previously discussed, in most European systems, public authorities distribute basic funding to HEIs through the use of block grants. The overall amount of the block grant may be determined in different ways; through negotiation, incrementally on a historical basis, or via a funding formula. The importance of these different elements in determining the overall amount of the block grant varies across the systems (Estermann, Bennetot Pruvot & Claeys-Kulik, 2013, p. 8). Incremental funding, where historical allocations play a large role, is becoming less common, and in many systems, has already been replaced by formula-based approaches with input-oriented indicators. In 20 out of 34 European higher education systems, funding formulae were of very large importance in 2008, compared to 1995 when only seven systems attached a large importance to it (Jongbloed et al., 2010, p. 47–48). The importance of input and output drivers in determining the operational grant for teaching, research and ongoing activity is shown in Table 4 below. Input-related drivers remain extremely important or important in almost all European higher education systems. The most important input criteria include the number of students or publicly-funded study places, the number of staff, and past costs of an institution. However, compared to 1995, when there were only 6 systems in which output-related criteria played an important or extremely important role, in 2008, 24 European systems considered output-related drivers important or extremely important. Frequently used output criteria include elements from teaching and research activities: degrees conferred, study credits accumulated, assessment results, indicators related to publications, or competitive research grants (Jongbloed et al., 2010, pp. 49–51). Where funding formulae are used to calculate the block grants, these are largely dominated 61 In most European higher education systems, the public funding of research takes place through a dual support system meaning that research is funded both through basic funding and through innovation-/profile- oriented funding (mainly competitive research grants allocated by intermediary allocated by research coun- cils, national academies or other national/federal intermediary bodies (cf. Jongbloed et al., 2010, p. 53). 246 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding by input-oriented indicators, namely student numbers (at Bachelor level, then at Master level). The corresponding output-oriented indicators (number of Bachelor and Master degrees conferred) are used less frequently or else have less weight in the formula (Estermann, Bennetot Pruvot & Claeys-Kulik, 2013, p. 9). Output-oriented indicators are typically part of the performance-based funding pillar, to be presented next. Table 4 The importance of input- versus output-related drivers of HEIs operational grants Number of systems and relative Number of systems and relative importance of input-related drivers importance of output-related drivers 1995 2008 1995 2008 Extremely important 38 24 3 8 Important 4 18 3 16 Minor importance or unimportant 3 3 39 21 Source: Jongbloed et al., 2010, p. 51 The main purpose of performance-based funding is to create financial incentives for HEIs to produce outputs and outcomes in certain areas of their activities by applying formula funding62. Performance-based funding arrangements reward HEIs ex post – that is, they reward their past teaching and research performance (Ziegele, 2013, p. 74). Despite the simplicity in terms of definition, it seems that performance-based funding is understood very differently across Europe. Nevertheless, a majority of systems consider their funding allocation mechanisms at least partially performance-based for teaching (via graduate-related criteria) and partially or mainly performance-based for research, where indicators related to publications and external research funding are normally taken into account (see Figure 1). Figure 1 Relative importance of indicators used in funding formulae in European higher education systems Source: Estermann, Bennetot Pruvot & Claeys-Kulik, 2013, p. 10 62 Or performance contracts which are related to part of the budget. REPORT 3: Higher Education Financing in Latvia: Final Report | 247 The third typical pillar of funding models, innovation-/profile-oriented funding, underscores intentions expected to be carried out in the future. Concretely, this type of funding is often utilized under the label of “targeted/earmarked funding”, “competitive funding”, “strategic funding”, “pro- ject-based funding”, “excellence initiatives” or “centers of excellence” – to name but a few. Regardless of the name, all these funding instruments basically aim to finance and incentivize innovations, research (or sometimes teaching) excellence, or the development of institutional profiles in advance (cf. Ziegele, 2013, pp. 73–74, p. 78). Innovation-/profile-oriented funding can take many forms, such as funding that is allocated on a competitive basis (e.g., the “Strategic Innovation Funding” in Ireland, established as a mechanism for institutional restructuring and moderni- zation) or a non-competitive basis directly allocated to HEIs (e.g., Higher Education Innovation Funding scheme in the United Kingdom, which focuses on knowledge exchange). Innovation-/profile-oriented funding includes excellence initiatives (e.g., Germany’s “Excellence Initiative”), as well as project funding programs for carrying out strategic research found in many European countries.63 Performance contracts (synonymous with target agreements, performance agreements), whereby certain goals are agreed between the funding authority and HEIs, are used in different ways within the funding pillars. With performance contracts, certain objectives, often in line with national strategic priorities and institution-specific missions, are agreed between the funding authority and HEIs. If performance contracts are connected to basic funding, they usually do not have to have a direct impact on funding. However, if the performance objectives are measured clearly and linked to financial incentives, performance contracts often become an organic part of performance-based funding arrangements64. Concretely, those performance contracts would be very broad, based on framework agreements, but might also take the form of more detailed contracts, highlighting specific and measurable objectives and targets (Jongbloed et al., 2010, p. 30). In this case, they would belong to the third, innova- tion/profile-oriented pillar. Over the recent years, performance contracts have become a common feature in many European higher education systems. Currently, performance-based contracts are in use in 15 out of 22 European systems. These contracts have a clear impact on funding allocations for instance in Finland, Austria, Germany and the Netherlands (Estermann, Bennetot Pruvot & Claeys-Kulik, 2013, p. 11). When taking into account the latest developments of higher education funding models across Europe, some clear trends can be observed. First, it is likely that basic funding becomes more dynamic and demand-oriented (rather than supply-oriented) through the “money-follows-the- student” approach, where rewards and incentives are based more heavily on factors related to student enrolment, rather than on staff numbers or past institutional costs. Second, the relevance and weight of the performance-based funding, including the formula funding, is likely to increase. Performance-orientation sets HEIs incentives for improvement of quality and efficiency; both of which are crucial aspects in the increasingly competitive environment. Third, it is foreseeable that the relevance and weight of the innovation-/profile-oriented funding compo- nent increases especially in the form of competitive and targeted funding with a special emphasis on innovation and excellence, of which both are considered important prerequisites for regional or national competitiveness. Furthermore, it is likely that performance contracting becomes more widely used within the funding pillars due to the increasing performance-orientation in public funding modalities (Ziegele, 2013, pp. 74–79). The responsibility for identifying the criteria was first assumed by the World Bank team, and then subjected to a feedback cycle with the MoES to ensure agree- ment. The criteria were derived from three different sources: •International experiences and standards regarding the features of “good” fund- ing models65; •Feedback and approval from the MoES; and •Stakeholders’ assessment of the importance of different criteria as obtained through interviews. Whereas these criteria were applied to Latvia’s current higher education funding model to determine its strengths and weaknesses in the World Bank’s first report, they have now become requirements or expectations vis-a ` -vis the proposed model. Table 5 summarizes the intentions of each criterion. 63 See http://www.excellence-initiative.com/ 64 It is important to note that performance contracts are applicable to all three funding pillars (basic funding, performance-based funding, innovation-/profile-oriented funding) and not restricted to only performance-based funding arrangements. 65 For a more comprehensive discussion, see first report (dated 18 March 2014). 248 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Table 5 Overview of Strategic orientation Promote national strategies assessment criteria66 Promote institutional profiles * Only relevant for institutions, not for student funding. Incentive orientation Provide clear, non-fragmented incentives Avoid undesired effects Create performance rewards and sanctions Create a competitive environment Sustainability Guarantee continuity in funding mechanisms Allow long-term planning* Take into account cost differences Promote risk-spreading and management* Legitimization Provide unambiguous and balanced funding structures Make funding transparent Support the perception of fairness Allocate lump sums* Guarantee academic freedom Autonomy and freedom Implement an adequate level of regulation Guarantee autonomy of internal resource allocation* Promote accessibility of diverse income sources* Practical feasibility Use available data Ensure administrative efficiency Respect methodological standards Ensure coherence with funding levels and steering approaches 66 Minor adjustments have been made in comparison to an earlier version of this table provided by the World Bank team in an ‘Information Note’ in July 2014. REPORT 3: Higher Education Financing in Latvia: Final Report | 249 4 Reforming the Funding Model for Latvian HEIs This section provides an overview of the desirable elements and suggested features of a new funding model for Latvian higher education. The new model is evaluated to identify how it may address the current challenges of the existing model as well ` -vis the aforementioned criteria for good funding models. as vis-a 4.1 Funding models considered In developing recommendations for Latvia’s new approach to financing higher education, the team considered several alternative funding models and options. As discussed in Section 3 of the second report, a range of funding mechanisms and options have been taken into consideration for not only evalua- ting current funding practices in Latvian higher education, but also to provide realistic alternatives that help Latvia achieve its objectives (ibid.), such as enhan- ced quality of teaching and research, greater efficiency, access, and internationa- lization, and stimulate innovation, entrepreneurship and staff development. As higher education challenges, objectives and practices differ from country to country, one cannot easily copy or import successful funding models from other systems and apply them in a system with different structures, tradi- tions, challenges, objectives and interests. External options and models must be assessed against and adjusted to the local needs — as is intended to be the case in Latvia. Reforms should be informed by international experiences and adopt good practices that correspond to the specific situation, but they should not just copy something that is done abroad. The range of funding approaches and instruments that inspired the team to select relevant funding options for the Latvian higher education system — including its challenges, ambitions and aims — includes various interna- tional practices with regard to the funding of teaching, research and stu- dents. Examples of state funding models to allocate resources among higher education institutions included funding formula that can be driven by the number of students, new entrants, graduates, internationally mobile students, research outputs, international staff, etc. Other approaches included ways of capacity fund- ing with governments and institutions agreeing on how many students institutions will teach and how many graduates they will “produce” within specific disciplines and against what tariffs. Funding options that enhance sector efficiency include sector consolidation programs (as in Denmark) or performance agreements be- 250 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding tween national ministries and individual higher education institutions on various aspects of teaching and research such as quality, completion, drop out, institutio- nal profiles, etc. (as in Germany, the Netherlands, Australia, Hong Kong, and New Zealand). Other funding approaches concern more performance and innovation stimulators such as excellence initiatives, research assessment exercises or targe- ted innovation funds. In the area of student funding, not only the above mentioned tuition regimes were explored, but also the ways in which students are supported by grants and scholarships, and how many students benefit from them and based on what criteria — either need-based (depending on family income and resources) or merit-based support (depending on the study achievements). Also various alternative loan schemes, including their eligibility criteria and repayment mecha- nisms, have been considered. Various approaches have been explored with regard to resource diversification. In the area of teaching, one can think of whether to charge tuition fees or not and to whom. Related to the question of whether higher education ought to be considered a public or a private good — or a mixture of both and to what extent — the team has examined funding models where higher education is tuition free to all students (e.g., Estonia’s new model under certain conditions67) as well as models where students have become the main source of teaching revenues (as in the English case of very high tuition fees accompanied by income-contingent loans). In the area of research, resource diversification is more often related to invol- ving business and industry in research funding, which can be stimulated by specific funds based on public-private partnerships, innovation vouchers for companies, etc. To summarize, Table 6 highlights many of the models explored as part of this study: Table 6 “Good-Practice” State Funding Netherlands’ performance-based funding models highlighted in the evaluation that address Sweden’s capacity funding challenges similar to those Finland’s performance formula for universities in Latvia Germany, Denmark, France’s Excellence initiatives English Research Assessment Exercise Hong Kong, Netherlands, Australia, New Zealand, and Germany’s use of target agreements Denmark’s comprehensive sector consolidation Resource Various German states/ länder Diversification Netherlands’ knowledge vouchers British universities recruitment of various disadvantaged students Financial Germany’s consolidation process in Lower-Saxony Autonomy Promote institutional profiles Student Funding Netherlands’ performance-related grants Estonia’s student loans German BAFöG loans German Bundesausbildungsförderungsgesetz (BaFöG), the English National Scholarships Programme, the Dutch Supplementary grants, the Australian Commonwealth Grants Scheme and the New Zealand Student Allowance Scheme (need-based grants) 67 It is free for students who complete the required 60 ECTS per year/30 ECTS per semester. REPORT 3: Higher Education Financing in Latvia: Final Report | 251 Finally, the issue of whether higher education is a public or private good has been heavily debated in Latvia. Below, an excerpt from an earlier report for this project has been provided to re-iterate the World Bank team’s perspective, to con- textualize the other models considered, and to preface the proposed model: Box 4 Higher education as public and private good From an economic perspective, HEIs produce outputs that can be categorized as “public” or “private” goods. Using a standard economic definition, public goods (e.g., products, services) are goods that are non-excludable and non-rivalrous. Non-excludability means that a good cannot be provided exclusively to only some individuals in a way that other individuals could be excluded from consuming the same good. This, therefore, implies that consumption by some individuals does not diminish the consumption levels of others of the same good. In the case of private goods, the situation is the opposite; individuals can be excluded from consuming the service or product if they are not willing or able to pay for it (i.e., a good is excludable), and consumption of a service or product reduces the possibilities of others to consume the same good or service (i.e., a good is rivalrous). In addition, public goods create spillover effects. If they are being offered, people who do not purchase the goods never- theless enjoy their benefits, e.g., dikes that are used