A presentation on university funding and financial incentives by prof. Hannu Vartiainen, one of the contributors to the Economic Policy Council 2017 report. Prof. Vartiainen gave his remarks at Finland's Economic Policy Council 2017 report launch seminar. Launch was held in Helsinki on 23rd January, 2018. See also: http://www.talouspolitiikanarviointineuvosto.fi/en/reports/report-2017/

1. Valtiotieteellinen tiedekunta
Allan Seuri
Economic Policy Council
Hannu Vartiainen
University of Helsinki
UNIVERSITY REFORM
AND FINANCIAL
INCENTIVES
23/01/20182018 Report of the Economic Policy Council 1

2. Valtiotieteellinen tiedekunta
UNIVERSITY REFORM
• Objective (Research and Technology Council 2006)
• to improve universities’ quality, impact and productivity
• to enhance structural development of the university system
”Korkeakoululaitoksen kehittämistoimet on suunnattava opetusministeriön
johdolla yksiköiden toiminnan vaikuttavuuden, laadun sisällön ja
tehokkuuden varmistamiseen ja edistämiseen suuntaamalla voimavaroja
suuremmiksi kokonaisuuksiksi, vahvistamalla verkottumista sekä
tehostamalla johtamista ja toiminnan arviointia.”
• Two elements in the reform: University Act 2010 and financial model
2013
• Bonus: budget cuts 2011 and 2015

3. Valtiotieteellinen tiedekunta
• The Universities Act 2010
• universities became independent legal personalities,
having autonomy with finances, employment policies, and
allocative decisions
• stronger community relations, e.g. external members of
the board
• Financing model 2013 (revised 2015, 2017)
• fixed core funding (ca.1,6 billion€), about 2/3 of total
funding
• output based indicators 72% of funding, zero sum game
• allocated to universities in a lump sum
• increasing significance on external competed funding
• 4-year agreements with MoE on tasks, profile, degree
objectives, and appropriations allocated on the basis of
these
• annual check-ups

4. Valtiotieteellinen tiedekunta
THIS REPORT
• Have the objectives of the reform achieved?
• incentive properties associated with the financing system
• systemic implications
• improvements
• Analysis, computational exercises, rectors’ interviews
• data from Vipunen (MoE), Federation of Finnish Learned
Societies, CSC, Ministry of Finance
• Key modeling assumption: financial incentives matter
• the reason to implement the university reform
• in most cases, the financing model has been relayed downwards
to the faculty level

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LESSON 1: INCENTIVES WORK
50,0
70,0
90,0
110,0
130,0
150,0
170,0
190,0
Student
mobility
ECYS in open
university/
non-degree
Students with
55 ECTS
Master’s
degrees,
foreing
nationals
International
research
funding
Jufo-points International
teaching and
research staff
Bachelor's
degrees
Master's
degrees
PhD degrees
Output by indicator
2010 2011 2012 2013 2014 2015 2016

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Average Jufo points 2011 and 2016 per
publication (2017-classification)
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0,0
0,2
0,4
0,6
0,8
1,0
1,2
1,4
1,6
1,8
2,0
2011 2016
Aalto yliopisto
Helsingin yliopisto
Itä-Suomen yliopisto
Jyväskylän yliopisto
Lapin yliopisto
Lappeenrannan teknillinen yliopisto
Oulun yliopisto
Svenska handelshögskolan
Taideyliopisto
Tampereen teknillinen yliopisto
Tampereen yliopisto
Turun yliopisto
Vaasan yliopisto
Åbo Akademi

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Number of publications in Jufo classes (2017-
classification)
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
Jufo0 Jufo1 Jufo2 Jufo3
2011 2012 2013 2014 2015 2016

8. Valtiotieteellinen tiedekunta
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
2010/2011 2011/2012 2012/2013 2013/2014 2014/2015 2015/2016 2016/2017
Number of 55 ECTS students, by field

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• How does the incentive system work?
• Indicators define output prices, indicate
what to produce
• Implicitly define value for each faculty,
department, programme, activity – and
individual
• Relays incentives to lower levels in
organization
• Encourages comparisons and
competition

10. Valtiotieteellinen tiedekunta
University financing system 2016
Weight
(%)
Unit
value (€)
Education 39
Master’s degrees 13 13 400
Bachelor’s degrees 6 6 600
ECTS in open university and non-degree programmes 2 100
Number of students with at least 55 ECTS per year 10 2 900
Student feedback 3 2 800
Employed degree holdsrs 2 11 200
Master’s degrees awarded to foreing nationals 1 100
Student mobility 2 74 800
Research 33
PhD Degrees 9 4 200
Scientific publications (Jufo 1-2-3 ranking) 13 9 300
International teaching and research staff 2 0,18
Completed research funding 9 0,42
Other education and science policy objectives 28
Strategic development 12
Field specific funding 9
National duties 7

