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Contents
5 Acknowledgments
6 Foreword
8 Preface
10 Report 1:
HIGHER EDUCATION FINANCING IN LATVIA:
ANALYSIS OF STRENGTHS AND WEAKNESSES
164 Report 2:
ASSESSMENT OF CURRENT FUNDING MODEL’S
‘STRATEGIC FIT’ WITH HIGHER EDUCATION
POLICY OBJECTIVES
228 Report 3:
HIGHER EDUCATION FINANCING IN LATVIA:
FINAL REPORT
ACKNOWLEDGMENTS
This publication consists of nine reports in three volumes that were prepared
as part of the World Bank’s Reimbursable Advisory Services on higher education
for Latvia. The team consisted of Nina Arnhold (Task Team Leader), Jussi Kivistö,
Elias Pekkola, Vitus Püttmann, Andrée Sursock, Hans Vossensteyn, Jason Weaver,
and Frank Ziegele, who contributed during different phases of the two engage-
ments. The authors had the much-appreciated support of a group of technical
experts and World Bank colleagues during institutional site visits. This group
includes Sophie Amili, Jeremie Amoroso, Susanna Niinistö-Sivuranta, Dominic Orr,
Melanie Rischke, Magnus Rüde, and Elif Yukseker.
The authors are grateful for comments provided by peer reviewers Francisco
Marmolejo, Harsha Aturupane, Javier Botero Alvarez, Roberta Malee Bassett,
and Jamil Salmi. The reports were edited by Diane Stamm. Filip Kochan helped
prepare the publication of the reports. Patrick Biribonwa provided administrative
support.
The work took place under the guidance of Alberto Rodriguez and Cristian Aedo,
the two Managers at the Education Global Practice of the World Bank during
the period 2013–2018. The team would further like to thank current and past
management in the European Union Unit of the Europe and Central Asia region
of the World Bank for guidance and direction, in particular, Arup Banerji, Mamta
Murthi, Carlos Pinerua, Marina Wes, and Xavier Devictor, as well as Christian
Bodewig.
Throughout this work, the Ministry of Education and Science of Latvia provi-
ded substantive inputs and comments for which the team is greatly indebted.
The authors would like to thank, particularly, L ga Lejiòa and Agrita Kiopa,
who oversaw this work, and Laura Treimane, Brigita Kukjalko, Dace Jansone,
and Santa Šm î dlere, for their substantive contributions. Management and staff of
the State Education Development Agency provided support during the first
project.
Finally, the team is grateful for the feedback received from Latvian university
leaders and higher education stakeholders during consultations, site visits,
and workshops throughout the two engagements. Without them, these reports
could not have been realized in this form.
FOREWORD
This publication reflects an important phase of higher education reforms in Latvia.
Since 2014, the Latvian Ministry of Education and Science has implemented
significant changes in the field of higher education with the goal of ensuring
quality and internationally competitive research-based higher education, offered
by effectively managed higher education institutions (HEIs). The reforms have
aimed at redefining the role of HEIs; as centers of knowledge, they must stimulate
the country’s economic development. The Ministry has charged HEIs, therefore,
with four tasks:
•To ensure a diversified knowledge base in all areas of academic activity while
promoting research in those areas that have the greatest potential for deve-
lopment, are internationally competitive, have sufficient scientific capacity, and
whose activities correspond to the goals and strategies defined in the Smart
Specialization Strategy;
•To facilitate the ability of enterprises to innovate by improving cooperation
between HEIs and companies, promoting the commercialization of knowledge,
and performing commissioned research;
•To create locally embedded and globally connected human capital;
•To develop as knowledge hubs or resource centers that accumulate knowledge,
and to develop infrastructure that drives development of the Latvian economy
and ensures its sustainability and the cohesiveness of society.
Based on global experience, the reforms address four core elements of education
quality: students, academic personnel, resources, and a corresponding legal
framework and rules of conduct.
A higher education system is fit for purpose if students acquire not only theoretical
knowledge, practical skills, and competences, but also if they develop personal
connections that embed them in local economic or societal activities and reach
across borders globally. Students shall have access to scholarly work, and
the opportunity to participate in research and creative projects that are national
or international in scope. Besides technical knowledge and skills in their chosen
field, students shall advance their transferable skills, enabling them to produc-
tively contribute and continue their learning in a variety of contexts.
Internationalization of higher education, competitive academic personnel, and
a strong foundation in academic integrity are other key aspects of quality higher
education. This kind of culture is shaped by a well-thought-through regulatory
framework, balancing incentives and quality standards. However, it also requires
HEIs with sound internal governance and financing processes, and suitable
options for the advancement of academic careers.
Latvia has made significant progress improving financing and governance of
higher education. In 2013, the Ministry began a cooperation with the World Bank
to create a new higher education financing model. The results of this cooperation
were successfully incorporated in legislation, and the new higher education finan-
cing model has been implemented since 2015. In 2016, we launched a second
project focusing on results-based, effective models of internal financing, gover-
nance, and human resources management. The success of both projects
is rooted in the consultations and consensus building that was possible thanks to
the substantial engagement of leading Latvian higher education institutions and
core stakeholders.
The close cooperation among the Ministry, HEIs, and the World Bank was
remarkable in various respects. It has produced tangible results directly impacting
sector policies and has facilitated a productive dialogue among the different
parties involved in the sector. The results of the work will be an important source
of information on Latvian higher education and will continue to inform legislative
changes and steering processes in the future.
On behalf of the Ministry of Education and Science, I would like to express
my deep appreciation for the work of the World Bank experts who delved into
the circumstances and problems of the Latvian higher education system and
offered their vision and hands-on advice on how to increase its quality and inter-
national competitiveness, based on international experience. We sincerely hope
that the partnership between our two institutions in higher education will continue
beyond these two projects. We would also like to express our gratitude to all
the HEIs that served as case study institutions, and to all stakeholders who
supported these projects. We hope that as one sector we will continue to jointly
address the challenges ahead.
L ga Lejiòa
State Secretary
Latvian Ministry of Education and Science
Riga, Latvia
PREFACE
Higher education receives considerable attention within the European Union.
Governments, European institutions, and organizations like the World Bank
understand that higher education fuels competitiveness and growth, and that
it is an important instrument for social cohesion. However, many countries are
searching for instruments that help them make available — and often scarce
— funding more performance-oriented, universities more dynamic, and academic
careers more attractive. This three-part publication addresses related questions
in the Latvian context, while its insights are applicable more broadly. It impres-
sively documents the outcomes of close cooperation between the Latvian Ministry
of Education and Science and the World Bank, and we hope that it will become
an important resource document for policy makers and practitioners around
the world.
Since 2013, the World Bank has supported the Latvian government through
a succession of advisory work focusing on performance at different levels of
the higher education sector.
An important trigger of the World Bank’s advisory work in higher education were
Country Specific Recommendations by the European Commission. The Latvian
government was tasked with evaluating its higher education financing system and
considering how funding could be used to promote better outcomes.
The World Bank supported the Latvian authorities through two advisory projects,
with three phases. The first project was implemented between December 2013
and August 2014, and focused on the development of a performance-based,
system-level funding model for the higher education sector. In the summer of
2015, the new financing model was approved by the government and its introduc-
tion accompanied by a much-welcomed increase in funding for the higher educa-
tion sector.
The second project comprised two phases: (1) on university-internal higher
education funding and governance, which was implemented in 2016–17; and
(2) on the doctorate and human resource policies in 2017–18. The first phase
focused on improving funding mechanisms and governance within higher edu-
cation institutions. The second phase, which is currently being implemented,
focuses on improving academic careers. Together the two advisory projects
comprehensively supported performance improvements from the system level to
individual academic careers.
Close cooperation with the Ministry of Education and Science, which was deeply
engaged and provided substantive inputs into the work, as well as intensive
exchanges with stakeholders, were cornerstones of the World Bank engagement
in Latvia. During all phases, a wide range of higher education stakeholders
were consulted and informed regularly. Several higher education institutions
were closely involved and supported the project by providing comprehensive
background information and engaging in discussions with the team’s experts
during site visits.
The Latvian government made outputs available to the public in Latvian and English.
Results were directly integrated into higher education policy making and the plan-
ning of EU-funded programs in the field of higher education. The frequent sector
consultations and the open and proactive engagement of the ministry can be con-
sidered key success factors of this cooperation.
One of the World Bank’s objectives for advisory work in EU member states
is to contribute to the global public good of knowledge on the how-to of public
sector reform. This is why we are pleased to see how the joint work is having
significant impact beyond Latvia’s borders. Insights and expertise generated
from 2013 to 2018 in Latvia have been taken up in various other contexts
in the Bank’s higher education work, including in the design of new projects
in Europe and Northern Africa. Together with the World Bank team, represen-
tatives of the Latvian government and of the higher education sector have shared
their experience with colleagues abroad. The new funding model was also show-
cased during EU peer-learning events.