to protect from water floods, etc. A public good has to be provided by the state and funded by taxes, as private markets would not lead to a sufficient provision of the good. A private good does not require state intervention and should be provided by the market. The public vs. private good argument regarding higher education is an explanation for the diverse tuition fee developments in Europe. In many European countries, politicians tend to “buy” either one of the two positions, often leading to a politically polarized debate where the two positions are opposed in contradiction, leading either to political reform blockades or to an unreliable sequence of introducing and later abolishing tuition fees. This paper proposes economic analysis and rational arguments to overcome the political impasse. Economists have been clear that there are private benefits to be gained from higher education, meaning that there is rivalry and excludability. But, they are also convinced that there are public benefits of higher education (see Table 7). Public benefits refer to positive externalities of the good, i.e., benefits for society not taken into account in the individual cost-benefit-analysis of the student (hence justifying public funding). Table 7 Potential private and public benefits from higher education Benefits from higher education Private Public Economic Higher salaries Greater national productivity and development Employment Reduced reliance on public support Higher savings Increased consumption Improved working conditions Increased potential for transformation from low-skill industrial to knowledge-based economy Personal and professional mobility Social Improved quality of life Nation-building and development of leadership Better decision-making skills Democratic participation; increased consensus; perception that society is based on fairness and opportunity for all citizens Improved personal status Social mobility Increased educational opportunities Greater social cohesion and reduced crime rates Healthier lifestyle and higher life expectancy Improved health Improved primary and secondary education Source: Steier, 2003, p. 167 Higher education has elements of both private and public goods. People can be excluded from higher education, from a particular institution, from a particular program, or from a particular teacher. This exclusion can be based, for example, on differences in academic merit; i.e., given that an individual has to meet certain conditions in order to have access to, and to graduate from, higher education institutions. However, nobody can be excluded from the higher productivity graduates exhibit at the labor market and the advancements made through their creativity and applica- 252 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding tion of skills after successfully completing quality higher education. There is also wide agreement that higher education creates both public and private benefits as well as costs, and that those who benefit from higher education should also contribute to its costs (equity principle). Higher education creates multiple social and economic public benefits thereby justifying significant public investments in higher education. However, individuals (mainly graduates) also receive significant private economic and social benefits, making the recommendation that they bear directly at least part of the costs of their training, both efficient and equitable. Economic rationales provide no arguments for 100 percent public or private funding. Differences in opinion nevertheless arise when determining what the “right” balance might be between benefits and costs and on how to measure up the benefits and costs (especially in terms of money). In any case, several scholars consider the full public-funding model of higher education as inequitable and regressive, based on the fact that higher education students are disproportionately from middle- and higher-income families (e.g., Barr, 2004; Bevc & Uršiè, 2008; Johnstone & Marcucci, 2010). OECD’s statistical yearbook Education at a Glance provides calculations annually on the public and private costs and benefits of higher education. According to OECD (2013, p. 135), it is very difficult to generate correct and comprehensive estimates of public and private returns, meaning that rates of return must always be interpreted with caution. Nevertheless, large discrepancies between private and public returns “should prompt additional analysis to assess whether government tax schemes or subsidies are strongly distortionary” (ibid., p. 135). Based on OECD calculations, average net private returns in EU21 countries slightly exceed public returns (ibid., pp. 144–147). However, in some specific coun- tries (Estonia, Turkey, Poland, Slovakia) private returns are considerably higher than public returns. On the other hand, e.g. in Belgium, Greece and Italy public returns are moderately higher than the private ones. This leads to the following conclusions: • Higher education is a “mixed good” creating both public and private costs and benefits. • Determining the exact public and private costs and benefits is difficult from a conceptual and methodological perspective. However, one- sided financing models emphasizing only public or only private dimensions (full public or full private funding) are neither adequate nor equitable. • Since the real balance between private and public costs and benefits is unclear, there is a wide range of potential arrangements between private and public funding that might be considered when developing an appropriate financing model. However, neither a pure market model nor a 100 percent free higher education model is within this range. In the case of Latvia, the first conclusion would be that economic analysis provides no basis for the polarized political discussions of the previous years, favoring either the argument of the pure private or public good. Acknowledging economic arguments might help in avoiding political reform blockades. Secondly, if we take the mixed good approach to the individual level, the dual track model seems to be problematic. Each student benefits from private returns and contributes to positive externalities. The economic rationale would instead suggest a certain cost- sharing for each student rather than an overall cost-sharing for all students combined. Third, the major question for Latvia will be where to move from the current situation: towards greater private or public funding shares (or might the current situation be adequate)? The status quo section analysis where public and private funding in Latvia stand in comparison to other European countries, and concludes that, at present, total societal investment in higher education is too low due to both limited public funding for HE and R&D, as well as limited private contributions, particularly in the R&D sector. Private contributions through tuition fees tend to typically come from students who cannot attend HE on subsidized study places, and have to pay the full costs. Analysis shows that it is in particular students from more advantageous backgrounds that profit from the subsidized (tuition-free) study places. Overall, examining the current funding situation in Latvian higher education, the team is convinced that Latvian higher education demonstrates characte- ristics of both public and private goods, which should one way or another be reflected in the funding model and its policy implications. The team believes that any policy recommendations for a new funding model will have to bring about a major change in the way Latvia funds its higher education system, institutions, and students in order to bring about stability as well as a stronger orientation towards quality, performance, efficiency and equity. In the section that follows, the team proposes a new model that contains various elements of the current Latvian funding model combined with elements that are being used elsewhere and are attuned to the Latvian context, reality and feasibility. Although stability is an important feature of any funding model, the team encourages Latvia to periodically assess its funding model to reflect evolving fiscal circumstances, poli- cy priorities, and cultural perspectives. REPORT 3: Higher Education Financing in Latvia: Final Report | 253 4.2 Positioning Latvia within European trends Positioning the Latvian financing model within the context of European trends in higher education provides additional context for the evaluation. Importantly, it should be noted that the team does not consider European trends to be the main criteria to evaluate the strengths and weaknesses of Latvian financing model. What seems to be popular or good in Europe does not automatically mean that it would be applicable or good for Latvian higher education financing. Funding models are tightly bound to the features (society, economy, demograp- hics, etc.) of different countries, and it is acknowledged that Latvia differs in these features with many respects. The following tables in Box 5 (Tables 8 to 12) are excerpted from the World Bank ` -vis European team’s first report and offer an overview of Latvia’s position vis-a trends: `-vis European trends Box 5 Latvia’s position vis-a Table 8 Models of public funding – European trends and Latvia Models of public funding European trend Current situation in Latvia Position of Latvia Structure of funding model • Three typical pillars for • Latvia applies only the pillar of Inconsistent with European allocating public funding for “basic funding” in allocation trend HEIs can be found from most of core public funding to HEIs of the European countries: • Performance contracts (1) basic funding; are applied between HEIs (2) performance funding; and and MoES (3) innovation-/profile- oriented funding • Performance contracts / target agreements are in use in 15 out of 22 European Basic funding • Basic funding: • Latvia applies formula Inconsistent / consistent and performance-based Formula-based approaches funding mainly with with European trend funding: modalities with demand-based input-oriented indicators input-oriented indicators (funded study places, are substituting incremental research equipment) funding with historical • The overall public budget of emphasis (mixed approach the HEIs remains largely is common) constant and develops • Performance-based incrementally on funding: Majority of systems a historical basis (rather consider their funding than demand) allocation mechanisms at • Current funding model does least partially not offer significant performance-based incentives for greater • In 2008, 24 European systems performance- considered output-related and output-orientation drivers important or extremely important (in 1995: 6 systems) 254 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Models of public funding European trend Current situation in Latvia Position of Latvia Innovation-/profile oriented • Innovation-/profile-oriented • The innovation-/profile- Inconsistent with European funding: modalities funding is used more frequently oriented funding component trend to support national policy in Latvia is currently priorities and development of composed of a number of institutional profiles different types of smaller • The relevance and weight of and larger third-party the innovation-/profile-oriente funding streams (including d funding component is likely EU Structural Funds) but not to increase; especially included in the system of in the form of competitive state funding and targeted funding Table 9 Resource diversification – European trends and Latvia Resource diversification European trend Current situation in Latvia Position of Latvia Public / private funding • Private expenditure on HEIs • Private funds (tuition) Consistent with / ahead of diversity has increased in 16 out of accounted total 23% European trend the 19 European OECD and “other funds” (excluding countries between 2000 international/EU funding) and 2010 20% of Latvian HEI revenue • EU21 average of private in 2012 expenditure on HEIs was 23% (Source: MoES, 2014) in 2010 Diversity of sources • Funding of European public • Latvian HEIs funding structure Inconsistent with / ahead of HEIs in 2008: on average (2012): European trend – 67% from public sources – 36% state budget funding through operational grants – 23% tuition fees (in 1995: 78%) – 41% “other sources” – 12% from private (out of which 21% were households as tuition from international funding, fees (in 1995: 8%) mainly EU Structural Funds) – 21% as third-party funds (Source: MoES, 2014) (in 1995: 15%) • On average, EU funding ranges from 3–4% (Estermann & Bennetot Pruvot, 2011) to over 10% (Estermann, Bennetot Pruvot & Claeys-Kulik, 2013) of the total income of HEIs REPORT 3: Higher Education Financing in Latvia: Final Report | 255 Table 10 Financial autonomy – European trends and Latvia Financial autonomy European trend Current situation in Latvia Position of Latvia HEIs freedom in internal • Block grants are used • One-year block grant split Consistent with European trend allocation of public funding in 25 systems, line-item into sub-categories budgets in 3 systems • No restrictions on the internal allocation of the block grant in 14 systems • Some restrictions for internal allocations of the block grant in 11 systems HEIs ability to keep a surplus • HEIs are able to keep a surplus • State funded HEIs can keep Consistent with European trend in 27 systems, not able a surplus with an approval of to keep in 4 systems external authority • No restrictions in keeping a surplus in 15 systems • Some restrictions in keeping a surplus in 12 systems HEIs ability to borrow money • HEIs are able to borrow money • Latvian HEIs are able borrow Consistent with European trend from financial markets money with an approval of in 23 systems, not able external authority to borrow in 7 systems • No restrictions for borrowing in 7 systems • Some restrictions for borrowing in 16 systems HEIs ability to own • HEIs are able to own their • Latvian HEIs own their Consistent with / ahead of their buildings buildings in 22 systems, buildings European trend not able to own in 6 systems • Latvian HEIs can sell • No restrictions in selling their buildings (restrictions assets in 8 systems apply in the case of State • Some restrictions in selling property) assets in 14 systems HEIs ability to set • HEIs are not able to set • Latvian HEis are free to set Ahead of European trend the salaries of their staff salaries freely in 28 systems, the salaries of their staff salaries can be set freely (above the minimum wage) in 5 systems HEIs ability to set the level of • In most European systems, • Latvian HEIs are able to set Ahead of European trend tuition fees HEIs ability to set the level of their fees at all levels tuition fees is restricted by the external authority, especially in the case of domestic/ EU students Overview on financial • The overall level of financial • HEIs have a high level of Ahead of European trend autonomy autonomy across Europe financial autonomy, Latvia has increased significantly was ranked 4th position over the last 15–20 years in EUA’s “University Autonomy Scorecard” 256 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Table 11 Student funding – European trends and Latvia Student funding European trend Current situation in Latvia Position of Latvia Tuition fees / fees • A large diversity of fee • Latvia applies a dual track No clear European trend systems, no clear European tuition fee system trend • 49% of all students • Majority of students pay (full-time and part-time) fees in 28 systems, minority pay fees (37% of full-time of students pay fees and 97% of part-time in 13 systems (2009/10) students) • During the past years, some (Source: MoES, 2013) systems have abolished fees, • Compared to many other whereas some systems have European systems, relatively introduced fees or raised high fees are charged the level of fees in Latvian HEIs Student support • A large diversity of student • Latvian higher education No clear European trend support systems, no clear system offers mainly European trend merit-based support • Need-based grants are most in the form of state funded frequently used in European study places, and relies more higher education systems, on government-subsidized, but still 20 out of 39 European mortgage-style loans systems still apply also offered by commercial banks, merit-based schemes rather than grants • Publically-supported student loan systems exist in 2/3 of European countries Table 12 Overview – European trends and position of Latvia European trend Position of Latvia Models of public funding Inconsistent with European trend Resource diversification Mixed Financial autonomy Ahead of European trend Student support No clear European trend REPORT 3: Higher Education Financing in Latvia: Final Report | 257 4.3 The proposed model Importantly, a new funding model could help to overcome the political blockades caused by the public versus private good debate and the current underfunding of higher education in Latvia. As higher education is a mixed good with public and private benefits, it needs mixed funding. It is clear, however, that the current level of funding, both public and private, for higher education in Latvia is not sufficient. This is illustrated by the signifi- cant gap between overall spending on higher education in Latvia vis-a ` -vis other 68 EU countries. Consequently, the government considers increasing its higher education expenditure. Private sector investments in higher education are also relatively low — except for the tuition contributions from part-time and full fee- paying students on non-state-funded study places. It is not clear how fast the current situation could be changed (see the subsequent section that addres- ses different funding level scenarios), but it is evident that proposals for a new funding system must acknowledge that the current system is substantially under- funded. The capacity to improve the system and to realize the potential benefits of a new model are directly related to funding levels. Increased government expenditure would not only serve as an example to stimulate increased private (business) funding but could also include incentives to help private partners to invest in higher education and research. The task would then be to increase pub- lic funding in connection with the implementation of new funding components and private funding through further diversification with an emphasis on sources such as small and medium enterprises and industry, research funds, etc. In the proposed model, the overall income stemming from tuition fees would not be expected to rise in the medium term; however, tuition fees would be ‘generalized’ as an important element of a more egalitarian system with a sufficient funding basis. Taking this approach, however, would be a political decision which is indepen- dent of the main emphasis on a changing nature of the allocation of public fun- ding. The team would advise the government and sector leaders to include political economy considerations in its further exchange on the model and its possible implementation. Considerations of higher education funding levels in Latvia should not be mixed with the funding levels of the education system as a whole; i.e., a potential funding increase related to lower levels of education would most likely not resolve the quality and performance issues which the tertiary sector faces and which were discussed in earlier reports. Funding increases should not be realized without changing the system. It is difficult to argue for a larger investment in a suboptimal structure; on the contrary, the potential for additional funds is greater if it is clear how these funds will add 68 “In 2010 (most recent data), public expenditure on higher education represented only 0.8 percent of GDP in Latvia, versus an average of 1.26 percent in the EU27 countries and 1.23–1.27 percent in Estonia and Lithuania respectively” (see first report and this final report, Box 1). 