Guide 98/63

How the HEFCE promotes value for money

November

A key role for the Council is to secure value for money in the use of public funds. This document sets out the principles underlying our approach, and how this translates into practice in current and future activities.

Principles

We believe that we can best promote value for money by:

• enabling decisions to be made by those in the best position to do so
• allowing market forces, within limits set by national policy and funding constraints, to shape decisions
• providing information that improves institutions' decisions and helps markets to work effectively
• creating accountability regimes that encourage the effective use of resources while minimising the burden on institutions
• influencing institutions to adapt quickly and effectively to changing circumstances
• helping institutions to manage change.

Practice

These principles are put into practice through many strands of activity, broadly grouped under the following headings: funding methods, quality assessment, providing information and guidance, working in partnership, setting a framework for accountability, and helping institutions to manage change.

Funding methods

Grants for teaching

HEFCE funds for teaching are distributed by applying the principle that similar activities are funded at similar rates. Inefficient institutions are not subsidised by efficient ones. The allocation method protects diversity - in terms of meeting the differing needs of stakeholders - by recognising special characteristics that have higher costs. These include part-time and mature students, long courses, additional costs of operating in London, some differentials in staff pension costs, and the extra costs of specialist institutions. (The funding method is continually refined. In future, funding may be linked to widening access to higher education.)

Institutions' actual funding is allowed to deviate from the standard rate by plus or minus 5 per cent. This means that, within these limits, institutions can respond to market forces and adapt to change without losing grant. They are also free to determine the mix of students and courses, within an overall limit of student numbers which controls public expenditure on tuition fees and student support. Thus demand from students largely determines what is required in terms of specific provision.

Additional funded student numbers, created by overall expansion of numbers for the sector or redistribution of students from contracting areas, are used to support policy objectives, for example, to reward high quality in learning and teaching, to widen access, or to increase provision below degree level.

Grants for research

We allocate research funding only to institutions that reach a quality threshold: the higher the quality, the bigger the grant. Relatively small and time-limited sums are targeted to enable new research departments to become established. This helps maintain a competitive environment by enabling new entrants to challenge existing players, thereby improving quality and keeping down costs.

Another small proportion of funds is used to reward collaborative research with industry, commerce and charities. This generates additional research income for the institution and promotes efficient use of scarce and expensive resources.

Block grant

The total HEFCE funding for teaching and research is allocated to each institution as a block grant. They are free to distribute this grant internally at their own discretion, as long as they comply with the conditions set out in their Financial Memorandum with the Council, and the money is used to support teaching, research and related activities. This arrangement gives managers in higher education the freedom to make decisions in the best interests of the institution and its stakeholders, but safeguards the public investment.

Special funding

The vast majority of HEFCE funding (91 per cent in 1998-99) is distributed by formula, enabling decisions to be made by those in the best position to do so. However, some issues have such a high priority that additional incentives are required: examples include the funding to attract outstanding research students from overseas, and access funds to help students with financial difficulties.

Some special funding aims to level the playing field so that the market can operate effectively. An example is the initiative to help institutions with a particularly poor estate. Without support, these institutions would need to divert grant to maintaining the physical infrastructure, and would have less to spend on teaching and research than better endowed institutions.

Most initiatives are set up with a limited life. They finish when the particular need has been met, or when the activity becomes self-sustaining, as in the case of development funding for continuing vocational education. Some initiatives are likely to have a longer life than others, such as the Teaching and Learning Technology Programme (TLTP) and the Fund for the Development of Teaching and Learning (FDTL), but the nature or emphasis of the initiative could change to adapt to new circumstances.

Quality assessment

Obtaining value for money calls for judgement of quality as well as cost.

Research quality

The Research Assessment Exercise (RAE) conducted by the four UK funding bodies assesses research quality every four or five years. Successive exercises have been refined and improved, and the RAE is now the most rigorous process of its kind in the world. Outcomes are used as weights within our research funding method. The process also acts as a stimulus for quality enhancement.

Following consultation with the sector, we are implementing changes to the RAE to improve its value as an indicator of research quality.

Teaching quality

Assessments of teaching quality, now undertaken by the Quality Assurance Agency for Higher Education (QAA), are not used to calculate teaching grant. However, poor quality assessment ratings could lead to withdrawal of grant. Only departments that can show evidence of high quality teaching are eligible for some special funding programmes, such as FDTL. We are now working with the QAA to develop a new quality assurance framework for higher education.

In future we will be collaborating with the new Institute for Learning and Teaching, for example in establishing systems for teacher accreditation. We are also developing and consulting on funding methods to reward and enhance quality in teaching.