On behalf of the World Bank, I would like to express my gratitude to the Ministry of
Education and Science and stakeholders of the Latvian higher education sector.
I hope that the products of the joint work will be disseminated widely and inspire
higher education reforms across Europe and beyond.
Arup Banerji
Regional Director for Operations in the European Union
The World Bank
Washington, DC
Report 1
HIGHER EDUCATION
FINANCING IN LATVIA:
ANALYSIS OF
STRENGTHS
AND WEAKNESSES
18 March 2014
Contents
16 Abbreviations
17 Executive Summary
23 1 Introduction
23 1.1 Latvia and the World Bank Group
24 1.2 Project context and objectives
26 1.3 Project methodology
27 1.4 Clarifying the project scope
29 2 European Developments in Higher Education Financing
30 2.1 Recent European trends in higher education financing
30 Models of public funding
34 Resource diversification
37 Financial autonomy
41 Student funding
45 Overview of European trends and position of Latvia
49 2.2 What do these trends mean for the further analysis?
49 2.3 Higher education as public and private good
53 3 Methodology of analysis: Criteria for Good Funding Models
53 3.1 Methodology to assess strengths and weaknesses
54 3.2 Sources for the assessment criteria
55 3.3 Explanation of the assessment criteria
59 3.4 Overview on the assessment criteria applied
61 4 Strengths and Weaknesses of Latvia’s Current Funding Model
62 4.1 General assessment of the higher education funding system and its context
64 4.2 Political climate for change
65 Overall conclusions (political climate for change)
65 4.3 Instruments of state funding: funding of teaching – study place model
75 Overall conclusions (instruments of state funding)
77 4.4 Instruments of state funding: funding of research
83 Overall conclusions (funding of research)
84 4.5 Diversification of financial resources for HEIs
87 Overall conclusions (diversification of resources)
88 4.6 Financial autonomy of HEIs
90 Overall conclusions (financial autonomy)
90 4.7 Student financing (tuition fees; study costs, student loans and scholarships)
96 Overall conclusions (student financing)
97 Appendices
97 Appendix 1 Latvia’s Current Funding Model
97 1.A Relevant framework conditions in Latvia
99 1.B Description of the higher education sector in Latvia
112 1.C Funding levels of higher education and research in Latvia
115 1.D Financial autonomy of HEIs in Latvia
121 1.E Public state funding to higher education in Latvia
132 1.F Resource diversification in higher education in Latvia
137 1.G Student financial assistance
142 Appendix 2 List of Documents Reviewed — Development of Discussion
on HE Funding Reform
149 Appendix 3 Note on Availability of Performance Data
155 Appendix 4 Stakeholder Consultations
161 References
Figures
32 Figure 1 Relative importance of indicators 113 Figure 12 Public funding in 2012 compared
used in funding formulae in European higher with 2008, adjusted for inflation
education systems
114 Figure 13 Annual expenditure on public and private
35 Figure 2 Average income distribution in European educational institutions in 2001–2010 per student
HEIs in 2008 (purchasing parity standard based on full-time
equivalent students, ISCED 5-6)
98 Figure 3 Tertiary education students at risk of
poverty or social exclusion 115 Figure 14 Expenditure for R&D in higher
education sector as percentage of GDP
99 Figure 4 Evolution of total post-secondary
school-age population in Latvia 2002–12 118 Figure 15 Remuneration of academic staff at
public HEIs in 2011
100 Figure 5 Distribution of students by the level of
studies (2010) 120 Figure 16 Distribution of expenditure at public
HEIs, 2012
101 Figure 6 Outbound student mobility ratio
123 Figure 17 Components in the formula for
101 Figure 7 Inbound student mobility ratio
state-budget allocation to cover the study
102 Figure 8 Number of peer-reviewed articles process at a HEI
published
126 Figure 18 Process of annual planning
108 Figure 9 Students by mode, level and financing of in state-funded study places at HEIs
their studies at public HEIs, 2013/2014
134 Figure 19 Revenues of public institutions of higher
111 Figure 10 EU-27 Tertiary Students (ISCED 5-6) by education in 2012
field of education (2010)
139 Figure 20 Financial aid to students, as percent of
113 Figure 11 Total public expenditure on higher total public expenditure on higher education
education (ISCED 5-6), 2001–10
Tables
31 Table 1 Importance of input- versus 48 Table 8 Student funding — European trends
output-related drivers of HEIs operational grants and Latvia
34 Table 2 Average proportion of public HEIs’ main 49 Table 9 European trends and position of Latvia
income categories in 1995 and 2008 — overview
39 Table 3 Setting tuition fees in Europe 50 Table 10 Potential private and public benefits
from higher education
44 Table 4 Proportion of first and second-cycle
students paying fees and receiving grants 59 Table 11 Overview assessment criteria
in academic year 2009/10 in 31 European HE
62 Table 12 Overview of strengths
46 Table 5 Models of public funding — European and weaknesses
trends and Latvia
98 Table 13 Long-term net migration of population,
47 Table 6 Resource diversification — European by region (2012)
trends and Latvia
102 Table 14 Breakdown of Invention Patent
47 Table 7 Financial autonomy — European trends Applications by Categories and Years,
and Latvia 2007–2013
103 Table 15 European patent applications by country 118 Table 21 Minimum wage thresholds for
of origin academic staff at institutions of higher
education
105 Table 16 Supervision of ministries over public
HEIs and colleges 119 Table 22 Expenditure of public institutions of
higher education on wages in 2014
106 Table 17 Study Programs offered by HEIs
in Latvia, 2013/2014 123 Table 23 Public funding coefficient values by
subject area
109 Table 18 Tuition fees and other fees in European
higher education systems in 2013–14 133 Table 24 HE funding in Latvia, 2012
110 Table 19 Students by subject area at public 135 Table 25 Revenues of public institutions of higher
institutions of higher education in 2013/14 education in 2012
116 Table 20 Latvia’s position in the EUA financial 136 Table 26 EU structural funds for higher education
autonomy scorecard and science, 2007–2013
16 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
Abbreviations
nd Weaknesses
EU European Union
ESF European Social Fund
EUA European University Association
HE Higher Education
HEI Higher Education Institution
MoES Ministry of Education and Science
MoE Ministry of Economics
RAS Reimbursable Advisory Services
RTA Reimbursable Technical Assistance
R&D Research and Development
SEDA State Education Development Agency
STEM Science, Technology, Engineering and Mathematics
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 17
Executive Summary
s and Weaknesses
The report at hand is the first in a series of three papers to be prepared by
the World Bank Latvia Higher Education Financing Team between Decem-
ber 2013 and September 2014. It sets out to shed light on the strengths and
weaknesses of Latvia’s funding system i) in light of European developments,
and ii) with a view to comparing against general criteria for good funding mo-
dels. These general criteria derive from good practice: they can be considered
as largely independent from the country context. The second paper will focus
on the ‘fit’ of the current funding mechanisms in Latvian higher education
with explicit strategic priorities of the government. The third paper will propose
directions for a future higher education funding model for Latvia. The report
at hand was developed with support by the Ministry of Education and Science
as well as other government agencies and in close consultation with stakehol-
ders. These consultations took place at workshops but also through a series of
interviews.
Higher education is an increasingly important topic on national policy agen-
das for many countries. As a significant driver of national economic competi-
tiveness in an increasingly knowledge-driven global economy, higher education
policy issues have received increased attention. Alongside the increased policy
importance of higher education, many systems also face serious challenges main-
taining their quality and relevance and in increasing the efficiency and securing
equity in the field of higher education. New higher education financing models
are being developed in many European countries as policy responses to these
challenges.
The Latvian higher education system has been underfunded for years. Over-
all funding levels are very low (and the lowest in all Baltic states); however,
in terms of public funding for higher education, Latvia figures at the bottom
across European comparisons, with an allocation of 0.8 percent of GDP
as compared to 1.27 in Lithuania; 1.23 in Estonia and an EU27 average of 1.26
( Eurostat data). Although the report at hand will largely focus on funding mecha-
nisms as opposed to funding levels, it is important to keep this point in mind
when the current Latvian funding system’s strengths and weaknesses are dis-
cussed.
The topic of higher education financing often spurns controversy, in Latvia
as elsewhere, with the discussion focusing on the question of whether higher edu-
cation is a public or a private good, whether it should be funded from public re-
sources or students’ contributions — with related policy implications for public
and private funding. The report argues that the outcomes of higher education
have characteristics of both public and private goods, and that acknowledging
economic arguments might help to avoid political reform blockades.