258 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding value to the system and advance policy objectives. Greater transparency in the way higher education is funded and is related to improvements of the quality of education and research will add to the willingness of various stakeholders to invest, so that the envisaged added value of higher education and research will not only be realized but also demonstrated. An important feature of the recommended funding model for Latvia is “balance.” Balance must be achieved in many areas to present a foundation for successful reform, including: •A balance between stability and incentives; •A balance between input- and output-orientation; •A balance between ex ante funding of innovations and ex post rewards of perfor- mance; •A balance between the promotion of national objectives and institutional profiles; •A balance between teaching and research as criteria of funding (plus an align- ment of both in the funding model); •A balance between basic across-the-board funding of research and focused, prioritized funding of (excellent) research; •A balance between public and private sources of funding; •A balance between need-based and merit-based student funding; •A balance between accountability and autonomy. As became clear in the first report within this World Bank Advisory Service, such a balanced approach does not exist at the moment but could result from the features of a new model which are discussed in this section. Some of the recommendations are closely related, while others do not depend on each other. The following paragraphs give a number of recommendations. In some cases, recommendations only make sense if they are combined. In other cases, it would be worthwhile to realize one recommendation even if another can- not be realized at the same time. Important aspects include the following: •The implementation of a new state funding model could be done without refor- ming the student funding system at the same time (and the other way round). •Within the state funding model a combination of all pillars is desirable, but new pillars could be implemented one after the other. •A general tuition fee model (and even the existing tuition fee model) definitely has to be linked to the proposed reforms in need-based student support and student loans. However, it can be organized separately from a new state funding model (including its various pillars). State funding would benefit from a three-pillar model. In such a model, stable funding is combined with a performance-oriented component, using a formula with performance indicators, and an innovation-oriented component allocated via performance agreements.69 The performance part rewards and sanctions past 69A performance agreement is a contractual arrangement between the MoES and a single university, defining clear and measurable goals of the university for a multi-year period within the framework of national objectives. In return to the obligation to attain the goals, the state provides funding. The agreement results from a structured negotiation process. For details, see Appendix 1. REPORT 3: Higher Education Financing in Latvia: Final Report | 259 performance (ex post funding), whereas the innovation-oriented component pro- vides financial support for the attainment of future objectives determined by a negotiation between individual universities and the ministry (taking into account state goals and institutional profiles). This also means that performance measure- ment and performance agreements are no longer bound to the study place model but constitute separate elements of the state funding model. Since teaching and research are partially separate but also interrelated activities, the funding mecha- nisms should reflect this with both separate and aligned approaches. There is, ho- wever, one multi-component public funding model which aligns teaching and re- search-oriented allocation criteria. The basic features of the three-pillar model for Latvia are described below; Figu- re 2 provides an overview. Figure 2 Three-pillar model of state funding The first pillar would mainly consist of the study place model. The study place model with its input-oriented planning approach remains an important element of the state funding system, since it continues to create a stable funding base. In the new model, however, the study place allocation is not intended to be the only component to cover the cost of the educational experience. Unlike the current model, the institutions would be intentionally expected to cover the cost of teaching and research from all sources of the three-pillar model, whereas the study place model is limited to the function of basic funding. With possible additional funding allocated through pillars 2 and 3, the level of overall public funding allocated through the model could come closer or correspond to the budget that would result from the currently envisaged “optimal price” of a study place. The ministry would still conduct periodic studies on the costs of delivering discipline-specific educational programs, but the intention is to understand the relationship among different areas of study as opposed to the precise cost. The relative cost relationship across different programs is then employed in the funding model as three to five different funding or tariff bands (e.g., social sciences and humanities, science and engineering, medical programs, arts — which would mean a simplification of the current cost coefficients). If it is deter- mined that programs in science and engineering, for example, cost approximately 1.5 times more than those in the social sciences, then the amount allocated 260 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding for a study place in science and engineering would be 1.5 times the amount for a study place in the social sciences. Keeping in place the study place model is predominantly meant to guarantee some base-level funding. Unlike in the current funding model, it is not the objec- tive of the new study place model to provide an exact representation of the pre- cise costs per student or some proportion of that (currently HEIs only receive around 80 percent of the “defined minimum costs of a study place”). The “new” study place model, however, is meant to provide stability within the overall sys- tem. The relationship to the politically decided number of study places indicates the socially desired balance between disciplines. This is the function of the first pillar. This tranche of funding should be topped up with the other funding ele- ments, such as the performance-based second pillar and profile- and target-orien- ted third pillar funding. Thus, keeping the first pillar funding as a basic financial foundation of the system allows for space in the public budget to also allocate performance- and profile-oriented funding at levels that will create real incentives within the system. Performance-oriented allocation implies that a university with high performance will have more state funds available per student than a low performing one. The study place model must become less complex and more transparent, flexi- ble, and strategic. The process to determine the number of study places should be optimized. A revised study place system would work in the following way: •The ministry plans the overall numbers for study places in different disciplines. The immediate emphasis is on the upcoming year, but a multi-year outlook is provided as guidance to institutions, students, and stakeholders. This plan is informed by stakeholder consultations (especially regarding employer needs), labor market forecasts, and data on the development of real demand. The overall target numbers for fields for the Latvian system would be published. This results in an incremental change from the plan’s starting point, which would be the current number of study places per field and institution. From this start- ing point certain overall increases and decreases per field are planned, and a certain percentage of the study places could be used for innovative programs suggested by the institutions. Reallocations of study places between universities are possible (putting an end to the practice of generating funds for new study places only from existing ones in the same institution). •The ministry makes an offer to each university, as part of the annual communi- cations around the performance agreement, mentioning the planned increases and decreases per field and inviting the institution to offer places in new pro- grams. The university develops a proposal, and the ministry makes a final deci- sion based on the available budget and quality of the proposal. For added transparency, the Higher Education Council or an independent panel (MoES re- presentatives, institutional representatives, employers with international experts) may serve in an advisory role when new study places are allocated. Through these proposals, the universities compete with their best arguments for additio- nal places or to establish new innovative programs. The private universities could take part in this competition for the pool of innovation-related study places, so they have an equal chance to gain study places with curriculum innovations (however, private institutions will not become a full part of the public system, as they are not subject to the overall study place planning and funding but could only get public funding for innovative programs). Each university could REPORT 3: Higher Education Financing in Latvia: Final Report | 261 decide whether to offer full-time or part-time study places; a part-time place would be apportioned based on a student’s progress towards degree (e.g., rewarded with 50 percent, assuming that half-time studies are a feasible model). There is no in-period micromanagement of study places by the ministry. •The amount allocated per study place in each discipline or field (e.g., social science, medicine, etc.) is based on the costing relationship among the study fields (i.e., cost coefficients described earlier) and on the available budget for study places (basic funding). Their relationship is analyzed and, if necessary, updated based on studies of the current cost structures in HEIs. •As long as the real number of students per field and per year does not fall below or exceed a certain amount of the study places planned (e.g., +/- 5 percent), there is no reaction by the state. If these thresholds are reached, this will have an impact on the ministry’s offer for the next period (by a negotiated adaptation of study places to demand). •Periodically, the ministry will conduct a review of the study places in a specific field (e.g., every three to five years and if needed). So the incremental approach per field would be questioned from time to time and the review could lead to broader reallocations. The review could use criteria such as proposed cost of programs, qualifications of academic staff, employment rates upon graduation, research activities, employer partnerships, student satisfaction, etc. •The current system with different line ministries involved will either be integrated or be replaced with a mechanism in which the funding incentives and levels are more closely related for institutions that have similar programs.70 The aim here is to create a more level playing field for teaching and research throughout the system. This requires a process of inter-ministerial collaboration and adjust- ments that needs to be addressed by an inter-ministerial committee. The first pillar also includes a per-capita funding component per number of professors or academic staff to enhance the available basic funding and to align teaching and research funding. The current basic research funding for those research institutes operating inside universities should be discontinued, as it restricts the university’s potential to use research funds flexibly and, accord- ing to the recent research evaluation, does not guarantee that research funds are allocated to real centers of excellence. Therefore, some basic research funding should be integrated into the first pillar by a per-capita premium per professor or academic staff (which of course does not mean that the money goes directly to the individual, as it should be used within the university strategically to promote publications or other agreed research outputs, allow networking in research, etc.).71 Institutions themselves can decide how these funds are allocated among their different faculties, departments and individual academics, but preferably stimulating focus and mass that enhance research quality and (international) com- petitiveness. As in most higher education institutions worldwide, some academics have more teaching intensity, while others have stronger research intensity, often 70 However, the proposed model may not be directly applicable to some specialized institutions ope- rating under a distinct institutional model and/or jurisdiction, like those subordinate to the Ministry of Defence. 71 “Academic staff” can include both teaching staff (such as associate professors, docents, lecturers, assistants) as well as research staff (such as leading scientists, scientists, research assistants). 262 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding in relation to personal capacities and preferences. Similar to the study place model, there could be a weight according to the relative cost situation in different disciplinary clusters. The per-capita funding that respects current organizational size guarantees that institutions can gradually grow into a new situation in which performance- and innovation-based funding become more important. As such, research funding follows a multi-faceted approach: a) widely available basic funds to strengthen the autonomous use of funds by the universities (as described above), b) through the use of agreed upon research-related performance metrics (as referenced with the second pillar, and c) targeted investments in a few innova- tive centers of excellence (related to the third pillar). The second, performance-oriented pillar contains a small number of indica- tors derived from national strategies and of general relevance for all HEIs. The budget reserved for formula allocations and the percentage that each indica- tor takes from that sum are defined. The indicators are measured for all institu- tions and the available budget per indicator is distributed according to the share of an individual institution related to the overall system performance. For instance, if a university “produces” 10 percent of the graduates, it will receive 10 percent of the budget allocated by numbers of graduates. The ministry also has the option of implementing some weighting on graduates in certain disciplines (e.g., science and engineering graduates could be weighted higher than social science gra- duates). In addition, the allocation can be smoothed by assessing three-year ave- rages rather than annual fluctuations. Latvia’s policy objectives72 suggest a variety of output-driven performance me- trics that could be part of a formula. The following indicators with across-the- board relevance for universities are worth considering (but subsequently require a political decision concerning priorities): •Number of graduates. This is complementary to study places and addresses output. It creates incentives to minimize drop-outs (or to induce inevitable drop- outs early) and to limit time to degree. •Number of PhDs, to stimulate PhD “production”. •Number of incoming and outgoing mobile students (and possibly academic staff), to address the internationalization objective. •A bibliometric indicator, to stimulate dissemination of research findings. An amount allocated via such a research-related indicator may help ensure that basic research funding rewards output and performance and does not favor large institutions over smaller ones in terms of the number of academic staff. Again, the model will create a balanced approach between performance orientation and stability. •Third-party funding of research and teaching, to reward and stimulate the gene- ration of external income. A higher weight for funds from European sources could be considered, given the assumption that there is a high preference for that kind of financial revenues. 