Published ratings

The ratings for both research and teaching quality are made publicly available. Good assessment ratings have a positive impact on student recruitment and improve the chances of attracting research contracts. The reverse is also true. Through market forces, information thus places pressure on the institution to meet and exceed quality standards. It also acts more directly, providing feedback to institutions which helps them improve.

Information and guidance

We also provide information and guidance directly to institutions.

Benchmarking and performance indicators

Benchmarking aims to give institutions the information to assess their own performance, so they can then target efforts to improve value for money. Financial indicators, procurement, estates management and high quality teaching and research are the areas of benchmarking that are most advanced within the Council. We plan to develop the use of international benchmarks and contacts to stimulate further improvement.

The impact of performance indicators is similar to that of benchmarking, but tends to be more focused on academic outcomes. However, there is less emphasis on process improvement, since that is already dealt with through the QAA.

Best practice guides

In producing best practice guides we enable universities and colleges to establish general principles that will help all institutions reach the standards of the best, both within the sector and outside. Topics covered include: effective financial management, costing and pricing, procurement, audit, the Private Finance Initiative, and the date change in the year 2000. Further guides will be issued on private finance and investment appraisal.

Value for money studies

These go a stage further than best practice guides by identifying and quantifying the service improvements and savings that can be achieved by implementing best practice. Examples include: treasury management, energy management, building maintenance, and managing information systems and IT.

Three further value for money studies (on stress and absenteeism, facilities management, and registry systems) are under way. We are also developing a strategy to contribute towards improving management of human resources, building on existing Council activity.

Case studies

We publish case studies to show how principles of best practice have been applied, and the lessons to be learned. Examples include projects funded under the Teaching and Learning Technology Programme, and the Fund for the Development of Teaching and Learning. We are about to issue case studies of the Pathfinder projects, which have been given support to explore use of the Private Finance Initiative and other public-private partnerships.

Working in partnership

Joint efforts

We work with institutions, their representative bodies, industry, professional bodies, Government, Research Councils and other funding councils. This reduces duplicated effort, increases resources that can be dedicated to resolve an issue, increases commitment to solutions that others need to implement, and improves the quality of work by bringing in different knowledge and perspectives.

Examples of collaborative projects include: most best practice guides, all value for money studies, the Joint Research Equipment Initiative, many research projects, improvements to procurement, and the HEFCE's strategic advisory committees. We are currently working with universities and colleges to set up an estates web site, to share information, comparative statistics, and examples of good practice.

We also fund some national and UK-wide facilities where these provide institutions with a better quality, lower cost service. Notable examples are the Joint Academic Network (JANET/SuperJANET) linking all higher education institutions electronically, special funding for national collections, and support for electronic libraries and electronic access to academic journals.

Acting as a broker

Institutions can sometimes achieve better value for money by collaborating or simply sharing ideas.

We encourage collaboration by targeting special funding and some research funding at institutions that collaborate, and making some special funding conditional upon collaboration. We encourage professionals within institutions facing similar issues to discuss them with each other, and work with existing networks of, for example, vice-chancellors and principals, auditors, finance directors and estates professionals. To bring together people from different institutions and different sectors, particularly within a region, we run seminars, conferences and workshops.

A framework for accountability

Contracts with institutions - the Financial Memorandum

The Financial Memorandum between the Council and institutions sets limits or thresholds on institutional behaviour which reduce the potential for financial risk. It also provides an auditing framework which, through an audit code of practice, sets minimum standards.

We monitor compliance with the Financial Memorandum and the accuracy of information supplied to institutions through financial returns, data audits, cross-checks against data from other sources (such as returns to the Higher Education Statistics Agency - HESA), and visits to institutions.

These processes provide feedback to institutions to help them improve the quality of their data. In the coming year we will be working with HESA on ways to ensure data are even more reliable.

HEFCE Audit Service

Our Audit Service monitors institutions' auditing, financial management and governance arrangements and recommends improvements. This work supports the other monitoring activity; it also provides assurance (both to us and to other stakeholders) that institutional systems can produce reliable information and that risk is properly managed.

We supported the Committee of University Chairmen (CUC) in producing its revised guide for governors in 1998. We also worked with the sector to develop guidance on effective financial management. These two guides should support governors and senior managers in devising governance and management arrangements that best suit their institution.

Helping institutions to manage change

We normally moderate any changes in the rates of funding for teaching and research, so that institutions can plan ahead and manage the change.

To encourage effective forward planning, we analyse institutions' strategies and financial forecasts. If these are not realistic and achievable, we require institutions to make alterations or contingency plans. Some special funding takes account of the quality and content of institutional plans. Additional grants are available, through a restructuring fund, for major strategic change.

Further information

Further information on the work of the Council, and copies of our publications, are available on our web site, http://www.hefce.ac.uk, or from the Corporate Communications team.