18 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
Student funding — that is, student contributions (mainly tuition fees or other
fees paid by the students) and student financial support systems (mainly
grants and loans) — is clearly among the most controversial issues in the
sphere of financing higher education. Approaches that place fees and loans at
the center tend to meet criticism all across Europe on the grounds of their expec-
ted negative effects on equity. However, tuition fees — combined with adequate
and well-targeted student support schemes — generate additional revenues
for HEIs, thus enabling increases in participation rates. They are also regarded
as more equitable by some, since they transfer part of the instruction costs to
those who will directly (and disproportionately) benefit from higher education.
Latvia’s Funding System in the Light of European Developments
Compared to other European countries, Latvia scores high in the area of finan-
cial autonomy. It is ranked 4th among the 28 European higher education systems
in EUA’s “University Autonomy Scorecard”. Providing a higher level of institutional
autonomy is often expected to improve the performance of higher education institu-
tions (HEIs) and higher education systems as a whole. It is assumed that the more
autonomous HEIs are, the better equipped they are to generate additional resour-
ces through fund-raising or efficiency measures, with the freedom to orient their
strategy towards available funds, focusing potentially on their specific research
strengths or shifting the balance between education and research. Based on this
assumption, many governmental authorities among European countries have gran-
ted HEIs more freedom to manage their resources and develop new income-gene-
ration policies.
Contrary to many other European systems, the current funding model in Latvia
does not offer significant incentives for greater performance- and output-orien-
tation. The main purpose of performance-based funding is to create financial incen-
tives for higher education institutions to produce outcomes in certain areas of their
activities which want to be encouraged by the funder. There are different ways
in which to cluster allocation models in the funding of higher education institutions.
Three typical pillars of funding models concern basic funding, performance funding,
and innovation-/profile-oriented funding. The innovation-/profile-oriented funding
component in Latvia is currently composed of a number of different types of smaller
and larger third-party funding streams (including EU Structural Funds) but not inclu-
ded in the system of state funding. In contrast to the tendency of many European
higher education systems to adopt more performance-based elements in their fun-
ding mechanisms, the Latvian model has remained predominantly input-related and
formula-based. The elements that are said to be performance-oriented, such as the
European structural funds as well as the national competitive research programs,
are not perceived by the authors to use transparent competitive criteria. This implies
the system does not fully exploit its competitive capacity and strife for excellence.
Latvia has a dual-track tuition fee system with — in some cases — relatively
high fees and relatively many fee-paying students. The Latvian higher educa-
tion system offers mainly merit-based support in the form of state funded study
places, and relies more on government-subsidized, mortgage-style loans offered
by commercial banks, rather than grants. While there are concerns amongst
stakeholders that ‘the best students migrate to countries where students do not
pay fees’, this causal chain appears in fact unlikely, given that these students
study for free in Latvia. To the extent that such migration of particularly gifted stu-
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 19
dents takes place at the tertiary level — and more research would certainly need
to be done on this issue — it would most likely be fueled by quality concerns and
more general economic considerations as opposed to the current fee structure
in Latvia. There is no general European trend in this area: some European coun-
tries that have previously introduced tuition fees later decided to abolish them
either entirely or partly. At the same time, other European countries have decided
to increase the share of private investment by allowing public HEIs to introduce
fees or charge higher fees while at the same time promoting equity of access by
restructuring their student support systems. Need-based grants are the most
frequently used modes of student support across European higher education
systems.
Strengths and Weaknesses of the Latvian Funding Model
Derived from European trends and international practice, there are criteria for
good funding models which are suitable to guide a discussion on strengths and
weaknesses of the current approach to higher education financing in Latvia. These
criteria are (the degree of) strategic orientation, incentive orientation, sustainability,
legitimization, autonomy and freedom, and practical feasibility. These criteria can be
further defined as follows:
Strategic orientation Incentive orientation
• Promote national strategies • Provide clear, non-fragmented incentives
• Promote institutional profiles • Avoid undesired effects
• Create performance rewards and sanctions • Balance ex post and ex ante performance
• Create a competitive environment orientation
Sustainability Legitimization
• Stability • Provide unambiguous and balanced funding
• Guarantee continuity in funding mechanisms structures
• Allow long-term planning • Make funding transparent
• Take into account cost differences • Support the perception of fairness
• Promote risk-spreading and management • Allocate lump sums
• Guarantee academic freedom
Autonomy and freedom Practical feasibility
• Implement an adequate level of regulation • Use available data
• Guarantee autonomy of internal resource • Ensure administrative efficiency
allocation • Respect methodological standards
• Promote accessibility of diverse income sources • Ensure coherence with funding levels
and steering approaches
The following table provides an overview of the strengths and weaknesses of the
Latvian higher education and research funding system according to the aforemen-
tioned categories of criteria. It distinguishes between the context of the funding
system and the features of the funding system itself. Many of these issues relate
to more than one criteria dimension.
20 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
Strengths Weaknesses
Context: Strategic orientation
• Diverse system of HE (many institutions, niche • Apparently low political priority given to HE and
players, different profiles, public-private) science (regarding low spending on HE and R&D)
• Substantial number of private HEIs • Inconsistent policy measures and political reform
• Start-up of quality assurance for study programs blockade because of polarized discussions
and research institutes (public vs. private good)
• Research institutes with more mass and focus • Many relatively small study programs
• High percentage of young people who qualify • Tendency to study abroad
for HE • Opaque HR structures in HE, with opportunities
• High employment rate and high rate of return on HE to have more than one job
• A functioning data monitoring system • High teaching loads for staff; little time for
(including performance and financial data) research
• High adaptability of system and HEIs • Quality assurance for teaching and research only
demonstrated in times of economic crisis in start-up phase
• MoES and line ministries are multiple voices for • Many graduates seeking employment abroad
the interests of HEIs • No clear way to consolidation vs. competition yet
Financing: Incentive orientation
• Study places allow national planning according to • One-pillar model of state funding instead of
labor market needs several pillars with balanced functions
• Study places offered on basis of merit including • No real performance orientation in state funding
rotation possibilities stimulate competition (hence also weak links to national or institutional
• EU structural funds for research allocated strategies)
with some form of competition • No funding for innovative initiatives
• Attract many fee paying students (willingness • No clear approach to the role of state money for
to pay/additional resources for HEIs) private HEIs
• Existence of performance contracts between • No funding options for research-related
HEIs and ministry developments such as post-docs, knowledge
transfer activities, etc.
Financing: Sustainability
• Study places funding provides cost-oriented • Underfunding of the HE and research system
stability in the system, but with a “money follows compared to most other European countries
student” element and to own governmental objectives
• Availability of substantial EU structural funds • Promised funding increase not yet effectuated
for HE and R&D (reason for survival in economic • Lower funding tariffs for HE students compared to
crisis) primary and secondary education
• Cost basis for subsidized study places outdated
Financing: Legitimization
• Availability of student loans for many students • Many competing needs in case of budget
with attractive repayment conditions increases (more quality in teaching, PhD schools,
• Full-fee paying option creates access post-doc careers, triple helix, etc.)
opportunities • Opaqueness and subjectivity in allocation of
subsidized study places, planning problems
through yearly interventions
• Subsidized study places particularly benefit
students from better socio-economic
backgrounds
• No subsidized study places for part-time students
• Student loans not attractive to some groups, e.g.,
the “guarantor requirement” forms a big hurdle
• Hardly any need-based support nor means-testing
mechanism for students from low-income families
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 21
Strengths Weaknesses
Financing: Autonomy and freedom
• Large degree of (financial) autonomy for HEIs • Heavy reliance on EU structural funds for R&D,
• Financial autonomy allows entrepreneurial which may not be a sustainable long-term
freedom situation (plus co-funding problem in case of
• Substantial level and good framework conditions matching funds)
of resource diversification • Relatively low funding from industry/ companies
Financing: Practical feasibility
• Substantial outward international student • Decentralized system for student loans
mobility (many systems have problems to send and scholarships (efficiency risks and problems
students abroad). This means other countries for HEI with needs assessment)
pay for the instruction costs. • Debt cancellation mechanisms too generous
• Mismatch between academic year and fiscal year
To summarize:
Latvia has a diversified higher education sector including capital, regional, public
and private higher education institutions. Universities enjoy a significant amount of
financial autonomy which allows for resource diversification. The funding model
based on study-places provides some basic stability for the sector and is related
to sector-level planning geared towards labor market needs. In addition, Latvia
has a high number of full cost-covering fee paying students and a significant
share of research funding coming from EU funds.
However, as mentioned above, the system is significantly underfunded in com-
` -vis
parison to not only other European countries but, importantly, also vis-a
the government objectives and legally-set targets per study-place.