72 For details, see second report under this Advisory Service. REPORT 3: Higher Education Financing in Latvia: Final Report | 263 The weights between the different indicators would be decided by the mini- stry according to policy preferences. A balanced representation of teaching and research indicators is being recommended. The Higher Education Council could be involved in this decision. If the plans for comprehensive alumni surveys/tracer studies are realized, an employment-oriented indicator could be added. Part of the allocation under the second pillar is reserved for institutional per- formance indicators which are university-specific and related to the profile and strategic development of the institution. One of the political objectives is to strengthen and even diversify the profiles of HEIs in Latvia. For instance, there are some universities with a research focus, and there are others with more focus on knowledge transfer or regional engagement. Similarly, internationalization does not play the same role for every institution. This leads to a situation where specific performance criteria do not have equal importance for every institution. Innova- tion, smart specialization and knowledge transfer are highly relevant areas where objectives should be set and rewarded, but not in the same way for every universi- ty. If the ministry wants to promote internships in industry, this is also not of equal importance for every field and HEI. To take all this into account, the formula should contain an element with institutional performance indicators (specific for each university and agreed upon in the performance agreement). The individual indicators represent major national strategic objectives. An institution could have up to three specific indicators with university-specific weights. This part of the formula needs a different algorithm: as the indicators per institution differ, a for- mula is needed that makes the outcomes comparable and the distribution cal- culable. This could be done by analyzing the progress made in reaching the goals (measured by percentage of change in individual indicators and comparing the percentages between the universities). The negotiation of institution-specific indicators and weighting allow the sector to diversify in meaningful ways that are consistent with the ministry’s policy objectives. If an institution wanted to pursue an alternative direction, then the institutional autonomy would still allow that to happen albeit without public funding. The third, innovation-oriented pillar provides funding for activities that contri- bute to targets set in a university performance agreement. The targets would take into account national priorities and operationalize university profiles and strategies. The contract between the ministry and each university would be renewed every three years. This performance agreement (which is different from what now exists in Latvia as a contractual arrangement) refers to national goals and the university strategy and defines a limited set of priorities for the university in the coming three years. Whereas the performance-oriented (pillar 2) compo- nent of the performance agreement is focused on selecting a few relevant indica- tors that are specific to the institution’s mission, the third pillar is assessing more broadly how the institution will contribute strategically to Latvia’s higher education vision, mission, and objectives. The second pillar provides ex post rewards, while the innovation fund (pillar 3) supports future plans by ex ante support. The prio- rities must naturally address teaching and research, but they should also extend to all kinds of third mission and knowledge transfer activities. The performance agreement also defines innovative measures to be taken to achieve these goals if there is a need for pre-funding of actions. This funding comes from a pool of money and is defined per action. The indicators to measure success regarding the priority areas are defined in the performance agreement (and used in the second pillar as mentioned above). The performance agreements follow a stan- dard format discussed between ministry and universities and subsequently 264 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding defined by the ministry (Annex 1.B shows a proposal for this format). National go- als could also be integrated by mentioning some state priorities for actions to be taken. Activities aimed at the longer-term development of university profiles are represented in the third pillar of state funding rather than in the allocation of EU Structural Funds.73 The current use of Structural Funds does not always reflect a secure, sustainable, long-term perspective on funding. It is, therefore, important to get long-term goals and developments into the “normal” funding model or annual operating budget. Through integration in the performance agree- ments, there is a periodic assessment of success every three years, but a longer- term perspective for renewal is possible. Looking at current strategic goals, there is a strong emphasis on the establishment of joint doctoral schools with non-uni- versity research institutions, post doc programs and the international accreditation of study programs. These developments should become elements of the perfor- mance agreements. The ministry announces that these aspects will be among the prioritized activities, and the universities then take this into account when drafting performance agreements. The third pillar also contains the funding of research centers of excellence, taking into account research evaluation outcomes and a national strategy for research priorities. As noted above, the funding of research institutes is replaced by widespread per-capita-funding. This research component would be part of the university’s lump sum allocation and combined with focused funding for a limited number of specific research units (i.e., centers of excellence) with the capability to generate internationally competitive research outcomes. The latter is included in the performance agreement. The ministry in consultation with key stakeholders defines the criteria for the centers of excellence, the universities prepare propo- sals, and a peer review supports the selection process (the results of the recent research evaluation could be used in the first round). It is possible (or even pro- moted) to have cooperative centers of several universities or universities and research institutes. Due to some similarities between the proposed centers of excellence and the former “State Research Program,” it is advisable that the expe- riences of the “State Research Program” be taken into account in the context of the development process of centers of excellence. Together with EU Structural Funds, business and industry funds could support the development of pillar 3. EU Structural Funds continue to help modernize the higher education and re- search sector and also focus on short-term change processes and the diver- sification of funding sources. A parallel debate is underway in Latvia on the appropriate use of EU Structural Funds in the higher education and research sec- tor. It is recommended that the incentives set through Structural Funds align with those in the new funding model for higher education and research, such as to sti- mulate quality, improve performance and attract young research talent. As Struc- tural Funds generally have a temporary and short-term character, these funds can particularly support important immediate changes, such as the following: •Incentivize the generation of other income streams. Resource diversification beyond tuition fees and the EU Structural Funds is a key to the sustainable financial development of the higher education and research sector in Latvia. 73 Though EU Structural Funds could potentially be used to kick off this pillar. REPORT 3: Higher Education Financing in Latvia: Final Report | 265 •The implementation of “knowledge vouchers” (according to the Dutch system) that allow small and medium enterprises to finance cooperation with universities, thus stimulating viable university-industry relations. •The set-up of a sector consolidation incentive program to create economies of scale and scope through voluntary strategic cooperation or mergers between programs and/or institutions, and to create quality and critical mass by linking with societal partners (similar to the process in Denmark which was not centrally planned). There is no need to change the rules of financial autonomy, but more trans- parency would be beneficial. Financial autonomy in Latvia is ahead of broad European developments. There is no need to change the existing regulations. However, financial autonomy and transparency of funding are two sides of the same coin. Universities have to publish an annual financial statement of revenues and expenditures and, for example, avoid declaring major parts of the revenues as “other.” Transparency is the basis for trust in the capabilities to deal with finan- cial autonomy. Another element of transparency is annual reports addressing pro- gress against the performance agreements. Decision-makers at some institutions should be encouraged to make more use of the financial autonomy they have. To reap the benefits of financial discre- tion, university managers have to be highly qualified in planning, budgeting, and financial management. To ensure this, several actions are recommended: training and capacity-building activities in financial management need to be provided to clarify and illustrate the potential of financial steering and planning, and examples of good practices (or of problems) need to be shared so that all institutions become aware of their opportunities and limitations, for example, by benchmar- king financial strategies. The profound experiences with financial management in the higher education institutions are a good basis to implement peer learning activities. Tuition fees are likely to remain part of the Latvian higher education funding system. However, the current approach to tuition fees needs to be reconside- red. Instead of the dual track system there could be a more general cost- sharing model. On the one hand, to avoid the current socially selective effects, the number of (partially) state-subsidized study places would be enlarged (to an amount around the current total number of students). On the other hand, as a general principle, all students have to pay a share of the cost of their study place. The state could set the shares per discipline together with the numbers of study places. The shares could be differentiated according to cost or labor market perspective of the field, or according to policy preferences (for example, lower tuition fees for STEM in order to make such fields more attractive to students). This general principle secures the income stream from tuition fees — which cur- rently is shrinking due to demographic developments — and reduces social selec- tion (in combination with the following recommendations on student funding). Ho- wever, if the revenue from tuition fees were to remain stable compared to the cur- rent situation, then more students would pay lower tuition fees. Means-tested or need-based financial support can widen access and address equity concerns. The current practice of having scholarships fund only the very best students would be discontinued, and merit-based considerations become a second-order criterion. Students from disadvantaged social backgrounds/low 266 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding income families would be eligible for a scholarship to refinance the private cost share. The continuation of such a scholarship would be decided every year based on the performance of the student (e.g., completion of modules/ECTS or grant turns into a loan). The transition from a mainly merit-based to a mainly need- based system may require a stronger centrally organized system that can better assess financial need (e.g., based on parental income). Need-based elements require a mechanism to determine the financial need of students, which could be established in cooperation with the Ministry of Welfare and potentially tax authori- ties. One could imagine replacing the current decentralized institutional scholar- ship administration by moving this function to the Study Administration Centre that currently also administers the student loans. This may also enhance unifor- mity in award criteria and as such stimulate transparency, equity and access. Part-time students would also be eligible for need-based scholarships. The scho- larships would primarily cover tuition fees, but students in need could also apply for them to cover living expenses if the pool of funds allows for it. In the current system, around 14 percent of the “budget place students” receive scholarships, which is low by international comparison. Most countries offer between 15 percent and 35 percent of the students’ need-based support in the forms of grants and scholarships. Depending on the investments foreseen by the Latvian government, such proportions may also be reachable in Latvia, particularly because of the alre- ady envisaged establishment of need-based scholarships that come in addition to the current scholarship budgets. Student loans would be made available to everyone by introducing a general state guarantee. The private guarantor for student loans is replaced by a state guarantee. So everyone (all full- or part-time students) is able to get a student loan. The state could introduce a merit-based element: for example, if a student belongs to a predefined percent of best graduates, a certain part of the debt is remitted. Student loans can be partially related to tuition costs as well as to the cost of living. Both scholarships and loans would ideally be administered by a central authority to guarantee students in different programs and institutions have equal opportunities and transparency in the system to underpin their study choices. The funding model should not be regarded as an isolated instrument; it needs to be part of a more comprehensive steering model. It is important to set favorable framework conditions by complementary reforms in other areas. The effects of a funding model result from its interaction with other ele- ments of higher education planning and steering. Several favorable conditions would maximize the effectiveness of the new model; a few of these conditions are listed below74: •A strategy on national research priorities and focused strategic plans of the higher education institutions. •A valid and trusted national database to monitor the system with key indicators. Synergies with existing datasets should be realized. For instance, it could be interesting to take the development of the U-Multirank75 dataset into account, 74 A critical condition is further a viable system to determine student financial needs, an aspect which would need to be discussed further with the Ministry of Welfare. 75 http://www.umultirank.org/ REPORT 3: Higher Education Financing in Latvia: Final Report | 267 where indicators for the individual objectives in performance agreements could be found. This will require common data definitions and may suggest the use a standardized accounting and financial system that links with the performance data. •Information to inform student study choices. The comprehensive data system provided by U-Multirank, including data from student surveys, could help stu- dents to compare different study options. An additional initiative providing impor- tant data is the establishment of an alumni database and information about labor market perspectives collected from alumni. •Verification and potential enhancement of the administrative capacities of MoES and other relevant public agencies is required for successful implementation of the model. •A robust quality assurance process, both for teaching and research, the out- comes of which should regularly inform the system, institutions, students, parents, employers, business and other stakeholders in an objective way. •A reasonable level of inter-ministerial coordination to create transparency and consistency in funding incentives, methods, and levels when multiple ministries are involved in higher education funding. •In principle, similar funding mechanisms ought to apply for teaching and re- search throughout colleges, universities, and research institutes to foster one singular (yet diverse) higher education and research system. Some of the sector diversity can be captured with proposed institutional indicators and by utilizing performance agreements (for example, see Appendix 1) for acknowledging specialized institutional missions. The drivers behind each sector’s allocation can reflect the primary activity area or emphasis for those institutions. As such, universities would have a stronger alignment of funding mechanisms for teaching and research, whereas colleges would be predominantly funded for teaching, and research institutes for research only. 4.4 How does the new model address the main challenges of the current model? Table 13 briefly explains how various aspects of the new model address key challenges of Latvia’s current model and how these aspects meet the aforemen- tioned criteria for a good higher education and research funding model. 