Education Strategies

Higher Education Financing Strategy

Higher education has developed very quickly in Palestine over the last three decades and faces expansion problems induced by pressing demand from a quickly increasing number of high school graduates, efficiency and quality issues related to its very development, and financing problems resulting from the aftermath of the Gulf War in 1990, with the cut-off of Arab financial support to the Palestinian Liberation Organization (PLO), which negatively affected the financing of Palestinian colleges and universities. The outbreak of the second Intifada in September 2000 further aggravated the situation because of the imposition of tight closure by Israel. In a context of severe fiscal constraints, PNA’s contribution towards higher education has declined substantially, raising further concerns about the financial sustainability of the sub-sector.

In response to the challenges facing the Palestinian HE sub-sector, the Palestinian Ministry of Higher Education and Scientific Research has developed an overall higher education strategy and is now proposing a more specific financing strategy for the sector as a whole.  The main purpose of the strategy is to create a more effective, accessible, efficient, sustainable and accountable higher education system.

In developing the strategy, a fundamental reality was acknowledged, namely, that the level of public financial support for Palestinian higher education is not now nor likely in the foreseeable future to be sufficient to ensure financial sustainability of the system as it currently exists.  Therefore, major reforms are being proposed so that public funds are targeted in ways to improve what will remain a largely public not-for-profit higher education system.

To achieve this purpose, the financing strategy is based on the following principles:
· Targeting public funds to national and regional human resource development needs by focusing on programs identified as having high priority;
· Enhancing students’ ability to pay for higher education over sustaining institutions as a primary means of public support;
· Promoting quality through competitive funding of selected projects by PNA;
· Promoting HE institutions investments for expanding capacity and improving quality, especially in priority fields, through partial funding of selected projects on a competitive basis and identification of potential donors;
· Promoting research through competitive funding of selected projects by PNA;
· Combining the autonomy of public non-profit Palestinian universities with greater accountability by emphasizing incentives more than regulations; and
· Improving the management of the institutions and higher education sector.

Those principles mean that the global philosophy of the strategy is incentive-based rather than regulatory.

The Council of Higher Education (COHE) and the relevant ministries and stakeholders will be responsible for establishing high priority HRD needs. They will elaborate a long term human resources development strategy, and will identify short and medium term priority needs using information on graduate employment and recent trends on labor markets. Priorities will be adjusted at intervals on the basis of new evidence on labor markets.

In priority fields of study, fees will be subsidized through vouchers funded by PNA, granted to all students fulfilling specific income and achievement criteria, and cashed by the institution they select. Fees and vouchers will be set in relation to normative economic costs including recurrent and annualized capital costs. All students will be entitled to apply for a loan to help them finance their fee. Loan beneficiaries will be selected on the basis of achievement and income. A limited rate of interest covering administrative and insurance for repayment costs will be charged. Repayment will start only after graduates get a job and the repayment period will be such that no graduate will be charged more than 10 percent of his/her income. The student loan scheme, which might grant new loans in the order of $ 4 to 5 million in 2005/06 and $ 7 to 8 million in 2010/11, should be funded through grants and soft loans, and PNA will contribute to it to a limited extent.

PNA will promote quality improvement and capacity expansion, especially in priority fields, by partially funding competitive institution projects responding to specific criteria. PNA will also promote research in key areas related to national development by partially funding competitive research projects responding to specific criteria.

In order to strengthen institutional management, MOHER will develop a plan including the establishment of a HE management information system, incentives to attract qualified staff, as well as in-service training of existing staff.

A Budget Tradeoff Model has been designed to assess the effects of alternative options concerning admissions into HE, staff, premises and equipment needs, priority areas, fees and vouchers levels in relation to normative costs, and student loans characteristics, on:
· PNA total contribution and its distribution by main component; and
· HE institutions’ financial balance.

The Budget Tradeoff Model has been used in two complementary ways:

• Various scenarios have been built to test the sensitivity of PNA’s contribution and the financial balance of HE institutions to marginal changes in the main parameters; and

• A scenario showing what might be the main options and financing structure of HE in Palestine in 2005/06 and 2010/11 under alternative contributions from PNA has been identified and is proposed as an example.