While, in principle, public funds are allocated according to study places, i.e.,
educational needs, this is de-facto nearly the only public funding instrument,
and thus has to accommodate many competing needs (partially related to re-
search and wider institutional missions) of universities. The small performance-
oriented elements, such as small competitive research funds, use criteria which
are not transparent to the stakeholders and thus miss the desired effects. In prac-
tice, the system is partially opaque and leaves room to subjectivity, both with rela-
tion to the allocation of study places and research funds. Also, there are planning
problems due to annual interventions (while MoES has a different fiscal year from
higher education institutions). The cost basis for the study places in legislation
is outdated while universities only receive 80 percent of the defined minimum
costs.
The current strong merit-based approach to budget places and grants raises
questions about equity, as subsidized study places and scholarships are
available to the “best students” and thus are most likely to particularly benefit
students from better socio-economic backgrounds. It can be questioned if this
really stimulates academic excellence within the whole system. The decentralized
loan system appears to be generous, but in reality creates practical problems and
appears not to be attractive to those who might need it most. There is very little
needs-based support or means-testing mechanisms for students from low-income
families.
22 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
The current public funding model appears as a largely input based
‘one-pillar’ model which, overall, does not represent a balance between stabi-
lity, performance, and innovation orientation. This also means weaker links
between public funding and national and institutional strategies. In addition,
the system relies heavily on EU funds, in particular for research and development
which might not be a long-term solution to stable research funding while also
funding from industry and other private sources appears to be underdeveloped.
More detail and context are provided for all of these points in the full report.
Following an introduction, there are three main sections of the report. The first
section discusses recent European developments in higher education financing.
This is followed by a section on criteria for good funding models, which discusses
general criteria for good funding models deriving from international practice.
Utilizing the current European developments and general criteria for good funding
models, the last section provides an overview of the strengths and weaknesses of
Latvia’s current approach. Notably, Appendix 1 serves as a key resource for the
current status of higher education funding in Latvia.
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 23
1 Introduction
The report at hand is the first in a series of three papers produced under
the World Bank Reimbursable Advisory Service on Higher Education Financing
in Latvia between December 2013 and September 20141. The introductory section
of this report provides background information on the World Bank’s activities
in Latvia and, in particular, on the genesis of the engagement concerning higher
education financing. The past decade has witnessed a significant amount of dis-
cussion on the topic of higher education financing in Latvia, further fueled by
the country-specific recommendations by the European Commission, in which the
Commission urged Latvia to reform its approach to higher education financing.
Higher education financing was also amongst the topics discussed between
representatives of the Ministry of Education and Science (MoES), State Education
Development Agency (SEDA), and the World Bank, within the framework of
its regular policy dialogue. Going forward, the World Bank has been invited,
as an external partner, to develop a proposal for a new higher education financing
model in Latvia. The timeline for the development of this proposal is ambitious:
nine months. It was also agreed that the proposal itself would be preceded by two
papers: (i) an analysis of the strengths and weaknesses of the current approach
to higher education financing in Latvia based on European and international good
practice (including a description of the status quo of higher education financing);
and (ii) a paper ‘zooming in’ on the ‘strategic fit’ of the current funding model with
expressed priorities for the sector. This paper is the first output of this exercise
(item i). The Bank team2 would like to express its gratitude to MoES and SEDA
as well as to several stakeholders (see Appendix 3) who provided valuable input
and thereby supported the preparation of this report.
1.1 Latvia and the World Bank Group
Latvia joined the World Bank in August 1992. In the following years, the Bank sup-
ported Latvia’s transition and preparation for the upcoming EU integration through
lending, policy dialogue, and analytical and advisory services. Latvia ‘graduated’
from the Bank in 2007: the last active Bank-financed investment project closed
1 The term ‘higher education’ is used in this report in a comprehensive and inclusive manner; i.e.,
it is used to describe any form of tertiary education at the post-secondary level, if not specified other-
wise.
2 Members of the Bank team are Dr. Nina Arnhold, Senior Education Specialist and Task Team
Leader, World Bank; Adjunct Professor Jussi Kivistö, University of Tampere, Finland; Professor
Hans Vossensteyn, Director of the Center for Higher Education Policy (CHEPS), the Netherlands;
Jason Weaver, Senior Education Specialist, World Bank; and Professor Frank Ziegele, Director of the
Centre for Higher Education (CHE), Germany.
24 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
in June 2007. However, Latvia continued to work with the Bank through analytical
and advisory services in several areas, including public finance management, inter-
national emissions trading, public-private partnerships, and regional development.
The relationship between Latvia and the Bank changed again in the context of the
economic crisis. Indeed, Latvia was one of the European countries that suffered
most from the crisis with GDP contracting by 25 percent, and a rise in unemploy-
ment by more than 20 percent (Aslund and Dombrovskis, 2011, p. ix). In Decem-
ber 2008, the Bank committed EUR 400 million in loans to help stabilize Latvia’s
economy. The Bank’s contribution was part of a EUR 7.5 billion package, which
included contributions from the International Monetary Fund, the European Union,
and Nordic countries. The first EUR 200 million loan, approved by the World Bank
Board in September 2009, supported the Government of Latvia in its efforts to
strengthen the banking sector and maintain long-term financial stability. The se-
cond EUR 200 million programmatic loan aimed to protect vulnerable groups
in two phases, by: (i) supplementing the government’s social safety net programs
during the economic contraction; and (ii) laying the foundation for structural re-
forms in the social sectors over the medium term.
To assist with its post-crisis recovery and further its reform agenda, the Latvian
government subsequently expressed interest in continuing its work with the Bank,
especially through knowledge services. The Bank has been, either recently or cur-
rently, engaged in several reimbursable advisory services (RAS) activities with the
Latvian government, including the following:
Latvian Social Protection System: Under this activity, the Bank developed a number of
analytical products aimed at informing Latvia’s social protection reforms — in parti-
cular, measures aimed at helping the long-term unemployed and inactive parts of
the population reintegrate into the labor force. Four analytical products were deli-
vered and a workshop was arranged to discuss the initial findings. The report was
launched in June 2013 in Brussels with the European Commission.
Enhanced Competitiveness of Latvia: The Bank provided reimbursable advisory
services for the Latvian Ministry of Economics (MoE) on industrial policies aimed
at enhancing the country’s competitiveness. The objective of the engagement
was to support the Latvian MoE in its efforts to design and implement modern
industrial policies to increase the competitiveness and productivity of the Latvian
industry. The Bank provided methodological advice and examples of international
good practice.
Higher Education Finance Reform: In the autumn of 2013, an agreement was
reached that the Bank would provide recommendations for a reformed higher
education financing model through reimbursable advisory services. The RAS
agreement was signed on December 2, 2013. The report at hand is provided
as one output under this latter engagement, whose details are provided hereafter.
1.2 Project context and objectives
In recent years, many countries have evaluated how different approaches to finan-
cing higher education can help achieve or enforce strategic policy objectives. Both
the International Monetary Fund and the European Commission have encouraged
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 25
Latvia to assess how its financing approach could provide better alignment with
incentives and thereby support policy objectives, which may cover, for example,
issues of access, quality, and efficiency (see e.g., IMF, 2013). The European Com-
mission attributed particular importance to financing reform in one of its 2012 Coun-
try Specific Recommendations for Latvia, encouraging the country to:
“[…] continue reforms in higher education, inter alia, by implementing a new
financing model that rewards quality, strengthens links with market needs
and research institutions, and avoids fragmentation of budget resources”
(European Commission, 2012, p. 7).
…followed by the 2013 Country Specific Recommendations for Latvia with a strong
emphasis on the need to:
“[…] implement the planned reforms of higher education concerning, in par-
ticular, the establishment of a quality-rewarding financing model, reform of
the accreditation system, consolidation of the institutions and promotion of
internationalization” (European Commission, 2013).
To help address these concerns, the Ministry of Education and Science conside-
red involving the World Bank as a long-standing external partner. An Expression
of Interest was sent to the Bank on April 16, 2013. Both parties continued refining
the objectives and terms of reference of the engagement until December 2, 2013,
when a legal agreement was signed by three parties — MoES, SEDA and the
World Bank — that focused on two main project objectives:
1. Identify the strengths and weaknesses of Latvia’s current approach to financing
higher education.
2. Recommend a reformed financing model that takes into account the criteria
developed by MoES and good international practice while [also] taking into
account stakeholder consultations.
Latvia seeks a new financing model that rewards quality, strengthens alignment of
market needs and higher education outputs, avoids fragmentation of budget
resources, and furthers other policy objectives to achieve a modernization of its
higher education system. For the purposes of this engagement, the higher educa-
tion funding system consists of four major dimensions:
1. Financial autonomy of higher education institutions (lump sums, freedom
to spend money flexibly and to build financial reserves, financial regulations,
discretion to set salaries, etc.).
2. Diversification of financial sources for higher education institutions (EU funding,
tuition fees, market revenues, external research income, transfer activities, etc.)
and the rules and regulations related to these.
3. Instruments of public funding of higher education (allocation from state budget,
research funding, etc.).