268 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Table 13 Overview of how new model addresses current challenges and meets criteria Assessment Criteria Supporting New Model and Alignment Challenges of Current Model New Model with Strategic Policy Objectives Latvian higher education is underfunded, Modernization of the funding model and Strategic orientation: Promotes national especially in terms of public funding. strengthening its links with policy objectives strategies. to justify the possible increase of public funds. Legitimization: Provides unambiguous and balanced funding structures. Practical feasibility: Ensures coherence with funding levels. Supports strategic objective: “Enhance funding base of higher education”. “One-dimensional” and static state funding Implementation of the three-pillar funding Strategic orientation: Promotes national model lacking two important pillars of funding, model consisting of pillar 1 (basic funding), strategies and institutional profiles. namely performance-oriented funding pillar 2 (performance-oriented funding), Incentive orientation: Provides performance and innovation-/profile-oriented funding. and pillar 3 (innovation-oriented funding). rewards, competitive environment, clear and non-fragmented incentives and aims to balance ex post and ex ante performance orientation. Legitimization: Provides unambiguous and balanced funding structures. Supports strategic objectives: “Increase quality of education and link with the national economy” and “Increase the quality and international competitiveness of research”. Funding model lacks alignment of basic funding Implementation of pillar 1 (basic funding) Sustainability: Supports stability and takes into of teaching and research. which aligns the teaching and research funding account cost differences. streams. Incentive orientation: Provides clear and non-fragmented incentives. Practical feasibility: Uses available data and ensures administrative efficiency. Supports strategic objective: “Increase sector efficiency”. Study place model and state research Implementation of pillar 2 Incentive orientation: Creates performance funding model are not creating meaningful (performance-oriented funding) to create rewards. and appropriate performance incentives performance incentives for HEIs. Strategic orientation: Promotes institutional for HEIs. profiles. Legitimization: Makes funding transparent and supports the perception of fairness. Practical feasibility: Respects methodological standards. Supports the strategic objective: “Increasing quality of education and link with the national economy”. REPORT 3: Higher Education Financing in Latvia: Final Report | 269 Assessment Criteria Supporting New Model and Alignment Challenges of Current Model New Model with Strategic Policy Objectives Model offers HEIs only limited incentives Implementation of pillar 3 (innovation-oriented Strategic orientation: Promotes national for promoting national higher education funding) to provide state funding for strategies and institutional profiles. strategies and strengthening institutional activities that contribute to the targets set Incentive orientation: Provides competitive profiles. in a performance agreement. The targets take environment, balances ex post and ex ante Research funding streams (including into account national priorities and HEI profiles performance orientation. EU Structural Funds) do not contain clear and strategies (for long-term development). Sustainability: Allows long-term planning, and transparent incentives for diversification of EU Structural Funds are to be included promotes risk spreading. institutional profiles, consolidation activities in pillar 3, although they have mainly between HEIs, collaboration between research a short-term character supporting Practical feasibility: Ensures administrative organizations or with external partners. important immediate changes in the sector efficiency. High reliance on EU Structural Funds harms (e.g., diversification of funding sources, Supports strategic objective: “Enhance the long-term financial viability of HEIs. consolidation activities, and collaboration technology, innovation, creativity, Income from private sources like industry with external partners). and entrepreneurship” and “Increase the quality or community services appears to be relatively Pillar 3 contains state funding of research and international competitiveness of research”. underdeveloped. centers of excellence taking into account evaluation outcomes and a national strategy of research priorities. Great level of financial autonomy is not always Offering training and capacity-building Autonomy and flexibility: Allocates lump sums, utilized by HEIs and it is not accompanied activities in financial management in order to guarantees academic freedom, implements with a high level of accountability towards stimulate peer learning in financial steering adequate level of regulation, guarantees external stakeholders (both public and private). and planning. autonomy of resource allocation and promotes Maintaining the high level of financial accessibility of diverse income sources. autonomy, but increasing accountability Supports multiple strategic objectives. and transparency through performance-measurement, annual performance agreement reports, and published financial statements. Dual track system with merit-based selection of Continued reliance on tuition fees Incentive orientation: Creates performance students for state-funded study places is likely in a cost-sharing approach, but introduces rewards. to subsidize full-time students from better-off more need-based scholarships to widen access Sustainability: Guarantees continuity in funding socioeconomic backgrounds. and address equity concerns. Merit-based mechanisms, promotes risk spreading. Current student support system is highly elements are included in the scholarship and loan scheme, but only as a second-order Legitimization: Supports the perception of decentralized, and its strong merit-based fairness. emphasis is likely to have negative impact on allocation criterion. access and participation especially in the case Introduction of state guarantee for student Autonomy and flexibility: Promotes accessibility of students from disadvantaged backgrounds, loans enabling all students (full-time of diverse income sources. and to some extent, part-time students. and part-time) to benefit from loans. Practical feasibility: Ensures administrative Loan debt of the highest performing graduates efficiency. could be partially remitted with public funds. Supports strategic objective: “Stimulation of Scholarships and loan schemes should be participation in and access to higher administered by a central authority. education”. 270 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding 4.5 Impact on different stakeholders Implementing the proposed new funding model will affect many stakeholder groups. A major factor for the quality of the new model lies in its benefits for the stakeholders. This section gives answers to the question “How will we benefit from the funding reforms?” from the perspective of the different stakeholder groups. The listed implications for different groups are related to different ele- ments of the reform: Whereas many effects of the state funding model are likely to affect the institutions, the students are more likely to be affected by student fun- ding (and to a smaller extent by the other reform components). As a major focus lies on the reform of state funding, the number of impacts on private higher edu- cation institutions is smaller. The impacts listed below will be generated by imple- menting all the proposed changes in the funding system; a partial realization of the recommendations would lead to a partial realization of the listed impacts. Public higher education institutions •The overall financial situation improves •Basic budgetary stability is guaranteed •State micromanagement of study places is reduced •Good performance is rewarded •Autonomy is guaranteed (also regarding mechanisms of internal resource allocation) •The development of specific profiles and of own goals are promoted •Performance is measured according to the indicators the institutions choose to represent their own objectives, which leads to more impact on the definition of success criteria •Financial sources become more diverse •Professional financial management is promoted by peer learning •The funding source of tuition fees is retained •Reduced social selectivity leads to a larger potential to attract good students Private higher education institutions •Public funding for program innovations is provided •Tuition fees are a general feature of the whole higher education system •Modified student loan program would also benefit private institutions. Non-university research institutions •Research excellence in cooperation with universities is promoted •Cooperative activities such as joint doctoral schools are promoted University staff •The potential to do research increases •Good performance is rewarded •Autonomy is guaranteed •Engagement in the strategic development of universities is promoted REPORT 3: Higher Education Financing in Latvia: Final Report | 271 Students •Attractive and innovative study programs are established •Improvement of funding situation and competitive environment for higher educa- tion institutions offer the potential to increase teaching quality •Study place planning process better adjusts study places to labor market needs •Public funding, scholarships and loans become available for part-time students •As more students pay tuition fees, the volume per student is reduced, and tuition fees are charged in a fairer way •Social selection in access is reduced •Students with a lack of own financial means get better access to scholarships and loans •Students do not have to bring a guarantor to get a loan Government •Political blockades to reform could be overcome •The study place system allows governmental planning •Sector consolidation is promoted •Horizontal diversity of higher education institutions is promoted to cover all kinds of societal needs •The attainment of national goals is measured and incentivized, and a compe- titive environment is created •Political preferences directly lead to budget allocations through performance- oriented funding •Financial statements increase transparency Employers/industry •Employability is a relevant issue for study place allocation and performance measurement •Employers are actively involved in state planning processes •Cooperation with higher education and research institutions is promoted (e.g., through possible industry participation in innovation funds) •Knowledge vouchers offer chances for small and medium enterprises to coope- rate with universities General public •Political blockades could be overcome •An efficient and effective higher education system is promoted •Horizontal diversity of higher education institutions is promoted to cover all kinds of societal needs •The attainment of national goals is measured and incentivized •Financial statements increase transparency •Accessibility of higher education is promoted 272 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding 5 From Conceptualization to Implementation 5.1 Alternative scenarios This section presents three scenarios in which a new funding model for Lat- vian higher education could operate. The three scenarios are related to the extent to which the whole system can attract more funding from the state and, to a lesser extent, from private entities. The three scenarios are as follows: A. Develop the knowledge society model B. Limited expansion model C. Scarcity model For each scenario, a brief table is provided to clarify the components of the fun- ding model described in the previous section that should be prioritized for imple- mentation, and those aspects that would likely need to be postponed until suffi- cient funding was available to introduce them. In other words, the “Extra Com- ponents” should not be forgotten but would likely be postponed until enough funding was available to support their implementation. Additionally, the final row in each table briefly describes other options or alternatives to consider. Based on the findings of its overall engagement in Latvia, the team would stron- gly support the first scenario aimed at developing a knowledge society in Lat- via. However, this scenario would need significant political commitment not only from the government but from all main stakeholders involved. A: Develop the knowledge society model The basic assumption in this scenario is that the government will have the opportunity and willingness to substantially increase its investment in higher education, as originally envisaged in its higher education legislation. This would provide the system with a resource level that can support the various incentive mechanisms of the three-pillar model. REPORT 3: Higher Education Financing in Latvia: Final Report | 273 Extra Components Introduced When Components Included Future Funding Levels Allow • Revised study place model (pillar 1) • Not applicable • Basic research funding per faculty member (pillar 1) • Universal indicator-based funding formula (pillar 2) • University-specific indicator funding (pillar 2) • Performance agreements negotiated by MoES and each institution that cover both teaching and learning initiatives and centers of excellence (pillar 3) • Provision of financial management training and support for institutional management to maximize autonomy • Transitional use of Structural Funds (e.g., for consolidation) • Some reliance on tuition fees in a cost-sharing approach • Need-based student aid (with merit component), as tuition fee waiver plus support of living costs • Enhanced student loan program with state as guarantor Alternatives for Consideration • Establish tuition levels to complement the amount of public funding for the sector (e.g., higher public funding could allow lower tuition fees) • ‘Innovation Fund’ for internationally competitive research in collaboration between higher education and/or research institutes, industry and international research organizations as a specific, separate part of the third pillar For Latvia to transition to this or any reformed funding model, the MoES will have to prioritize and sequence initiatives based on significant sector consultation to ensure institutions and individuals are adequately prepared for the change. B: Limited expansion model In this second scenario, the amount of public funding enables limited invest- ment increases in higher education. The main difference is that the system is not likely to have enough funding to fully support the components in pillar 2 or pillar 3. In order to make better progress towards Latvia’s higher education policy objectives, this scenario emphasizes the performance agreements for each institution as a way to agree on the expected contributions of each institution in ex- change for the funding received from the state. It also integrates some needs-based elements of student funding. 