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PROBLEMS
• Blind spots; nonmeasured outputs
• negative substitution effects
• diminishing significance of internal incentives
• zero-sum game does not enhance cooperation and
externalities
• Encourages manipulation
• degree standards
• 37% of Finnish publications at least Jufo 2, 10% in Jufo 3
(compared to 20% and 5% world average)
• Treats different fields differently

12. Valtiotieteellinen tiedekunta
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
4,0
4,5
5,0
Jufo1/HTV Jufo2/HTV Jufo3/HTV Yhteensä/HTV
Jufo points by faculty member by field (2012-15)

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LESSON 2: DOES NOT
ENHANCE STRUCTURAL
CHANGE
• Profilation and division of labor have not advanced much
between 2012-2016
• Fields with increased number of departments 27 (out of
65)
• Median size of department: 4,9 professors in 2012, 4,3
professors in 2016
• Median share of two largest departments: 63% in 2012,
65% in 2016

14. Valtiotieteellinen tiedekunta 23/01/2018Presentation Name / Firstname Lastname 14
0
20
40
60
80
100
120
140
160
180
Tietojenkäsittely ja tietoliikenne Kauppa-, hallinto- ja oikeustieteet
Profitability of financing model (revenue/costs) in business,
admin&law and computer sci&communications, 2016

15. Valtiotieteellinen tiedekunta
• Differences between fields potentially
dangerous: incentives consistently against
certain fields and in favor of others
• To evaluate the problem, we computed indeces
on relative ”profitabilities” of fields (MoE
steering fields)
• An index number of field x tells the difference
between the ratio of revenue generated by and
cost implied by an input in field x relative to
university average
• Hence we can also make bilateral comparisons
of revenues generated by same input units in
different fields

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Field Relative to personnel costs Relative to total costs
Revenue Revenue
+field
specific
Revenue
+field
specific
+external
funding
Revenue Revenue
+field
specific
Revenue
+field
specific
+external
funding
Humanities 107 96 80 135 120 101
Education 123 110 87 142 126 100
Business,
administration, law
140 125 100 143 128 103
Natural sciences 84 86 101 80 82 96
Medicin 94 108 118 85 98 107
Agriculture and
forestry
92 82 85 75 67 70
Services 125 111 96 119 106 92
Art and culture 53 133 94 56 143 101
Technology 99 98 114 91 90 105
Health and well-
being
110 98 101 96 86 88
Computer sci and
communication
93 82 94 96 85 97
Social sciences 107 96 89 119 106 99

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OBSERVATIONS
• ”Long term” profitability remarkably balanced
(accounting all costs)
• not large incentive to swap departments/faculties
• … except for agriculture and forestry
• assuming external and internal funding equally valuable
• High ”short term” differences (only accounting for
personnel costs)
• field specific financing a game changer for medicine
and, in particular, art and culture
• external funding important for medicine, technology,
natural sciences
• …which generate the best revenue for a unit of
personnel input
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18. Valtiotieteellinen tiedekunta
• ”Short termism” coupled with financial incentives
potentially dangerous as it leads to similar structural
development in all univerisities
• no division of labor
• unbalanced structure
• arbitrary selection criteria
• However, structural reforms in a tight grip of MoE
• degree quotas de facto define the structure
• on the margin, strategic financing component important
• Rectors not recognize as a problem
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19. Valtiotieteellinen tiedekunta
RECTORS’ INTERVIEWS
• Consider universties contribution to the society as the strategic
objective
• Find structural change and profilation important
• … but do not find finances as the motivation for that
• see MoE as the key player in structural reforms
• Do not recognize adverse pressures from the financing system
• by-and-large, find the system good; transparent, predictable, fair
• criticism: too many indicators, strategic component unpredictable, does not
take into account regional aspects
• see natural to relay the financing model – or its version – to the faculty level
• Have not recognized lesser cooperation between universties as a
consequence of more competitive university environment
• Find that external financing plays too big a role (costly, random)
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20. Valtiotieteellinen tiedekunta
CONCLUSIONS
• University reform – autonomuous status and new financing
model:
1. has increased productivity of the universities
2. has not enhanced structural reforms
• financial model not encourage division of labor
• if anything, provides incentives for biased development
• however, surprisingly balanced across fields
• Steering by the MoE necessary
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21. Valtiotieteellinen tiedekunta
3 (ALTERNATIVE)
REMEDIES
1. Field specific indicators
• enhances comparisons between units in the same field, not across
fields
• encourages division of labor and profilation
• administratively heavy
• who decides sizes of the fields?
2. Emphasize the steering role of the MoE
• e.g. by increasing the size of strategic component in the financing
model
• could be coupled with lesser number of indicators, to reduce admin
costs
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22. Valtiotieteellinen tiedekunta
3. Enhance the financial independence of the universties
• capitalization, donations
• (modest) tuition fees, coupled with flexible student loan system
• provides incentives on true profilation
• steering mechanism by the MoE, to guarantee overall balance
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23. Valtiotieteellinen tiedekunta
THANK YOU!
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