4. Student funding and support (in particular with regard to tuition fees, loans,
scholarships, etc.).
26 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
1.3 Project methodology
The engagement began in December of 2013 and is tentatively scheduled to con-
clude in the autumn of 20143. To accomplish its objectives, the project has been
planned for three stages, each with a corresponding deliverable.
The first stage in the project’s methodology is an assessment of Latvia’s current
approach to financing higher education. Findings and observations are based
primarily on existing data, a document review and stakeholder interviews (see
Appendix 1 and 3 for a list of documents reviewed and stakeholders interviewed).
The deliverable at this stage — this report — is an overview of the state of higher
education financing in Latvia, as well as an assessment of its perceived strengths
and weaknesses in light of European developments, good international practice,
and input from stakeholder consultations. These stakeholder consultations played
an important role in the preparation of the report at hand and will also consti-
tute a very important input for subsequent steps. The stakeholder roundtable on
December 3 helped the team to gain a better initial understanding of higher edu-
cation financing in Latvia, also in light of ongoing European developments. Exten-
sive stakeholder interviews in early February provided an opportunity to discuss
criteria for good funding models and explore strengths and weaknesses of the
current Latvian funding system with respect to these criteria; thus, they served
as a key input into Chapter 4 and other sections of this report. Finally, the main
findings of the report are going to be discussed during a workshop with stake-
holders scheduled for March 12, 2014.
The second stage of the project focuses on how well the current financing
approach aligns with the policy objectives specified by MoES. Whereas the first
stage provides a broad analysis of the strengths and weaknesses of the current
funding approaches, the second ‘zooms in’ on the ‘strategic fit’ of the current
financing system, taking into account the specific strategic objectives which the
government has defined for higher education. Findings and observations at this
stage will rely on the analysis of data and documents, interviews with key stake-
holders, and prior team experience with various international practices. The deli-
verable will identify to what extent the existing approach does or does not align
with policy objectives, as well as begin to surface potential alternatives in order
to improve the linkages between higher education funding and strategy.
In the third stage, the focus is on proposing reforms for Latvia’s higher education
financing system, specifically those that can be accomplished in the medium
3 On December 2, 2013, immediately after the signing of the Legal Agreement, the Bank team con-
ducted a workshop with MoES staff. This was followed by a first stakeholder roundtable on Decem-
ber 3, 2013. The Bank’s Latvia Higher Education Financing team consists of World Bank staff as well
as international and local experts bringing together expertise from a range of countries (Finland,
Germany, the Netherlands, Latvia, the wider European area, and the United States) and contexts.
The Legal Agreement foresees 36 weeks, or roughly nine months, for the execution of the task
(leading to August 2014). However, it might be recommended to conduct a dissemination event after
the academic break, i.e., in autumn 2014.
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 27
term, i.e., the next three-to-five years. The recommendations will take into account
the policy and strategic objectives discussed in the project’s second stage.
The deliverable of this third phase will actually take the form of two complemen-
tary documents: (i) a proposal for a medium-term higher education financing
system that takes into account the previous strengths and weaknesses analysis
and clearly identifies next steps, and (ii) an information note for the government.
The implementation of recommended reforms, though a critical step, is not inclu-
ded within the scope of the existing agreement. Implementation activities which,
for example, would focus on (i) structural aspects of the model proposed,
(ii) procedural aspects of introducing the new financing model, and (iii) capacity
building, are currently the sole responsibility of the Government of Latvia. In any
case, the nature of the World Bank team’s task is the preparation of a proposal.
The decision to accept and implement the proposal will, however, lie with the
Government of Latvia and the sector.
1.4 Clarifying the project scope
Throughout the cooperation, including the Bank’s current engagement on higher
education financing in Latvia, it is important that all parties revisit and refine
expectations in accordance with the nature of the agreement. Since this engage-
ment is focused on potential ways in which financing higher education can further
policy objectives, it is important to clarify what is feasible in order to manage
expectations for what the financing approach can, and cannot, do. Thus, the
second stage of this project, in which critical policy and strategic objectives of
MoES are in focus, is a necessary step to the resulting recommendations put
forth in phase three.
It is also important to recognize in advance that some policy objectives may only
be impacted to a certain degree by the funding approach, and that alternative
actions might be considered more advantageous or suitable in achieving spe-
cific objectives. For example, if a government seeks to encourage degree comple-
tion, then it may consider tying a portion of its funding allocation to the number
or share of graduates produced by each institution, provided that such a model
is accompanied by suitable quality assurance arrangements. Certainly, though
there are many other initiatives outside the realm of funding that could also help
ensure more and better graduates (e.g., better secondary school preparation for
higher education), it might be the case that they come at a different “cost” (e.g.,
longer time frame or additional political capital). The same would apply to the goal
of consolidating programs or institutions. Financing can be one means of suppor-
ting and providing incentives for consolidation; however, it is not the only policy
instrument in this context.
Finally, it will be important to consider higher education financing reform as one
aspect of systemic reform for which sufficient support needs to be mobilized
in order to ensure success. While exhaustive lists of demands and ‘maximum
positions’ might indeed go some way in satisfying a certain political clientele, their
chances of implementation in practice will be limited. Higher education reform,
in general, and higher education financing reform, in particular, has an impor-
tant political economy dimension, i.e., considerations of what might be politically
feasible in a given country. Such considerations — while not being the major
28 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
driver of technical recommendations — should not be completely alien to a finan-
cing proposal. While certain steps might be desirable under ideal circumstances,
they might not help improve the current situation. The World Bank team’s inten-
tion is to use a pragmatic approach, which considers such constraints.
Following this introduction, there will be four main sections of the report. The first
section discusses recent European developments in higher education financing,
in particular with regards to the financial autonomy of higher education institutions
(HEIs), their resource diversification, and models of public funding and student
funding4. This is followed by a section on criteria for good funding models, which
discusses general criteria for good funding models deriving from international
practice — as mentioned above, in contrast to criteria for a suitable funding model
deriving from specific strategic objectives as established by the Latvian govern-
ment. The latter topic will be subject to a separate paper under Component 2.
Taking into account current European developments and general criteria for
good funding models, the last section provides an overview of the strengths
and weaknesses of the current approach that the authors have observed. Notably,
Appendix 1 provides a broad description of the current status of higher education
funding in Latvia which, similar to the chapter on European developments and
in addition to some general system features, discusses the financial autonomy of
Latvian HEIs, their resource diversification, and models of public funding and
student funding.
4 The term higher education institution (HEI) is used throughout this document in an inclusive man-
ner, referring to all post-secondary institutions of the higher education sector (universities and non-
universities), if not specified otherwise.
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 29
2 European Developments
in Higher Education Financing
As stated above, higher education is an increasingly important topic on national
policy agendas for many countries. The widespread assumption that higher
education is a significant driver of national economic competitiveness in an in-
creasingly knowledge-driven global economy has promoted the importance of
higher education (cf. Santiago et al., 2008, p. 13). Alongside the increased poli-
cy importance of higher education, many systems also face serious challenges
maintaining their quality and relevance, increasing the efficiency and securing
equity in the field of higher education. New higher education financing models
are being developed in many European countries as policy responses to these
challenges.
Financing higher education has also been one of the key policy issues in Euro-
pean higher education policy. The European Commission’s “Delivering on the
Modernisation Agenda for Universities: Education, Research and Innovation”
(European Commission, 2006) report identified several areas of European higher
education requiring special attention. One of these areas is the funding of higher
education. The Commission expressed the need to “reduce the funding gap and
make funding work more effectively in education and research”, and proposed
that national governments spend at least 2 percent of GDP — including both
private and public funding — on higher education (in 2011 Latvia spent a total of
1 percent of GDP on higher education (Eurostat data)). The Commission also
recommended more output-oriented funding and called upon universities to take
more responsibility for their financial sustainability. Furthermore, the Commission
recommended that member states “critically examine their current mix of stu-
dent fees and support schemes in the light of their actual efficiency and equity”
keeping in mind that “free access [...]does not necessarily guarantee social equity
(European Commission, 2006, p. 7)”.
In 2011, the European Commission built on the Modernisation Agenda by pub-
lishing another communication, “Supporting growth and jobs — an agenda for
the modernization of Europe’s higher education systems” (European Commis-
sion, 2011). In this communication, the Commission emphasized the importance
of designing funding mechanisms in support of excellence; reaffirmed the need
to achieve an adequate level of public and private funding for higher education;
called for funding mechanisms to be linked to performance and introduce an ele-
ment of competition; and recommended the facilitation of access to alternative
sources of funding, including using public funds to leverage private and other
public investments in higher education (e.g., through match-funding arrange-
ments).