274 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Extra Components Introduced When Components Included Future Funding Levels Allow • Revised study place model (pillar 1) • Basic research funding per faculty member • Performance agreements negotiated by MoES (pillar 1) and each institution • Universal indicator-based funding formula • Continued financial autonomy and support (pillar 2) for institutions • University-specific indicator funding (pillar 2) • Transitional use of structural funds • Funding to cover both teaching and learning (e.g., for consolidation) initiatives and research centers of excellence • Increased reliance on tuition fees (pillar 3) • Need-based student aid but only as fee waiver • Provision of financial management training and support for institutional management to maximize autonomy • Modified student loan program • Limited teaching innovation fund provides start-up capital for promising new programs with enough resources to seed about x initiatives per year under the assumption that y programs will be sunset (this would occur on a larger scale under pillar 3 in scenario A) Alternatives for Consideration • With the higher private cost-share (i.e., tuition), a portion of those additional funds (e.g., 20 percent) must be immediately reallocated as need-based aid to support students unable to afford the tuition fee • Relative funding model based on the numbers of new entrants, students, graduates, PhDs according to 3 different funding tariffs (social sciences, science and engineering, medical programs) and relative success in attracting third-party funding • Repurpose EU Funds into an ‘Innovation Fund’ C: Scarcity model The third and final scenario is designed around a situation in which the govern- ment cannot afford to make additional investments in higher education. This sce- nario is completely geared towards an attempt to optimize the current funding levels and mechanisms towards the strategic objectives that receive highest priority in Lat- vian higher education. To be clear, the current system is significantly underfunded in comparison to not only other European countries but, importantly, also vis-a ` -vis the govern- ment objectives and legally set targets per study place. Acknowledging that Latvia has many competing demands for its limited resources, flat funding will continue to negatively impact the quality of higher education and thus jeopardize the country’s competitiveness. Without any incremental funds, there is minimal capacity to reform the financing model. Allocating fewer or even the same amount of resources differently may create substantial volatility within the system. Although the components may look similar to Scenarios A and B, the anticipated outcomes, as they relate to quality and the pursuit of policy objec- tives, are expected to be significantly lower in this final scenario. REPORT 3: Higher Education Financing in Latvia: Final Report | 275 Extra Components Introduced Components Included When Future Funding Levels Allow • Revised study place model (pillar 1) • Basic research funding per faculty member • Performance agreements negotiated by MoES (pillar 1) and each institution (no additional funding • Universal indicator-based funding formula for financial incentives unless funds are pulled (pillar 2) from the study place model – not to be • University-specific indicator funding (pillar 2) recommended under this scenario) • Funding to cover both teaching and learning • Provision of financial management training initiatives and research centers of excellence and support for institutional management (pillar 3) to maximize autonomy • Need-based financial aid • Transitional use of Structural Funds • Modified student loan program (based on need (e.g., for consolidation, innovation funds, etc.) and state as guarantor) • Further increased reliance on tuition fees • Repurpose merit-based scholarship to need-based student aid Alternatives for Consideration • Maintain the study place model but add a fixed allocation per student to include a premium per graduate with different funding tariffs (social sciences, science and engineering, medical programs) • Align allocation mechanism of Structural Funds with those of the Science Council and operate a few programs for competitive research funding, one based on academic criteria, one on collaboration with private partners and one on international collaboration for EU funding • Limited scholarships based on need and merit 5.2 Implementation roadmap As indicated in the previous parts of this report as well as in the previous reports within this project, many stakeholders within and outside Latvian higher edu- cation indicate that the system requires change in its financing structures and instruments in order to make Latvian higher education and research more competitive internationally and better serve the needs of society. As argued before, the system needs stronger incentives towards quality, perfor- mance, efficiency as well as maintaining a healthy level of stability. Latvia’s current funding model, at least for allocating funding, is specified in Cabinet Regulation No. 994, “Procedures for the Financing of Institutions of Higher Education and Colleges from the Funds of the State Budget.” Table 14 below reiterates many of the weaknesses of Latvia’s current funding and highlights potential modifications necessary should Latvia move forward with any of the recommended changes. 276 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Table 14 Cabinet Regulation Cabinet Regulation No. 994 No. 994 Procedures for the Financing of Institutions of Higher Education and Colleges from the Funds of the State Budget • Single pillar model of state funding does not offer the advantages of a multi-pillar approach • Little to no real performance orientation in state funding, except that internal allocation for the development of scientific work should be based on competition results (but what results?) Limited incentives for promoting national higher education strategies and in strengthening institutional profiles • Little to no integration of funding for teaching and research • Little to no funding for innovative initiatives • No clear approach to the role of state money for private HEIs • No funding options for research-related developments such as post-docs, knowledge transfer activities, etc. • Performance contracts between MoES and HEIs are under-utilized compared to their potential • Suggestion that it is known what the actual basic costs of a study place are, regardless of the institution, teaching/research intensity while in the end institutions have a high degree of spending autonomy • Calculating many support facilities per study place with subjective expert opinions and no relationship to potential economies of scale • No reasoning why an optimal and minimum value of the coefficient of study costs per field of study is necessary and why the differences between these vary from discipline to discipline • Complicated formula when in practice prices are substantially reduced • Is it necessary to include transportation and vehicles, hostels etc. in the social security part? • Promised funding levels not yet effectuated • Cost basis for subsidized study places outdated • Opaqueness and subjectivity in allocation of subsidized study places, relation to Doctoral Degree holding academic staff, planning problems through yearly interventions • State-subsidized study places are likely to benefit students from better socio-economic backgrounds • No state-subsidized study places for part-time students The previous section has described three scenarios for the further development of the financing structures and instruments in Latvian higher education. However, implementing new structures and instruments that support the system to de- velop in the desired direction has to be done in a careful way, particularly because the good elements of the current system — such as a diversified institu- tional landscape, institutional autonomy and a dedicated academic workforce — should not be lost but strengthened. Nevertheless, the system requires a strong incentive impulse in the short run in order to immediately initiate a system-wide move towards the national strategic objectives of a high quality and competitive higher education and research system. There are a few conditions favorable to initiate the required change. First of all, the government’s intention to increase its investments and expenditure on higher education — if materialized — will provide the opportunity to deve- lop new funding instruments that can be developed with “new money” flowing into the system. It is generally known that changes in the funding regime are much more likely to be acceptable and successful if “new money” is involved — unless all stakeholders are convinced that something in the current funding regime has to change. The second favorable condition for funding reform is the forecasted decline in student numbers. Besides the negative effects this may have on the develop- ment of a knowledge economy and reduced tuition revenues from self-funded students, this may also lead to relatively higher future expenditure per student compared to current levels. The money “freed up” due to a decline in student REPORT 3: Higher Education Financing in Latvia: Final Report | 277 numbers, can be used to intensify and improve the quality of teaching and re- search. It is assumed that the government’s intention to intensify higher education investments will at least secure current absolute funding levels. When implementing a new funding regime, governments can use various strategies. First, one could use a “shock therapy” including radical changes and accepting substantial changes for various stakeholders and institutions in the sys- tem. This is not a preferred option. The second strategy would be of a more gra- dual — but certain — shift towards the new situation. This can be accomplished through a transition towards a new funding regime but with a cautious implemen- tation path, e.g., with maximum changes in institutional budgets of plus or minus 5 percent per year in the first five years. The third strategy would be a gradual re- duction of the relative size of the basic funding method (in Latvia the study place model). This would be accompanied by the introduction of new funding instru- ments that will gradually grow in importance over the years up to the levels that are politically desired. This development is depicted in Figure 3 below, one for each for the three proposed scenarios. In the scenarios, it is also mentioned that Latvia could consider a revised (and fairer) tuition fee model. This is not a precondition for the other elements of the funding reform, but — besides equity considerations — it may substan- tially help to diversify institutional resources and to maintain the income stream that institutions may lose in the coming years through the declining numbers of (part-time) full fee-paying students as a result of the demographic change. This, however, remains a political decision. Tuition revenues have also been integrated in the graphs below, but are not critical to the changing state funding regime. The three scenarios demonstrate the main elements of the new public funding structure to allocate teaching and research funds to higher education institutions: pillar 1 funds (a modified study-place model), pillar 2 funds (performance based funding) and pillar 3 funds (innovation funds for teaching and research). Figure 3 shows the implementation paths of the different scenarios. All scenarios set the 2014 higher education budget at one hundred and then demonstrate an increasing or decreasing pattern for the various pillars. In 2014, the total budget is assumed to consist of pillar 1 funding and some tuition revenues (currently from full-fee paying students). As indicated, above figures are only pro- vided for the illustration of a possible phasing-in of the three-pillar model under different scenarios. The tuition fee revenue stream is kept constant and remains included in the three figures. In Scenario A, which assumes a growing investment path, all sources of reve- nues are considered to grow. Pillar 1 funding grows at an annual increase of 2.5 percent; in addition, a performance-based budget (pillar 2) and an innovation fund (pillar 3) have been installed, both growing by 15 percent annually. Most of this growth comes from government investments, but the innovation fund is assumed to be shared with business and industry. Generic tuition fees are an optional instrument to generate additional revenues. Scenario B demonstrates a less intensive growth pattern. Regardless of the decline in student numbers, pillar 1 funding is kept stable and is topped up with a performance-based budget (pillar 2) and an innovation fund (pillar 3). Both are 278 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding assumed to increase by 5 percent76 annually, including some additional funds from business and industry. Scenario C shows a situation where public spending is kept relatively stable, while the decrease in student numbers (assumed — for illustration purposes — to be 2.5 percent annually) will lead to a similar decline in pillar 1 funding. However, in this illustrative example the budget that becomes available will be reinvested in setting up pillar 2 and pillar 3 funding which will make the system more competitive and oriented towards Latvia’s strategic objectives. Figure 3 Possible development of funding pillars under scenarios A, B, and C77 76 These figures are only used to illustrate the possible phasing-in of the model. In practice, this deve- lopment is likely to be less linear, as political decisions are made for a legislation period — or diffe- rent time span — impacting on the graph. 77 These scenarios are provided for illustration purposes only. The actual developments and alloca- tions will depend on political — and subsequent funding — decisions of the Government of Latvia. REPORT 3: Higher Education Financing in Latvia: Final Report | 279 Over time, all scenarios create some space to make the system as a whole more competitive and quality-oriented while maintaining a stable basis of pillar 1 funding; however, under scenario C this happens to a more limited extent and with a significant time lag. The implementation trajectory for student financing is different from the pub- lic funds for higher education institutions. The transition towards a more need- based than merit-based scholarship system can be accomplished in several ways. First, the current merit-based scholarship system can be topped up with need- based scholarships, as foreseen in the government plans. One can also increase the need-based criteria within the current scholarship programs and increase the budget by a level desired by the government. However, a stronger need-based orientation may require a more uniform and transparent need-testing (parental income test) which in most countries is most efficiently organized at the central level, e.g., based on tax information. This may require a shift in replacing insti- tutional infrastructures to distribute scholarships to a national (ministerial) unit to provide the scholarships. This may cause some additional investment in setting up such a unit, processes and procedures, but may lead to a nationally more transparent scholarship system that enhances access and equity through more uniformity and certainty to students about what they may be entitled to regardless where they study. With regard to student loans, the transition from a guarantor requirement and various debt remittance structures towards a more need-based system requires administrative changes as well as a potential redistribution of funds. If students from lower income backgrounds can receive loans — maybe topping up their scholarships if they receive these — than the same need-test that applies for scholarships can be applied for loans. The current subsidies through debt remit- tance for graduates with particular types of jobs and who have children can be used to guarantee repayments or debt remittance for graduates who cannot repay due to low income. Finally, the process towards the real reforms requires intense stakeholder consultation and monitoring. Similar to the current process of developing the ideas for a new funding arrangement for Latvian higher education, the imple- mentation of a new funding model and student financing should be achieved in close collaboration between the government, ministries, higher education institutions and various other stakeholders. As a start, one could ask the various stakeholders for their feedback, e.g., in the form of short statements about the elements that should definitely be in the new funding model. Later in the pro- cess, the new model should be tested against its “real world impact.” This could, inter alia, include a model simulation in the first year (though funding could, de facto, still follow the previous model) so that everyone has advance notice for how they fair in the new system. During subsequent phases, some funds could be set apart to initially “soften” the impact for some institutions more severely affected. These and other considerations will need to be discussed before imple- mentation. To monitor and evaluate the implementation, a committee of representative stakeholders should be convened and charged. Aside from certain ex officio members and MoES leadership, other committee members should be selected to represent the interests of key stakeholder groups (e.g., students, academic staff, institutional leaders, employers, government representatives, etc.), serve 280 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding staggered terms to ensure continuity, and vow to act in the interests of Latvia’s entire tertiary education sector. As a proposal, this document intends to provide important overall direction for Latvia’s higher education funding model, but considerable work remains to implement this program and then monitor its success. This Committee would provide guidance and feedback to identify, implement and evaluate actions that address the arguments and recommendations contained within the World Bank team’s reports. Sample activities for the committee include: i. Develop detailed implementation plans and operational activities, utilizing international experts and stakeholder feedback, that align with the approved funding model ii. Facilitate collaboration among stakeholders in Latvia higher education sector as they implement a revised funding model iii. Monitor progress and expected goal attainment utilizing performance indica- tors and metrics iv. Disseminate information and annual progress reports about the implementa- tion throughout the higher education sector and to external parties v. Identify training and resources required to implement the funding model vi. Adapt objectives/action steps of the funding model in light of future develop- ments or as needed Focusing on specific next steps for implementation, the MoES and the new Com- mittee could appoint a Task Force of experts to work with select MoES and insti- tutional leaders with technical expertise in the funding of higher education to pre- pare detailed implementation plans, including activities, phasing (if appropriate), timelines, resource requirements, roles and responsibilities, risks, and mitigation strategies. The Task Force could then submits its detailed implementation plans for the Committee’s feedback. The World Bank team is convinced that all stakeholders in Latvian higher education have a strong interest in the enhancement of the higher education sector in terms of quality, efficiency, strategic orientation, international com- petitiveness and equity. The positive spirit that was experienced in the process until now has to be used to materialize the steps that will really bring about the sector-wide improvements that Latvian higher education deserves. Bringing about financial reforms will not only change the mechanics of financial instru- ments, but will also stimulate a cultural change towards an identity that is related to quality, efficiency and strategic orientation. REPORT 3: Higher Education Financing in Latvia: Final Report | 281 Appendices Appendix 1 Sample Performance Agreement Appendix 1.A Guidelines for a performance agreement 1. Role of the guidelines: Performance agreements (also performance contracts or target agreements) are based on trust between the contract partners. Trust is endangered if the partners have different ideas about the function and the right way to deal with the contracts and if these differences emerge during the process. The consensual definition of the “rules of the game” should guarantee that everyone could rely on a common notion about performance contracts. The contract partners (MoES and higher education institutions) should regard the rules as binding guidelines for the steps taken and the beha- vior in the process. In each phase each partner could remind the other of the rules set. Both partners of a contract should be aware that it takes many steps to build trust in such a process, but one mistake is enough to destroy it again. It is extremely important that both sides see the objectives in the perfor- mance contract as an obligation; contracts must not be broken. 