The following conclusions may be drawn from the various scenarios:

• Under present admission criteria, total enrollments would be multiplied by 2.8 in 2010/11, in relation to the base year (2000/01). Even if more restrictive admission criteria were applied, total enrollments would still increase at a fast pace, because of the quickly increasing number of high school graduates induced by the impact of high demographic growth on enrollments in a quasi-generalized secondary education, and the number of families returning to Palestine. This raises the policy issue of whether MOHER should control admissions, and how in order to take into account tradeoffs between quantitative expansion and reform;

• There is presently a high variance in student teacher and non-teaching staff ratios across fields of study and institutions that reveals both over and under utilization of staff. Specific studies should be undertaken to understand staff recruitment and utilization practices, and identify measures to improve quality while raising efficiency. Assuming this is feasible, Student Teacher and Non-Teaching Staff Ratios have been projected at a lower level in fields of study where they were considered too high, and at a higher level when they were considered too low. The impact on expenditure per student is rather significant; it is even more marked in Al Quds Open University where enrollments expansion will lead to major economies of scale; 

·Enrollments in priority fields and the individual value of vouchers have a strong influence on the total value of vouchers and the corresponding MOHER contribution. MOHER should therefore be very careful in deciding about priority fields and setting vouchers levels;

· However, even when the total value of vouchers is high, they would not represent much more than 6 to 8 percent of students’ resources for funding fees. Vouchers are not therefore and will not be a very significant resource for the students considered as a whole. They will however be a significant source for those of them enrolling in priority fields and this incentive needs to be carefully assessed, lest MOHER face a strong increase of demand for these fields;

· Vouchers fund a share of institutions recurrent expenses varying between 4 and 8 percent for most institutions and in most scenarios. This share is related to the relative size of priority fields in each institution and the value of vouchers in relation to NCs. Vouchers are not therefore a significant mechanism for financing institutions recurrent expenses in general. They will however be a strong incentive for institutions to develop innovative programs attracting additional students;  

· HE institutions’ financial sustainability is mainly dependent on the level of fees in relation to normative costs. Unless the PNA and MOHER are able to increase substantially the resources they channel to institutions through vouchers, there is no way to escape a further increase of fees in the future, and this increase will depend on PNA’s total contribution. MOHER contribution through the Quality Improvement Fund is not meant to fund institutions’ recurrent expenses and limited resources will be channeled to institutions through it. Fee setting is therefore a crucial policy issue and should be controlled by MOHER. Normative costs will be a key tool for MOHER in this regard;

· This has significant implications for students and the way they fund fees. Increased fees inevitably mean increased personal students’ contribution, which they would fund partly through loans, since scholarships are bound to remain a marginal resource for the students considered globally. The number of loan beneficiaries has a strong impact on the total amount lent to students. Annual repayments represent a share of new loans that may vary between 25 and 35 percent, in 2010/11, depending on the average repayment period, for various reasons: a) the number of beneficiaries increases in relation to total enrollments, inducing a time lag between new loans and repayments; b) the longer the repayment period, the smaller the annual amount repaid by students in relation to their debt; and c) the potential impact of default. The institutions financing the loan scheme must therefore be prepared to inject annually substantial amounts of additional funds, which will be repaid only in the medium/long range. There are financing constraints, therefore, to the development of the student loan scheme. Furthermore, the management of a big student loan scheme is complex, and controlling the default rate may prove difficult. MOHER’s contribution in the form of vouchers is therefore a key policy parameter. The tradeoff between promoting students ability to pay through increased contribution to the loan scheme and reducing fee levels in priority fields through increased vouchers must be carefully assessed by MOHER. MOHER should also consider that increasing its contribution in the form of vouchers may allow him to better control the reform process;

· In 2010/11, loans would fund 5 to 6 percent of students’ expenses for fees, depending on the assumptions. Loans will not play a major role in funding students’ fees in general, but they will be a significant resource for those students benefiting from a loan;

· A ‘Standard Scenario’ has been designed with the following characteristics: a) global admission rates in relation to high school graduates similar to those observed in 2000/01; b) student staff ratios aiming at improving efficiency and raising quality; c) enrollments in priority fields amounting to 40 percent of total enrollments in Information Technology, Engineering, Medicine, Medical Professions and Science; d) fees set at 100 percent of NCs in non priority fields and 70 percent in priority fields; e) vouchers set at 30 percent of NCs in priority fields; f) average loan equal respectively to 50 and 30 percent of the fee in non priority and priority fields; g) share of loan beneficiaries in total enrollments increasing from 8 percent in 2001/02 to 12 percent in 2010/11; h) quality improvement fund set at 10 percent of MOHER total expected contribution; I) capital fund set at 10 percent of capital needs; and j) total MOHER contribution set at $ million 5.0 in 2001/02, and increasing by 5 percent annually. Under this standard scenario, vouchers would increase from $ million 3.6 in 2001/02 to 10.6 in 2010/11 and would be higher than the total MOHER contribution, starting from 2005/06. After accounting for all components of its contribution, MOHER financial deficit would total respectively $ million 4.7 and 9.0 in 2005/06 and 2010/11. In other words, total MOHER contribution should be around $ million 17.0, in 2010/11, to avoid any financial deficit under the assumptions used in this scenario. All HE institutions would have a recurrent surplus and a capital deficit, which should be funded through grants and loans. Vouchers and loans would fund respectively 7.3 and 6.0 percent of students’ fees in 2010/11. Additional funds to inject in the student loan scheme would amount to approximately $ million 53 in 2010/11, while repayments would cover 35 percent of new loans if the repayment period is of 5 years on average.  