30 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
The recent financial and economic crisis has had profound negative effects on na-
tional and regional economies throughout Europe. Around half of the European
countries have reduced their education budgets during the years 2011 and 2012
(European Commission/EACEA/Eurydice, 2013, p. 32). In countries where funding
is being cut, higher education institutions have increased their efforts in seeking
new funding sources to support their activities. The level of public funding alloca-
ted to higher education has not only been reduced, but also the nature and form
in which it is provided to HEIs has been changing. In many countries, growing
accountability requirements set by the governments have been accompanied
by granting HEIs more institutional autonomy. At the same time, the efficiency
of funding in terms of the capacity of HEIs to meet certain policy goals
in a cost-effective way is becoming increasingly important throughout Europe.
For this reason, it will be a crucial challenge for many governments to re-think
both the design and implementation of higher education funding arrangements
in order to enhance funding efficiency in the sector (Estermann, Bennetot Pruvot
& Claeys-Kulik, 2013, p. 4).
The purpose of this chapter is to provide a short overview of the recent trends
related to financing higher education in Europe. It is organized into four sections
highlighting the major topics of financing higher education in Europe: models of
public funding, resource diversification, financial autonomy, and student funding.
Each of these topics includes a brief description of the topic, a short analysis of
the latest trends in European higher education systems, as well as Latvia’s current
position vis-a` -vis these trends. An overview of trends as well as Latvian position
with respect to trends is presented in a series of Tables (see Tables 5–9). The final
section of the chapter offers a brief analysis of higher education as a public
or private good, and includes some general insights to be taken into account
when developing financing models of higher education.
2.1 Recent European trends in higher education
financing
Models of public funding
There are a number of different ways in which to categorize or cluster alternative
allocation models in the funding of higher education institutions. A frequently
applied categorization distinguishes between negotiated, incremental, formula,
and competitive funding (e.g., Eurydice, 2008; Jongbloed et al., 2010). For practi-
cal purposes, this report adopts the categorization of Ziegele (2013) who has
identified three typical pillars of funding models: (i) basic funding; (ii) performance
funding; and (iii) innovation-/profile- oriented funding.5 Regardless of the diver-
sity throughout higher education systems and funding models in Europe, these
three pillars can, to a certain extent, be identified in most systems. Negotia-
5 In most European higher education systems, the public funding of research takes place through
a dual support system meaning that research is funded both through basic funding and through
innovation-/profile-oriented funding (mainly competitive research grants allocated by intermediary
allocated by research councils, national academies or other national/federal intermediary bodies
(cf. Jongbloed et al., 2010, p. 53).
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 31
ted, incremental, formula and competitive funding are instruments that could be
applied within the three specific pillars.
Basic funding can be described as an amount of public funding that remains largely
stable over a specific period of time. The purpose of basic funding is to provide
predictable and reliable financing that covers the main part of operational costs, the-
reby enabling HEIs to perform their core tasks of teaching and research (Ziegele,
2013, pp. 73–74). As previously discussed, in most European systems, public autho-
rities distribute basic funding to HEIs through the use of block grants. The overall
amount of the block grant may be determined in different ways; through negotiation,
incrementally on a historical basis, or via a funding formula. The importance of these
different elements in determining the overall amount of the block grant varies across
the systems (Estermann, Bennetot Pruvot & Claeys-Kulik, 2013, p. 8).
Incremental funding, where historical allocations play a large role, is becoming
less common, and in many systems, has already been replaced by formula-based
approaches with input-oriented indicators. In 20 out of 34 European higher educa-
tion systems, funding formulae were of very large importance in 2008, compared
to 1995 when only seven systems attached a large importance to it (Jongbloed
et al., 2010, p. 47–48).
Number of systems Number of systems Table 1 Importance of input-
and relative importance of and relative importance of versus output-related drivers
input-related drivers output-related drivers of HEIs operational grants
1995 2008 1995 2008 Source: Jongbloed et al., 2010, p. 51
Extremely important 38 24 3 8
Important 4 18 3 16
Minor importance or unimportant 3 3 39 21
The importance of input and output drivers in determining the operational grant
for teaching, research and ongoing activity is shown in Table 1. Input-related
drivers remain extremely important or important in almost all European higher
education systems. The most important input criteria include the number of
students or publicly-funded study places, the number of staff, and past costs of
an institution. However, compared to 1995, when there were only 6 systems
in which output-related criteria played an important or extremely important role,
in 2008, 24 European systems considered output-related drivers important
or extremely important. Frequently used output criteria include elements from
teaching and research activities: degrees conferred, study credits accumulated,
assessment results, indicators related to publications, or competitive research
grants (Jongbloed et al., 2010, pp. 49–51). Where funding formulae are used
to calculate the block grants, these are largely dominated by input-oriented indi-
cators, namely student numbers (at Bachelor level, then at Master level). The cor-
responding output-oriented indicators (number of Bachelor and Master degrees
conferred) are used less frequently or else have less weight in the formula (Ester-
mann, Bennetot Pruvot & Claeys-Kulik, 2013, p. 9). Output-oriented indicators are
typically part of the performance-based funding pillar, to be presented next.
The main purpose of performance-based funding is to create financial incentives
for HEIs to produce outputs and outcomes in certain areas of their activities by
32 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
applying formula funding6. Performance-based funding arrangements reward HEIs
ex post — that is, they reward their past teaching and research performance (Ziege-
le, 2013, p. 74). Despite the simplicity in terms of definition, it seems that perfor-
mance-based funding is understood very differently across Europe. Nevertheless,
a majority of systems consider their funding allocation mechanisms at least partially
performance-based for teaching (via graduate-related criteria) and partially or main-
ly performance-based for research, where indicators related to publications and
external research funding are normally taken into account (see Figure 1).
Figure 1 Relative importance
of indicators used in funding
formulae in European higher
education systems
Source: Estermann, Bennetot Pruvot
& Claeys-Kulik, 2013, p. 10
The third typical pillar of funding models, innovation-/profile-oriented funding,
underscores intentions expected to be carried out in the future. Concretely, this
type of funding is often utilized under the label of “targeted/earmarked funding”,
“competitive funding”, “strategic funding”, “project-based funding”, “excellence
initiatives” or “centers of excellence” — to name but a few. Regardless of
the name, all these funding instruments basically aim to finance and incentivize
innovations, research (or sometimes teaching) excellence, or the development of
institutional profiles in advance (cf. Ziegele, 2013, pp. 73–74, p. 78). Innova-
tion-/profile-oriented funding can take many forms, such as funding that is alloca-
ted on a competitive basis (e.g., the “Strategic Innovation Funding” in Ireland,
established as a mechanism for institutional restructuring and modernization)
or a non-competitive basis directly allocated to HEIs (e.g., Higher Education Inno-
vation Funding scheme in the United Kingdom, which focuses on knowledge
exchange). Innovation-/profile-oriented funding includes excellence initiatives
(e.g., Germany’s “Excellence Initiative”), as well as project funding programs for
carrying out strategic research found in many European countries7.
6 Or performance contracts which are related to part of the budget.
7 See http://www.excellence-initiative.com/
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 33
Performance contracts (synonymous with target agreements, performance agree-
ments), whereby certain goals are agreed between the funding authority and
HEIs, are used in different ways within the funding pillars. With performance con-
tracts, certain objectives, often in line with national strategic priorities and institu-
tion-specific missions, are agreed between the funding authority and HEIs. If per-
formance contracts are connected to basic funding, they usually do not have
to have a direct impact on funding. However, if the performance objectives are
measured clearly and linked to financial incentives, performance contracts often
become an organic part of performance-based funding arrangements8. Concre-
tely, those performance contracts would be very broad, based on framework
agreements, but might also take the form of more detailed contracts, highlighting
specific and measurable objectives and targets (Jongbloed et al., 2010, p. 30).
In this case, they would belong to the third, innovation/profile-oriented pillar.
Over the recent years, performance contracts have become a common feature
in many European higher education systems. Currently, performance-based con-
tracts are in use in 15 out of 22 European systems. These contracts have a clear
impact on funding allocations for instance in Finland, Austria, Germany and the
Netherlands (Estermann, Bennetot Pruvot & Claeys-Kulik, 2013, p. 11).
When taking into account the latest developments of higher education funding
models across Europe, some clear trends can be observed. First, it is likely that
basic funding becomes more dynamic and demand-oriented (rather than supply-
oriented) through the “money-follows-the-student” approach, where rewards and
incentives are based more heavily on factors related to student enrolment, rather
than on staff numbers or past institutional costs. Second, the relevance and
weight of the performance-based funding, including the formula funding, is likely
to increase. Performance-orientation sets HEIs incentives for improvement of
quality and efficiency; both of which are crucial aspects in the increasingly com-
petitive environment. Third, it is foreseeable that the relevance and weight of
the innovation-/profile-oriented funding component increases especially in the
form of competitive and targeted funding with a special emphasis on innovation
and excellence, of which both are considered important prerequisites for regional
or national competitiveness. Furthermore, it is likely that performance contracting
becomes more widely used within the funding pillars due to the increasing per-
formance-orientation in public funding modalities (Ziegele, 2013, pp. 74–79).