2. Objectives and role of the performance contracts in Latvia: The performan- ce contracts intend to bring “to life” — together with the formula in pillar 2 — the national objectives for the higher education sector through stimulating the universities to engage for these objectives. But at the same time they want to stimulate institutional strategic planning and the development of university profiles. This means the contracts play a coordinative role in national and insti- tutional strategies. All this is supported by connecting a financial “innovation pool” to the objectives (pillar 3 of state funding). The performance contracts will turn objectives into clear and controllable/measurable targets. They should promote the dialogue between ministry and universities on the level of objecti- ves and output/outcome, and they should legitimize the allocation of public resources through transparency of funding criteria. As innovative processes take time, performance contracts should also lead to a multi-year funding perspective. A period of three years seems to be adequate. The performance contracts should refer to the whole set of performances, teaching, research and third mission activities. 3. Strategy base: The idea of performance contracts is based on negotiations between the ministry and the individual university about objectives. The objec- 282 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding tives have to be derived from strategies of both sides. The national strategy should set the corridor in which the individual university has the discretion to move according to the institutional strategy. Even in a situation without per- fect national strategies the contract process could be started by defining a stra- tegic orientation at least for the contractual period. The „strategic fit” analysis reflects the state of national goals; this should be taken as a starting point for the contracts. If national goals are considered, the development of academic qualification paths (through joint doctoral schools with non-university research, post doc programs) or the quality development of study programs through international accreditation, to give just a few examples, could be mentioned in the contracts as state priorities. In the end, this does not mean that a univer- sity has to pick up all of the strategic items; universities should prioritize accor- ding to their profile and strategic focus and select areas where they could make the best contributions to national goals. 4. Steps in the contract process: The following steps of the contract process are derived from experience (and could be adapted to the specific situation in Latvia): •Ministry and universities agree on rules of the game •Ministry communicates broad national objectives, sets up all relevant proces- ses, and defines timelines for the following steps •Ministry sends an offer to universities to start negotiations on performance contracts, defining formal structure/format of the contract •Each university develops a contract draft in an internal participative process and sends it to ministry •Ministry analyzes all drafts from universities, compares the drafts, and deve- lops a negotiation position •Negotiation, separate with each university (meeting, discussion of positions) •Revision of contract drafts by universities •Agreement (if necessary additional meetings, exchange of papers) •Signing and publishing of the contract •Allocation of budget •Workshop with ministry and all universities on experiences with the instru- ment, conclusions for the next round •Controlling, report by each university •Annual meeting with each university, if necessary revisions of contract •Financial rewards/sanctions 5. Partnership and division of rights: Performance contracts intend to stimulate negotiations between autonomous partners. However, even in a situation of university autonomy an asymmetry remains in the partnership: The ministry provides the public budget and the university wants to have it. In order to gua- rantee a respectful partnership, there should be clearly divided rights to do specific things in the contract process (establishing a top-down/bottom-up process). Only the ministry has the right to do the following: •Take all measures to guarantee that the process stays in line with the legal requirements. •Define general national objectives as a framework to the development of indi- vidual strategies and profiles of autonomous universities. •Define the steps of the contract process and set schedules. •Collect the necessary data from the universities. REPORT 3: Higher Education Financing in Latvia: Final Report | 283 Only the university has the right to do the following: •Develop autonomously an institutional strategy within the general framework of national objectives. •Make the first draft of the performance contract. •Suggest measures that have to be taken to realize the intended objectives. •Make the first suggestion for university-specific indicators and aspired indica- tor values. 6. Procedural and funding rules and mechanisms: •In general the signing of contracts by universities is voluntary. If a university does not provide a draft for a contract, it will receive no funding from the third pillar. There is only one obligatory element: The definition of institution-speci- fic indicators that go into the funding formula. •The performance contracts should run for three years, with talks and possibi- lities for revision every year. •The funding from the innovation pool should be linked to the degree of aspi- ration and also to the level of attainment of objectives. This means that it has to provide pre-funding according to the level of future objectives and to speci- fic measures to be taken, and it has to define rewards and sanctions if targets are met or missed. •The contracts are signed by the rector and the minister. They are published on the internet. •The targets have to be measurable/controllable (by indicators, by yes/no). Yearly reports and discussions should be used to analyze the reasons behind the development of indicators. All targets should be performance-/output-/ outcome- oriented. •Targets could only be interpreted on the basis of a status quo analysis. This should be provided in the performance contract. •Activities and measures done by the universities could appear in the con- tracts (and in reports) if the universities want to present them. Their descrip- tion is helpful in order to generate trust that performance targets could really be achieved. But they are not linked to the assessment of success of the uni- versity; the success parameters are the performance indicators. The univer- sities should have the flexibility to change measures within the contract period if they find better ways to achieve the goals. Sometimes the borderline between activities and goals is not perfectly clear; for example, is quality assurance through international accreditation just an activity or already a goal? Here the system has to stay flexible. 7. Format: For the performance contracts there should be a standardized format that guarantees that certain standards are fulfilled: •The contracts should be focused on a few priorities and not all aspects of uni- versity activities. •The contracts should provide measurements and controlling approach which focus on performance/output/outcome; they should not see the fact that money is spent for the predefined purposes as a success factor. These standards lead to the grid for performance contracts shown below. This gives a general structure for contracts to be used by all universities. There should be some discretion in handling this structure for the university; the way of using the structure could adapt to the culture practiced in each of the universities, without losing the “storyline” and the level of specification defined in the format. 284 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Appendix 1.B Example structure performance agreement Performance contract between the University X and MoES (201X – 201Y) 1. Preamble The performance contract intends to bring the national objectives for the Latvian higher education sector “to life” through stimulating the universities to engage for these objectives. But at the same time they want to stimulate institutional strategic planning and the development of university profiles. This means the contracts play a coordinative role in national and institutional strategies. All this is supported by connecting a financial “innovation pool” to the objectives. The contract will turn objectives into clear and controllable/measurable targets. The performance con- tract should promote the dialogue between ministry and universities on the level of objectives and output/outcome, adding a performance element to traditional study place funding, and it should legitimize the allocation of public resources through transparency of funding criteria. University X and MoES share this understanding of performance contracts and will contribute to the realization of these objectives. 2. National objectives in Latvian higher education In the period 201X – 201Y, the major national objectives and priorities of the Latvian government for the performance contracts include the following: XXX These objectives define the boundaries and the general framework for institutional strategies of Latvian universities. MoES and University X agree to promote the autonomous development of strategies and a profile of University X. The bounda- ries defined by the national priorities will leave sufficient discretion for autono- mous target setting of the university. Not each university could contribute by the same degree to different goal areas. Depending on the strengths and strategies of University X, it should prioritize the national goals, mention the objectives it wants to focus on, and if necessary add specific goals relevant on the institutional level. 3. University profile In the period 201X – 201Y, the major objectives and priorities of University X according to the specific development of a profile include the following: XXX 4. Prioritization of objectives by University X Based on the institutional strategy, the national objectives (and if relevant for the profile additional compatible goals) are prioritized in the following way: REPORT 3: Higher Education Financing in Latvia: Final Report | 285 Degree of priority Explanation Objectives (A-B-C) (regarding the situation of the university) The A-priorities form the major part of this contract. 5. Operationalization of objectives and status quo analysis Each of the top priorities of University X has to be operationalized by breaking it down to sub-goals and their measurement: Priority 1: XXX Indicator/measurement Sub-goal (including exact operationalization how to measure, which data to use, etc.) Priority 2: XXX Indicator/measurement Sub-goal (including exact operationalization how to measure, which data to use, etc.) Etc. Out of the proposed indicators, the following indicators will go into the funding formula: XXX For all indicators/measurements used the status quo looks like the following: Available data within last Interpretation/explanation of Indicator/measurement 3 years current situation 286 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding 6. Performance obligations of University X The intention of University X is to achieve substantial developments, improve- ments and changes in the priority areas. The indicators provide the relevant infor- mation to assess these developments. University X and MoES agree to set the following targets for the contract period: Indicator/measurement Target Timeline for achieving target 7. Activities and measures to realize the objectives University X will undertake the following activities and measures to realize the objectives: •XXX The description of the activities intends to make the efforts of University X to achieve the goals plausible and understandable. The realization of certain activities does not indicate performance and will not be controlled as success criteria within this contract. University X will adapt activities (and report the adapta- tion) within the funding period if better ways to achieve the goals are discovered. 8. Financial support and incentives for achieving the targets MoES financially supports the activities to achieve the objectives from an “innova- tion fund” (not all objectives require additional funding): Activity Contribution to goal achievement Funding (Year 1, 2, 3) The achievement of the targets in paragraph 6 is measured and rewarded/sanctio- ned by the following mechanism: XXX (there are alternatives for incentives: reward/sanction according to achieved per- centage of targets, measurement after year 2 and cut of funding for year 3 if goals are not achieved, etc.) 9. Centers of Excellence Centers of excellence in research have been defined out of a peer review process. University X has the following centers with the following partners: XXX REPORT 3: Higher Education Financing in Latvia: Final Report | 287 For the contract period, the following research performance goals are directly linked to the center of excellence: Indicator/measurement Target Timeline for achieving target For the center of excellence, the university receives a basic funding of XXX. The full payment of this funding depends on goal achievement using the following mecha- nism: XXX. 10. Time horizon, controlling, dialogue The performance contract will run for the period 201X – 201Y and terminate on XXX. Every year in (MONTH) University X will write a short report on goal achieve- ments, using the indicators and measurements in this contract. Based on the re- port, every year in (MONTH) MoES and University X will meet for a discussion of the developments and further perspectives. If both parties agree, performance contracts could be adapted to unforeseen developments. Minister Rector 288 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Appendix 2 Stakeholder Reactions MoES would be invited to collect feedback on final report/all three outputs (e.g., in format of 1-pager) which could then be attached here. Appendix 3 Stakeholder Consultations Workshop: 2 December 2013 Institution, organization Representative(s) Position Ministry of Education Iveta Graudiòa Councilor to the Minister and Science Lîga Lejiòa Director of the Department of Political Initiatives and Development Inese Stûre Deputy Director of the Department of Higher Education, Science and Innovations Marina Mekša Senior Expert of the Department of Higher Education, Science and Innovations Anatolijs Melnis Senior Expert of the Department of Higher Education, Science and Innovations Inta Švirksta Expert of the Department of Structural Funds and International Financial Instruments Laura Treimane Officer of Higher Education/Local Consultant State Education Development Dita Traidâs Director Agency Stakeholder Roundtable: 3 December 2013 Institution, organization Representative(s) Position Higher Education Council Andris Teikmanis Associate Professor Latvia Students’ Union Ingûna Zariòa Member Asnâte Ka oka Member Latvia Confederation of Anita Lîce Expert Employers Latvia Chamber of Commerce Karîna Zariòa Director of Political Department and Industry REPORT 3: Higher Education Financing in Latvia: Final Report | 289 Institution, organization Representative(s) Position Ministry of Economics Vita Skuja Official/Department of Economic Development and Labour Market Forecasts Riga Stradins University Toms Baumanis Prorector of Development Jânis Bernâts Legal Advisor Business Higher Education Aldis Baumanis Lecturer Institution, “Turîba” Latvia Academy of Arts Andris Teikmanis Associate Professor Ventspils University College Ligita Blumberga – Riga Graduate School of Law Kitija Freija Director University of Latvia Gundars B çrzi òš Chancellor Riga Academy of Pedagogy Tija Zîriòa Associate professor, Manager of the Department and Education Management of the Organization of Studies Vidzeme