Those conclusions suggest the following lines of action:

• Review present admission criteria and determine whether the admission policy should be reconsidered in the future;

• Carefully assess staff recruitment and utilization practices and select the most cost-effective options for improving efficiency while preserving quality;

• Develop an advanced HEMIS, based on modern management techniques. This HEMIS could also take into account the information needs suggested by the model;

• Set up a comprehensive training program for high and middle level staff in MOHER and institutions. This program could include training in the use of the model at the sub-sector and institutional level;

• Identify sources for funding institutions quality improvement and capital needs, the loan scheme and the various actions aiming at strengthening the capacity of MOHER and HE institutions;

• Consider increasing PNA’s contribution towards HE when the fiscal situation has improved.

 A series of administrative and regulatory measures are needed to support and implement the policies outlined above. They include:

• Improving licensing and accreditation: a) MOHER will establish an autonomous Commission for Accreditation and Licensing; b) MOHER, in coordination with COHE will develop an effective quality assurance mechanism and a continuous evaluation process; c) COHE will set up evaluation teams to review and evaluate all existing programs at HE institutions. Following the evaluation, MOHER should make the necessary modifications and adopt its accreditation system; d) Funding of HE institutions will be limited to accredited programs that meet national high priority needs.

· Strengthening the HE Management Structure. In consultation with HE institutions, MOHER will develop a plan to improve institutional management. The plan will include the development of HEMIS and staff training in areas such as database, planning, financial management, assessment, and self-evaluation. In coordination with HE institutions, MOHER will also develop a plan to provide incentives to attract qualified staff and expertise and recruit mid-level staff to the MOHER.

MOHER will take into account that the pace of implementing this strategy might need a transitional period to shift from the traditional financing mechanism. However, it is important that a series of concrete steps be taken in 2002 to demonstrate the viability of the strategy. Six steps are required to accomplish such a demonstration:

· Determining high priority HRD needs. COHE needs to conduct its first meeting for the purpose of discussing and determining high priority needs. This step will constitute the cornerstone in the process of implementing the strategy, since it will not only identify the areas of funding, but will also rank them in terms of priority;         

· Introduction of the proposed administrative measures. This includes setting-up an autonomous commission for accreditation and licensing, constitution of the HEMIS task force, and designing and introducing institutional management plans in coordination with HE institutions;

· Elaboration of HE Funds, design, and implementation plan. One of the most recent accomplishments of MOHER has been the launching of a Student Revolving Loan Fund (SRLF), and laying the design for HE Development Fund.  This has been initiated in 2001;

· Generating consensus among decision makers and stakeholders. MOHER is to organize a series of workshops for the purpose of buying in decision makers and stakeholders into the financing strategy;

· Training institutional staff in the use of the BTOM. The model may be easily adapted to the institution level and could be used as a tool for helping decision making at this level. This could also be a step towards building the HEMIS and developing institutional plans;

· Carrying out the studies suggested in this document.

 Since the reform of higher education implied by the strategy will have significant consequences on HE internal and external efficiency, quality, financial sustainability and equity, it is urgent to start implementing it as soon as possible. In the present context of financial strains, however, implementing the strategy requires external resources which should be earmarked to components vital for its success, such as:
· Strengthening the capacity of MOHER and HE institutions. This component might include the establishment of the HEMIS, training of MOHER and institutions high level staff, and elaborating the long term human resources development strategy which will guide in the identification of priority fields ($ 2.5 million);
· Supporting and expanding the student loan scheme ($ 5 million);
· Establishing the Quality improvement fund and contributing to its funding for targeted interventions ($ 3 million); and
· Supporting the development of a few selected high priority fields of study, as identified by COHE through the long term human resources development strategy ($ 5 million)