To summarize:
•Incremental funding is being applied less frequently, and in many systems has
been replaced by formula-based approaches.
•Although input-related drivers remain important in almost all European higher
education systems, the use of output-related criteria is also continually increas-
ing.
•It is likely that basic funding of HEIs will become more dynamic and demand-
oriented (rather than supply-oriented).
8 It is important to note that performance contracts are applicable to all three funding pillars (basic
funding, performance-based funding, innovation-/profile-oriented funding) and not restricted to only
performance-based funding arrangements.
34 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
•The relevance and weight of the innovation-/profile-oriented funding component
is likely to increase; especially in the form of competitive and targeted funding.
Input-related and formula-based drivers of the basic funding pillar have also been
important in Latvia, but, contrary to many other European systems, the current
funding model does not offer significant incentives for greater performance- and
output-orientation. The innovation-/profile-oriented funding component in Latvia
is currently composed of a number of different types of smaller and larger third-party
funding streams (including EU Structural Funds) but not included in the system of
state funding.
Resource diversification
Resource diversification (a.k.a. income/revenue diversification) can be understood
as a generation of additional income through new or existing funding sources
that contribute to balancing the income structure of the institution (Estermann
& Bennetot Pruvot, 2011, p. 26). In many European higher education systems,
HEIs have been encouraged to diversify their revenues and reduce their depen-
dence on public funding. As a result of this, many countries have decided to grant
more financial autonomy to HEIs to encourage a differentiation of institutional
missions and diversification of resources (Jongbloed et al., 2010, p. 10). The rela-
tive proportion of expenditure on HEIs from private sources increased in 16 out of
the 19 European countries for which OECD data are available, between 2000
and 2010. Countries in which the increase has been more significant include
the United Kingdom (from 32 to 75 percent), Portugal (8 to 31 percent), Slovakia
(9 to 30 percent), Italy (23 to 32 percent) and Austria (4 to 12 percent), with EU21
average (14 to 23 percent) (OECD, 2013, p. 207).
There are a number of alternative ways to categorize HEI sources of income. Tradi-
tional categorization includes (i) operational grants allocated by public authorities
for ongoing teaching and/or research activities; (ii) tuition fees (or other fees) paid
by the students; and (iii) third-party funding, including all project and contract
funding received from public, international and private sources (e.g., research
council funding, ministry funded, specifically targeted policy programs, EU funding,
contract research, and contract teaching) (Jongbloed et al., 2010, p. 44).
In 2008, European public universities received on average 67 percent of their
funding from public sources through operational grants. About 12 percent was
from private households in the form of tuition fees. Third-party funds represented
the remaining 21 percent. Table 2 below shows the development of income cate-
gories over the period 1995–2008. A move towards a higher share of tuition
fees (from 8 to 12 percent) and third-party funds (from 15 to 21 percent) as well as
a lower share of operational grants (from 78 to 67 percent) all show increasing
resource diversification.
Table 2 Average proportion of 2008 1995
public HEIs’ main income
Operational grant 67 percent 78 percent
categories in 1995 and 2008
Source: Jongbloed et al., 2010, p. 44 Tuition fees 12 percent 8 percent
Third party funds 21 percent 15 percent
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 35
A recent study conducted by the European University Association also confirms
the existing trend of increasing resource diversification (Estermann & Bennetot
Pruvot, 2011)9. Direct public funding continues to be the most important income
source for HEIs in Europe, representing on average 73 percent of HEI income
(see Figure 2). Although direct public funding is often allocated as a block grant,
public authorities tend to also use competitive and targeted funding more frequen-
tly than before. Co-funding requirements, whereby institutions are requested
to finance part of the activities, are also becoming more frequent (Estermann
& Bennetot Pruvot, 2011, p. 8).
Figure 2 Average income
distribution in European HEIs
in 2008
Source: Estermann & Bennetot
Pruvot, 2011, p. 27
Student financial contributions (i.e., tuition fees and other fees), represent a signifi-
cant income source in some countries (on average 9 percent of HEI income). Stu-
dent financial contributions have the potential to constitute a large income source.
Especially in view of the economic downturn, the inclusion or introduction of fees
continues to be at the heart of the political debate around funding models for
higher education. However, in this respect, European countries seem to be
moving in different directions. For instance, some of the Nordic countries (Finland,
Sweden, Denmark), in which fee-free access to higher education has been a long-
standing policy principle, have recently implemented fees for foreign (non-EU)
students and have thereby added a cost-sharing element in their systems.
On the other hand, countries like Austria, Estonia and the German states have
decided to abolish fees for their domestic students and rely more on public
funding (cf. Estermann & Bennetot Pruvot 2011, p. 8; pp. 30–33).
Other sources of funding together account for nearly 20 percent on average of the
total income structure of European HEIs. This includes income generated from
contracts with the private sector (6.5 percent) philanthropic funding (4.5 percent),
income generated by the provision of services and financial activities (4.1 percent)
and funding received from international public organizations (mainly from EU)
(3 percent).
According to the same EUA study, it should be noted that specifically European
funds are not always identifiable in the universities’ income structure; this may be
9 Figures presented in Table 2 and in Figure 2 are not directly comparable due to the differences
in data collection and methodology.
36 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
for instance the case of structural funds, which are delivered by the national
or regional authorities, and may be thus labeled as national/regional funds.
Overall, these types of additional income source can exceed 10 percent of the
average universities’ income in most systems. According to EUA, a worrying trend
seems to be that in some countries, European funds are perceived as a mecha-
nism to compensate decreases in national public funding. From the perspective of
long-term sustainability, this is highly problematic. Moreover, European funds are
often allocated on a competitive basis and therefore success in the competition
requires institutional capacities and resources that in turn depend on financial
means (Estermann, Bennetot Pruvot & Claeys-Kulik, 2013, p. 8).
Resource diversification is facilitated by an institutional legal status enabling HEIs
to behave entrepreneurially in terms of costing and pricing of activities, internal
allocations, decision-making on commercial possibilities, and responsive supply
of educational programs and research activities10. Furthermore, incentives for re-
source diversification can also take the form of matching funds linked to funding
generated from outside sources as well as (tax) incentives to stimulate philan-
thropic giving to HEIs (Santiago et al., 2008, p. 248). It seems that a positive cor-
relation exists between the degree of diversification of the income structure of the
university and its perceived degree of staffing and financial autonomy. Noticeable
positive correlations can be found in particular between income diversification and
the ability of the university to invest in stocks and shares on the financial market,
to borrow from banks or to carry over financial surpluses (Estermann & Bennetot
Pruvot, 2011, p. 41).
In order to implement their strategies and policies regarding the diversification of
higher education funding, including in particular private sources of funding other
than households, almost all European countries have developed an incentive of
some sort for HEIs and/or private partners. The most commonly adopted incentive
has been to offer tax relief for donors/sponsors/private partners of HEIs (adopted
in 20 out of 33 systems) or to provide a regulatory framework authorizing insti-
tutions to own intellectual property rights (adopted in 13 out of 33 systems),
as well as financial or other support for partnerships with the private sector (adop-
ted in 12 out of 33 systems) (Eurydice, 2008, p. 81). Many European governments
have also influenced income diversification strategies through the modalities
under which they allocate funding to the HEIs. For instance, specific criteria
in funding formulae aimed at encouraging external funding, or the extended use of
competitive funding, project funding and targeted funding can all offer strong
incentives for resource diversification (Estermann & Bennetot Pruvot, 2011,
pp. 46–47)11.
The main trends in resource diversification can be summarized as follows:
•During the past 10 years, the relative proportion of HEI income coming from
private sources has increased in most of the European countries. This trend
10 If HEIs do not know the costs of their activities, it is also very difficult to set adequate prices.
For this reason, cost calculation is an essential element in supporting the resource diversification pro-
cesses. Determining costs also increases transparency on how HEIs spend money and what the real
costs of their activities are (more on costing, see Estermann & Claeys-Kulik, 2013).
11 EUA glossary definition for funding formula: “[A]lgorithm based on standard criteria to calculate the
size of public grants to higher education institutions for teaching and/or ongoing operational activity
and, in certain cases, research. Criteria include input components and/or performance indicators.”
(E.g. Estermann, Pruvot & Claeys-Kulik, 2013, p. 6).
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 37
is likely to continue in coming years, due to the constraints in maintaining
or increasing public spending on higher education.
•In many European countries the share of direct public funding (core funding)
has decreased at the same time that the share of fees and third party funding
has increased. Nevertheless, direct public funding continues to be the most
important funding source for HEIs across most European higher education
systems.