University of Agnese Lapetrova Rector’s Assistant – Research Coordinator Applied Sciences Stockholm School of Rita Kaša Pro-Rector Economics in Riga B.Sc. Thesis Faculty Advisor Daugavpils University Participated. Liepaja University Riga Technical University Ventspils University of Applied Science Latvia University of Agriculture Stakeholder Interviews: 5–7 February 2014 Institution, organization Representative(s) Position Ministry of Culture Roventa Putni òa Officer at Budget Department Barba Krišj âne Head of Budget Department Latvia Academy of Arts Sandra Plota Director Gita Se òka Deputy Director of International Cooperation and Development Latvia Academy of Culture Zane Šiliòa Vice Rector Latvia Academy of Music Normunds Vîksne Vice Rector of Academic Affairs Ir çna Balt âbola Director of Study Programs Vita Daudiša Head of Finance Department 290 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Institution, organization Representative(s) Position Riga Academy of Pedagogy Dace Markus Rector and Education Management Daina Voita Vice Rector of Science Latvia Academy of Sports Svetlana Panova Chief Accountant Education Juris Grants Vice Rector of Science Janis îdens Rector Latvia Maritime Academy Andrejs Zvaigzne Vice Rector J ânis Br ûnavs Professor J ânis B çrziòš Rector BA Business School of Dr. Andris Sarnoviès Rector Business and Finance L îga Peiseniece Vice Rector for Academic Affairs Ministry of Defense Ilona Dreìe Under State Secretary of Administrative and Legal Affairs Inese Kaive Deputy Director of Section of Military Education and Science of Department of Human Resources National Academy of Defense Georgs Kerlins Vice Rector Daugavpils University Several participants Students, PhD students and PhD students from Institute of Systematic Biology Inese Kokina Vice Rector for Research Ir çna Kaminska Vice Rector for Studies Rectors’ Conference78 J ânis Bern âts Legal Expert Agnese Rusakova Expert Higher Education Council Several – representatives from the Higher Education Council Ministry of Interior Alda Strode Financial Specialist Larisa Tumanana Director of Department of Financial Management Agnese Laure Office at Department of Financial Management, Section of Financial Policy and Methodology Gints Rozenbils Officer at Department of Human Resources Management 78 Separate meeting with Andrejs Rauhvargers, Secretary General of Rectors Conference on 18 Fe- bruary 2014. REPORT 3: Higher Education Financing in Latvia: Final Report | 291 Institution, organization Representative(s) Position Ministry of Agriculture Ilze Slokenberga Official of Department of International Affairs and Strategic Analysis Ministry of Environmental Edgars Pauloviès Officer at Zemgale Planning Region Development Protection and Regional Department (counterpart of Latvia University of Development Agriculture) Latvia University of J ânis Sprukts Chancellor Agriculture Daira Treigute Head of Financing Department Dita Stefenhagena Rector’s Assistant State Police Nat âlija Doro ko Head of Financial Department Gunta Gregersone Head of HR Department, Section of Professional Competence Building State Police College M âris Rieksti òš Deputy Director State Border Guard Aivars Uzulnîks Deputy Director Velta Grecka Head of Finance Department Sandra Keiša Senior Specialist of Human Resources Department State Border Guarding Iveta Plasa Head of Department of Finance and Planning College Daiga Kupc âne State Border Guard Fire Safety and Civil Vilis Students Deputy Director Protection College Ministry of Health Inese Andersone Head of Department of Coordination of Financial Analysis and Investment Biruta Kleina Deputy Director of Health Care Department Ministry of Welfare Danute Jasjko Director of Department of Social Services Aldis D ûdinš Senior Expert of Department of Social Services Riga Stradins University Toms Baumanis Vice Rector of Development J ânis Bern âts Rector’s Legal Advisor Juris L âcis Vice Rector of Administration Red Cross Medical College Gastons Neimanis Director (of Riga Stradins University) In âra Urpena Deputy Director in Academic Affairs and Research Social Integration State Jana Pulkstene Deputy Director in Professional Rehabilitation Agency Inese Urpena Administrator of College Study Programs Business Higher Education Aldis Baumanis Associate Professor Institution “Turîba” 292 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Institution, organization Representative(s) Position Riga International School of Irina Se òòikova Rector Economics and Business Administration Ilm ârs Kreituss Vice Rector of Academic Affairs Tatjana Vasi ï jeva Vice Rector of Science Ieva Brence Head of Department of Economics and Finance Transport Irina Yatskiv Acting Rector and Communications Institute Igors Kabaškins President Igors Graurs Vice Rector of Academic Affairs Ministry of Economics Vita Skuja Officer of the Department of Economic Development and Labor Market Forecasts Ludis Neiders Head of Department of Structural Policy of National Economy, Economic Coordination Section Ruta Rimša Officer at Department of Structural Policy of National Economy, Economic Coordination Section Ministry of Environmental Veronika Jurèa Senior Expert of the Department of Regional Protection Development Planning Cross-Sectoral Coordination Elîna Petrovska Consultant Center Latvia Confederation of Inga Šîna National Coordinator in Professional Education Employers and Employment Latvia Chamber of Commerce Aldis Baumanis Associate Professor and Industry Latvia Students’ Union Ing ûna Zari òa Member Lîva Vikmane Member Vidzeme Planning Region Kristaps Rocâns Project Manager Ministry of Finance Ilonda Stepanova Director of Budget Department Lîga Šulca Head of Division Ministry of Education Inese St ûre Deputy Director of the Department of Higher and Science Education, Science and Innovation Gunta Ar âja Deputy State Secretary – Director of the Department of Structural Funds and International Financial Instruments Marina Mekša Senior Expert, Department of Higher Education, Science and Innovation Anatolijs Melnis Senior Expert, Department of Higher Education, Science and Innovation J ânis Paiders Officer, Department of Higher Education, Science and Innovation REPORT 3: Higher Education Financing in Latvia: Final Report | 293 Institution, organization Representative(s) Position Reinis Lasmanis Officer, Department of Higher Education, Science and Innovation Kristîne Keièa Officer, Department of Higher Education, Science and Innovation Karîna Aleksandra Officer, Department of Higher Education, Science and Innovation Evita Sarma – University of Latvia J ânis Stonis Administrative Director Gundars B çrzi òš Chancellor (supervises Department of Development and Planning, and Department of Finance and Accounting) Ventspils University College Gita R çvalde Associate Professor and Rector Vidzeme University College Gatis Krûmiòš Rector Iveta Putniòa – Liepaja University J ânis Rimš âns Rector Riga Technical University Ingars Eriòš Chancellor, Associate Professor Uldis Sukovskis Vice-Rector for Academic Affairs Tâlis Juhna Zin ât òu prorektors Uìis Bratuškins Dean of the Faculty of Architecture and Urban Planning Juris Smirnovs Dean of the Faculty of Building and Civil Engineering State Education Development Dita Traid âs Director Agency Elita Zondaka Head of Department of Structural Funds Management and Monitoring Ansis Pekšs Head of Science Project Monitoring Unit, Department of Structural Funds Management and Monitoring Ingus Zitmanis Head of European Social Fund Project Monitoring Unit, Department of Structural Fund Management and Monitoring Atvars Sauss Head of Infrastructure Project Monitoring Unit, ERDF Infrastructure Project Control Department Agnese Aivare Head of the ERDF Infrastructure Project Control Department 294 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Stakeholder Workshop: 12 March 2014 Institution Representative(s) Position Ministry of Education Ina Druviete Minister and Science Sanda Liepi òa State Secretary Lîga Leji òa Director of the Department of Political Initiatives and Development Agrita Kiopa Director, Department of Higher Education, Science and Innovations Jolanta Silka Officer, Department of Higher Education, Science and Innovations J ânis Paiders Officer, Department of Higher Education, Science and Innovations Anatolijs Melnis Senior Expert, Department of Higher Education, Science and Innovations Reinis Lasmanis Officer, Department of Higher Education, Science and Innovations State Agency of Education Dita Traid âs Director Development Elita Zondaka Head of the Department of Structural Funds Management and Monitoring Agnese Aivare Head of the Department ERDF Infrastructure Project Control Department Viktors Kravèenko Head of Eurydice Programme Laura Treimane Project Coordinator Ministry of Economics Vita Skuja Officer of the Department of Economic Development and Labor Market Forecasts Ruta Rimša Officer of the Department of Economic Development and Labor Market Forecasts Ministry of Interior Agnese Laure Officer at Department of Financial Management, Section of Financial Policy and Methodology Ministry of Defense Liene Liepi òa Head of the Department of Military Education and Science Ministry of Agriculture Ilze Slokenberga Official of Department of International Affairs and Strategic Analysis Ministry of Environmental Çriks Leitis Senior Expert Protection and Regional Development Ministry of Health Inese Andersone Head of the Department of Coordination of Financial Analysis and Investments Ministry of Culture Lolita R ûsi òa Senior Officer REPORT 3: Higher Education Financing in Latvia: Final Report | 295 Institution Representative(s) Position Ministry of Welfare Daina Fromholde Senior Expert, Labour Market Policy Cross-sectoral Coordination Elina Petrovska Consultant Centre Rector’s Conference Andrejs Rauhvargers Secretary General Janis Bernats Legal Advisor Agnese Rusakova Expert Higher Education Council Janis Vetra Chairman Latvia Union of Teachers Ilze Trapenciere Representative Latvia Students’ Union Inguna Zarina Member Latvia Confederation of Ina Sina National Coordinator in Professional Education Employers and Employment Latvia Chamber of Commerce Aigars Rostovskis Vice President and Industry University of Latvia Gundars Berzins Chancellor Riga Medicine College of Astra Bukulîte Director the University of Latvia Latvia University of J ânis Sprukts Chancellor Agriculture Riga Technical University Ingars Eriòš Chancellor Uìis M âlmanis Deputy Chancellor Daugavpils University Inese Kokina Vice Rector of Science Aivars Stankeviès Researcher Rezekne Higher Education Ir çna Beinarovièa - Chief Accountant Institution Litvinova Ventspils University College Marina Mekša Vice Rector Vidzeme University College Iveta Putni òa Administrative Vice Rector Latvia Academy of Arts Andris Teikmanis Associate Professor Latvia Academy of Culture Zane Šili òa Vice Rector Latvia Academy of Music Normunds Vîksne Vice Rector of Academic Affairs Latvia Maritime Academy J ânis Br ûnavs Professor Riga Stradins University Tatjana Ko íe Vice Rector of Academic Affairs Red Cross Medical College In âra Upmale Deputy Director in Academic Affairs (of Riga Stradins University) and Research Riga Academy of Pedagogy Daina Voita Vice Rector of Science and Education Management 296 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Institution Representative(s) Position Latvia Academy of Sports Andra Fern âte Vice Rector of Academic Affairs Education Transport and Igors Graurs Acting Rector Communications Institute Business Higher Education Aldis Baumanis Associate Professor Institution “Turîba” Stockholm School of Rita Kaša Vice Rector Economics in Riga Riga Institute of Aviation Sandija Z çverte-Riv a Programme Director State Police College Anita Fišere Head of Education Coordination State Border Guarding Aivars Uzulnîks Deputy Director College National Information Agency Laura Celmiòa Reporter (LETA) Stakeholder Workshop: 23 April 2014 Institution, organization Representative Position Parliamentary Committee of Dana Reizniece-Ozola Chair of the Committee Education, Science and Culture Ministry of Education Sanda Liepiòa State Secretary and Science Lîga Lejiòa Deputy State Secretary, Director of the Department of Political Initiatives and Development Gunta Ar âja Deputy State Secretary, Director of the Department of Structural Funds and International Funding Instruments Agrita Kiopa Deputy State Secretary, Director of the Department of Higher Education, Science and Innovations State Agency of Education Dita Traid âs Director Development Laura Treimane Project Coordinator Rector’s Council Andrejs Rauhvargers Secretary General J ânis Bern âts Legal Advisor Latvia University Gundars B çrziòš Chancellor Riga Technical University Leonîds Ribickis Rector Latvia Academy of Arts Andris Teikmanis Vice Rector, Associate Professor Latvia Academy of Culture Zane Šili òa Vice Rector R ûta Muktup âvela Chair of Centre for Scientific Research REPORT 3: Higher Education Financing in Latvia: Final Report | 297 Institution, organization Representative Position Vidzeme University of Sarmîte Rozent âle Vice Rector Applied Sciences Ventspils University of Gita R çvalde Rector Applied Sciences Marina Mekša Vice Rector of Finance and Administrative Issues Rezekne Higher Education Ir çna Beinarovièa - Finance and Planning Department Institution Litvinova Liepaja University J ânis Rimš âns Rector Dzintars Tomsons Vice Rector for Development Daugavpils University Inese Kokina Vice Rector for Research Latvia University of Agriculture Santa Rutkovska Finance Department Latvia Academy of Sports Andra Fern âte Vice Rector of Studies Education Riga Teacher Training Dace Markus Rector and Educational Management Academy Latvia Maritime Academy J ânis Bçrziòš Rector BA School of Business Andris Sarnoviès Rector and Finance Delegation of the European M ârti òš Lustiks Representative Commission in Latvia Agency of Commercial Activity Andris N âtri òš Director and Funding Research Stockholm School of Nellija Titova Director of Executive Education and Executive Economics in Riga MBA Department Cross-Sectoral Coordination Elîna Petrovska Counsellor at the Department of Development Centre and Assessment Monitoring 298 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding Stakeholder Workshop: 8 July 2014 Institution, organization Representative Position Ministry of Education Ina Druviete Minister and Science Agrita Kiopa Deputy State Secretary, Director of the Department of Higher Education, Science and Innovations Reinis Lasmanis Officer at the Department of Higher Education, Science and Innovations J ânis Paiders Officer at the Department of Higher Education, Science and Innovations Velta Basevièa Officer at the Department of Higher Education, Science and Innovations Elîna Zari òa Officer at the Department of Structural Funds and International Financial Instruments Delegation of the European Inna Šteinbuka Head of the Delegation Commission in Latvia M ârtiòš Zemîtis Economic Analyst State Agency of Education Dita Traid âs Director Development Laura Treimane Project Coordinator Higher Education Council Jânis Vçtra Chairman Rector’s Council J ânis Bern âts Legal Advisor Latvia University Gundars B çrziòš Chancellor Indra Dedze Project Manager at the Academic Department Riga Technical University Ingars Eriòš Chancellor Uldis Sukovskis Vice Rector for Academic Affairs Riga Stradins University Ingrîda Kalvi òa Director of the Department of Development and Projects Je ï ena Davidova Director of Finance Department Latvia Academy of Arts Aleksejs Naumovs Rector Andris Teikmanis Vice Rector, Associate Professor Latvia Academy of Culture Zane Šili òa Vice Rector Latvia Academy of Music Toms Ostrovskis Deputy Director of Study Programs Vita Daudiša Head of Finance Department Riga Teacher Training Maira Koc çna Head of the Development and International and Educational Management Relations Unit Academy Latvia National Academy of Skaidrîte Ivanišaka Methodologist Defence REPORT 3: Higher Education Financing in Latvia: Final Report | 299 Institution, organization Representative Position Daugavpils University Ir çna Kaminska Vice Rector for Studies Vidzeme University of Gatis Kr ûmiòš Rector Applied Sciences Ventspils University of Aivars Stankevics Rector’s Advisor Applied Sciences Latvia University of Kaspars Vârtukapteinis Vice Rector for Studies Agriculture Ilze Stokmane Head of the Project Department Latvia Academy of Sports Andra Fern âte Vice Rector for Studies Education Latvia Maritime Academy J ânis Br ûnavs Professor Riga International School of Ilm ârs Kreituss Vice Rector for Studies Economics and Business Administration Tatjana Vasi ï jeva Vice Rector for Science Ieva Brence Head of the Department of Economics and Finance BA School of Business Lîga Peiseniece Vice Rector for Studies and Finance Turîba University Aldis Baumanis Associate Professor, Chairman of the Board Employers’ Confederation of Anita Lîce Advisor on Education and Employment Affairs Latvia Vilnis Ranti òš Board Member Latvia Association of Colleges Juris Gerasimovs Chair of the Board Latvia Trade Union of Ilze Trapenciere Representative Education and Science Employees Rasma Mozere Representative Latvia Students’ Union Kirils Solovjovs President Ing ûna Zari òa Officer of Academic Affairs KOFI Andris N âtri òš Director Riga Stradins University Ingrida Kalvina Director of the Development of Project Department Latvia National Television (LTV) Lîva Rauhvargere Reporter National Information Agency Anastasija Teterenko Reporter (LETA) 300 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding References Barr, N. 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