Part 10: Tertiary Education Commission's monitoring of the tertiary education institution sector

10.1
In this Part, we explain our decision to postpone until 2011/12 a performance audit of monitoring by the Tertiary Education Commission (the TEC) of the tertiary education institution (TEI) sector.

10.2
The tertiary education system is a significant national asset and is very important to New Zealand's economy and society. Given the importance of tertiary education and the significant sums of money involved, we planned to carry out a performance audit of the TEC's monitoring of TEIs.¹ Our intention was to provide assurance to Parliament that the TEC's monitoring function was being effectively carried out. We planned to carry out this work in 2009.

10.3
In early 2009, the TEC underwent significant restructuring. The restructuring included a new approach to how the TEC monitors the operation and long-term viability of TEIs. Given these significant changes, we decided to defer until 2011/12 our audit of the TEC's monitoring of TEIs.

Tertiary Education Commission

10.4
The TEC is a Crown entity responsible for a range of functions, including monitoring the financial and operational viability of TEIs and overseeing the Crown's financial interests in the TEI sector. It has a staff of 240² and manages the $2.9 billion³ allocated each year to the TEI sector. Expenditure in the sector is guided by the Tertiary Education Strategy 2010-2015.

Funding changes in the tertiary education institution sector

10.5
Funding arrangements in the TEI sector have changed significantly in the last five years. Historically, TEIs were almost solely funded based on student numbers. However, funding TEIs based on student numbers represented a high level of risk for TEIs because they were vulnerable to changing numbers of annual enrolments.

10.6
Investment Plans have replaced this previous funding system. The change to Investment Plans has required the TEC to work with each TEI to prepare a flexible plan that takes into account the TEI's current capability, asset base, and financial situation, and its place within the overall network for the provision of tertiary education, as well as student numbers.

Monitoring financial and operational viability

10.7
Until early 2009, the TEC's role of monitoring TEIs was carried out by a unit called the Tertiary Advisory Monitoring Unit (TAMU). TAMU had a staff of 16 and its functions included:

• monitoring TEIs' finances, governance, and management;
• providing advice on Ministerial appointments to TEIs' councils;
• governance and management capability building, which involved meeting regularly with TEIs to discuss their strategies and financial management issues;
• lead responsibility for risk assessment and advice on statutory interventions in TEIs, which involved identifying risks to the financial and operational viability of a TEI, supporting TEIs when risks arose, and advising the Crown if further action was required (for example, installing a Crown Observer); and
• implementing the Minister for Tertiary Education's decisions on interventions.

10.8
In early 2009, the TEC restructured and disestablished TAMU. The restructuring reflected the Government's objective to simplify the tertiary education funding system, reduce central bureaucracy, strengthen quality, and ensure greater accountability.

10.9
A new unit, TEI Financial Monitoring (TEIFM) was established. TEIFM will concentrate on one of the core functions of TAMU⁴ – monitoring and assessing TEIs' financial affairs against budgets and financial guidelines and reporting on risks to the viability of TEIs.

10.10
Functions that require direct engagement with TEIs are carried out by Investment Managers who have regular discussions with TEIs and monitor reports to the TEC on financial and non-financial performance.

TEC's monitoring and reporting processes for TEIs

10.11
In line with the Government's wish to strengthen quality and ensure greater accountability in the TEI sector, the TEC is implementing new monitoring and reporting processes for TEIs.

10.12
The TEC has five new processes:

• Financial monitoring framework: Separate from the TEI's statutory intervention role, this process will allow TEIs to be rated as of low, moderate, or high financial risk. TEC will then monitor the TEIs, according to the level of financial risk. The first set of assessments using this new monitoring regime will be completed by September 2010.
• Reporting to Government: TEC now plans to report to the Government in April and October each year on the performance of TEIs. The first such report has been submitted. The report comments on the financial and educational performance of TEIs and includes the TEC judgements on the actions taken by TEIs to address the financial and educational challenges they face. The TEC expects the depth of information reported to increase over time.
• Capital asset management reporting: The TEC is requesting information on TEIs' capital asset values and the condition and suitability of TEI assets. The TEC will use this information to provide annual reports to the Treasury on TEIs' capital asset management. The depth of information sought through this reporting process will increase over time⁵ and as capital asset management capability in the TEI sector matures. This new monitoring process is currently being implemented.
• Statutory interventions: The Education Act 1989 enables the Government to intervene in the operation of a TEI if its long-term viability is considered to be at risk. These intervention powers, and the criteria used to trigger an intervention, are being reviewed. New educational performance criteria will be included in the gazetted criteria for interventions in TEIs. The range of interventions available to the Crown has also been extended.⁶
• TEI governance: Legislative changes to the structure and composition of some TEI councils have been passed and will be in effect by 1 May 2010. The TEC is preparing an assessment tool that will enable it to form evidence-based judgements about TEI governance capability.

Tools TEC can use to address under-performance

10.13
If a TEI is not delivering agreed outputs, the TEC can:

• require the TEI to "make up" under-delivery or over-delivery in the following year;
• reduce funding in future years, or not provide any increase for growth;
• recover funding where the expected delivery has not occurred;
• suspend funding; or
• revoke the Investment Plan.

Reasons for postponing our performance audit

10.14
The changes outlined above are being implemented now. By 2011/12, they will have been in place long enough for us to assess the TEC's implementation of its new approach. At present, we would be able only to describe the new system and identify any gaps, although our analysis so far indicates that the system is sound.

10.15
We have, therefore, decided to postpone our performance audit until we can reasonably assess the TEC's implementation of the new system. This will result in more useful assurance about whether the TEC's system for monitoring the TEI sector is working effectively and enable us to identify improvements at an early stage (if they are required).

1: See Part 8 for background information on the TEI sector and the results of the 2008 audits.

2: Full-time equivalent staff as at 30 June 2009.

3: We have excluded student support initiatives (for example, student allowance and student loan amounts), which are estimated at about $1.1 billion – see www.minedu.govt.nz/theMinistry/PolicyAndStrategy/TertiaryEducationStrategy/AppendixContextAndTrends.aspx.

4: The remaining functions that were carried out by TAMU are now carried out by other TEC units, not TEIFM.

5: The TEC requires this capital asset management reporting from all TEIs that are granted any special right – such as the Secretary for Education's consent to borrow or to dispose of assets (under section 192 of the Education Act).

6: These changes are introduced through the Education (Polytechnics) Amendment Act 2009 and relate to an enhanced range of Crown interventions available only for polytechnics. The Ministry of Education and the TEC have been consulting on the use of statutory interventions for universities and wānanga.