Adapted from a talk delivered yesterday at the 14^th FICCI Higher Education Summit in New Delhi, India.

If you spend any time talking higher education policy in developing countries, the talk turns pretty quickly to the subject of “innovative methods of financing”. It’s easy to see why: money is always short, quality higher education costs a lot, and so these systems are always terribly squeezed.  Anyone holding out hope for “innovations” always gets a ready audience.

The problem is that actual innovations are rare and many of the promises concerning such mechanisms are not much better than snake oil.  At the end of the day, there are only three sources of income: government, students, and the private sector. Some people talk about a fourth – finance  – but while finance can help you reduce risk and transfer income from the past or future into the present, it’s not actually a source of income because eventually you have to pay it back using income from the three sources above.

Innovations in government funding are almost entirely chimerical.    At the end of the day, all the money comes out of Consolidated Revenues.  You can add or remove conditionality from transfers, you can put money in more or fewer dedicated silos, you can attach some incentives to certain funding envelopes in the hope that institutions will change their behaviour a bit.  The most innovative thing you can do with government funding, really, is to work out ways that government funding can leverage funding from student or private sources.

Let’s start with private sector income, because it is a bit simpler, and it’s also where most of the snake oil ideas about university finance come from.  The most important area here is philanthropy, which is often touted as a miracle cure for education. Examples from the United States are invariably trotted out to buttress this point.  The problem is, using philanthropy as a funding source presupposes the existence of a lot of rich people who a) feel a responsibility to donate to public causes b) think higher education is a worthy cause and either c) think there are existing institutions who can be trusted not to waste their money or d) are rich enough to set up their own institutions and play the field this way.  D is pretty rare outside of Gulf Monarchies (where they are a dime a dozen). In India, option D actually happens, and the results are impressive. Bennett University and Shiv Nadar University serve as two very interesting recent examples.  But while such universities are good for the system because they introduce new institutional forms and models, they also represent a huge poke in the eye to existing universities: rich people simply don’t trust them to spend the money.

There are other private sector mechanisms, of course.  Institutions can sell their services – though again, this presupposes that they have anything to sell that meets market testing (most often, this happens through the delivery of health services through university-owned hospitals – a very big deal for some American universities as well as ones in Japan and Hungary).  They can engage in various research partnerships with outside organizations, though again they must be doing things that outside institutions find worth partnering on, which is hardly a given in many parts of the world.

Government funding can try to incentivize institutions in these areas by providing top-up or matching funding to institutions with good results. But successful provision of services is really a matter of institutional culture, not incentives.  Doing this stuff well – as it is done in some of the most advanced countries – above all else requires getting the balance between entrepreneurialism and academic rigour exactly right.  That’s tricky: in Canada, it has taken decades, and in many cases, institutions still don’t get it right.  It’s not something one can expect universities in developing countries to “adopt” instantaneously.

Student funding is by far the most reliable way of increasing institutional revenues.  You can always count on demand for educational services, so the most reliable way to let institutions increase their revenues is to let them charge for services.  Some countries may want to keep some core educational services free; that’s suboptimal, but even then they can still allow institutions to charge for non-core services such as professional master’s degrees or short-course professional certifications, for international students, and so on.

Obviously, the introduction of fees requires government to develop offsetting systems of student loans so that steep present-day charges can be dispersed into smaller payments over a long period of time – maybe the all-time best example of using government funding to leverage private income into higher education.  A lesser-used approach is to reverse the time element and get people to save forward for education rather than borrow and repay.  Special schemes to encourage private savings, such as Canada’s Registered Education Savings Plan’s/Canada Education Savings Grant, 529 plans in the USA, or Malaysia’s SSPN higher education savings fund are all good examples of this.

Of course, giving institutions leeway to charge fees raises the spectre of barriers to access.  Which is why most of the real innovation these days is less about finding ways to get money to institutions than it is in designing better and fairer ways to help students offset those costs.  I’ve probably banged on about Targeted Free Tuition more than I should have over the last while, so I won’t do so again here (but read this!), but this is an important form of innovative financing that should not be ignored.

Finally, a warning about finance.  A lot of innovative funding proposals have to do with loans (usually with the word “soft” in front of them).  Basically, these schemes either involve government guaranteeing or subsidizing loans for new buildings or changing regulations in ways that makes it easier for institutions to borrow (for instance, giving them title to university grounds or buildings for use as collateral).  And these are fine so far as they go.

The problem is, they only work if there are future income streams which allow you to support the loan. China’s universities, for instance, got into some terrible trouble last decade when they borrowed heavily to expand, in part in the expectation that they would have leeway to charge higher tuition fees.  But when Hu Jintao’s government decided to essentially freeze tuition fees mid-decade, those future revenue streams dried up.  Result?  Over $40 billion in debt.

In short, innovation in finance is good.  But it’s not an alternative to the essentials which are 1) freedom to charge fees, 2) solid student assistance systems to protect the poor and 3) cultural and regulatory change which encourage entrepreneurialism with sacrificing academic rigour.  Absent those three things, “alternative” or “innovative” financing is mere gimmickry.