•A number of European countries have recently offered financial incentives for
HEIs and third parties for actions supporting the greater resource diversification
of HEIs.
Compared to many other European systems, resource diversification in Latvia can
be considered very high. According to the Law on Higher Education Institutions,
financial resources of higher education established by the state are formed from
the resources of the State general budget, as well as other income, which institu-
tions of higher education earn by performing activities towards the realization of
the aims specified in the constitutions. In 2012, direct public funding covered
only about 36 percent total income of HEIs whereas tuition fees (23 percent) and
funding received from international organizations (including EU Structural Funds)
(21 percent) together accounted nearly a half of HEIs income. Also funding from
other sources comprised a relatively high share (20 percent) of HEI income
(see Chapter 4 for further discussion).
Financial autonomy
Providing a higher level of institutional autonomy is often expected to improve
the performance of HEIs and higher education systems as a whole. It is assumed
that the more autonomous HEIs are, the better equipped they are to generate
additional resources through fund-raising or efficiency measures, with the free-
dom to orient their strategy towards available funds, potentially focusing on speci-
fic research themes or shifting the balance between education and research.
Based on this assumption, many governmental authorities among European
countries have granted HEIs more freedom to manage their resources and deve-
lop new income-generation policies (Steier, 2003, p. 162; Jongbloed et al., 2010).
Financial autonomy is one of the most significant sub-areas of institutional auto-
nomy12. Key dimensions of financial autonomy include at least (1) type of public
funding allocated to HEIs; (2) HEIs ability to keep a surplus; (3) HEIs ability to bor-
row money; (4) HEIs ability to own buildings; (5) HEIs ability to set staff salaries;
and 6) HEIs ability to charge tuition fees (e.g., Estermann, Nokkala & Steinel,
2011; cf. Jongbloed et al., 2010, pp. 41–43; Estermann & Nokkala, 2009,
pp. 18–26)13.
12 The European University Association (EUA) has compiled an “Autonomy Scorecard” highlighting
four areas of institutional autonomy: organisational autonomy, financial autonomy, staffing autono-
my, and academic autonomy. Autonomy Scorecard summaries are available at:
http://www.eua.be/Libraries/Governance_Autonomy_Funding/Scorecard_summaries.sflb.ashx
13 Data for these dimensions has been obtained from the European University Association’s online
database “University Autonomy Tool” at http://www.university-autonomy.eu/dimensions/financial/.
The database contains data from 29 European higher education systems and mostly describes the
state of HEI autonomy in late 2010.
38 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
1. HEIs freedom in internal allocation of public funding. In Europe, there seems
to be a clear trend towards the allocation of public funding through block
grants instead of line-item budgets. Block grants cover several categories of
expenditure and enable HEIs to have greater freedom in dividing and distribu-
ting their funding internally according to their needs. In line-item budgeting,
funding is allocated to particular items or types of expenditure such as person-
nel salaries, capital investments, travel expenses, and building maintenance.
With line-item budgets, HEIs have significantly less freedom in deciding inter-
nal allocations (Estermann, Nokkala & Steinel, 2011, p. 30).
Currently, in 25 European higher education systems, HEIs receive their basic
public funding in the form of a block grant, whereas line-item budgets are
applied only in three countries (Cyprus, Greece, Turkey). However, there are
differences in how freely HEIs are able to internally allocate the block grant.
In 14 systems (including, e.g., Denmark, Estonia, Finland), HEIs have no res-
trictions on the allocation of funding, but in 11 systems (including, e.g., France,
Hungary, Iceland) the funding authority has set more or less restrictive limita-
tions for internal allocations.
2. HEI ability to keep a surplus. HEIs might either have a right to accumulate sur-
plus from public funding or else are required to return any potential surplus
to the funding authority at the end of the financial year. Currently, in 27 Euro-
pean higher education systems, HEIs can keep a surplus either without restric-
tions (15 systems) or else with some restrictions (12 systems). In contrast,
only in 4 systems (Cyprus, Greece, Ireland, Lithuania) are HEIs unable to keep
the surplus.
3. HEI ability to borrow money. Currently, in 23 European higher education
systems, HEIs are allowed to borrow money from financial markets either
without (7) or with (16) restrictions set by the external authority. In only 7 Euro-
pean higher education systems (Greece, Hesse in Germany, Hungary, Nor-
way, Portugal, Switzerland, Turkey) are HEIs not allowed to borrow money
at financial markets.
4. HEI ability to own their buildings. In 22 European higher education systems,
HEIs are able to own their buildings. However, HEIs are not necessarily able to
autonomously decide on the sale of their assets; in only 8 systems are HEIs
able to sell their buildings without restrictions set by the external authority
(including, e.g., Hungary, Lithuania, Sweden). In 6 systems, HEIs are not at all
allowed to own their buildings (three German states, Hungary, Lithuania,
Sweden).
5. HEI ability to set the salaries of their staff. Salaries for senior academic staff can
be determined freely by HEIs in only five European systems (Latvia, the Czech
Republic, Estonia, Sweden, Switzerland)14. In all other (28) systems, the ability
of HEIs to set salaries is restricted in one way or another (e.g., salary bands
are negotiated with other parties or they are prescribed by an external authority
for all staff)15.
14
Though there is a lower-bound limit for Latvia, as discussed in Chapter 4.
15
In EUA autonomy clustering, HEIs ability to set staff salaries is included under the area of “staff autono-
my”. See EUA’s “University Autonomy Tool” at http://www.university-autonomy.eu/dimensions/staffing/.
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 39
6. HEI ability to charge tuition fees. Universities’ ability to set fees and decide on
their level is often essential to ensuring their financial capacity, since it enables
the institution to generate new funding streams through private contributions.
In Europe, there are great differences across the systems in collecting and
setting the level of fees. These differences depend mainly on the level of study
(Bachelor, Masters, Doctoral level) as well as on student origin (national/
EU-students and non-EU students) (see Table 3).
Table 3 Setting tuition fees in Europe
Cooperation Ceiling set by law Fees set by law
Universities free universities/ or external or external
to set tuition fees external authority authority authority No fees
National and EU students/ BB (DE), CZ, DK, FI,
IT, LT, NRW (DE),
EE, HU, LU, LV CH AT, CY, ES, FR, NL, TR GI, HE (DE), IE, IS,
Bachelor level PT, UK
NO, PLC, SE, SK
National and EU students/ BB (DE), CZ, DK, FI,
EE, GR, HU, IE, LU,
CH IT, LT, NRW (DE) AT, CY, ES, FR, NL, TR HE (DE), IS, NO, PL,
Master level LV, PT, UK
SE, SK
National and EU students/ BB (DE), CZ, DK, FI,
EE, IE, HU, LT, LU,
CH IT AT, CY,ES,FR,TR GR, HE(DE), IS, NO,
Doctoral level LV, NL, PT, UK
NRW (DE), PL, SE, SK
Non-EU students/ EE, HU, IE, LT, LU,
BB (DE), CZ, FI,
LV, NL, PT, SE, SK, CH, DK, PL IT, NRW (DE) AT, CY, ES, FR, GR
Bachelor level HE (DE), IS, NO
TR, UK
Non-EU students/ EE, GR, HU, IE, LT,
BB (DE), CZ, FI,
LU, LV, NL, PT, SE, CH, DK, PL IT, NRW (DE) AT, CY, ES, FR
Master level HE (DE), IS, NO
SK, TR, UK
Non-EU students/ BB (DE), CZ, DK, FI,
EE, IE, LT, LU, LV, NL,
CH, HU, PL IT AT, CY, ES, FR GR, HE (DE), IS, NO,
Doctoral level PT, SK, TR, UK
NRW (DE), SE
Source: Estermann, Nokkala & Steinel, 2011, p. 35
Generally speaking, European HEIs are more autonomous in setting fees for
non-EU students than for national/EU students, whose fees are often set by either
an external authority or not levied at all. For instance, in 8 European systems,
HEIs are free to set tuition fees at the Masters level for domestic/EU Masters
students, whereas in 10 systems, fees are not collected at all (at Bachelor
level fees are not collected in 12 systems and at doctoral level in 12 systems).
In 11 systems, universities are allowed to collect fees from domestic/EU Masters
students, but external authorities in one way or another influence the process of
setting the level of tuition fees (Estermann, Nokkala & Steinel, 2011, p. 34).
The following main trends in financial autonomy have been observed in Europe
(cf. Estermann, Nokkala & Steinel, 2011, pp. 36–37):
•The overall level of financial autonomy across Europe has increased significantly
over the last 15–20 years. In 2008, HEIs in 28 countries had a high or medium
level of financial autonomy whereas this was the case across only 19 countries
in 1995 (Jongbloed et al., 2010, pp. 41–43).
40 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
•Although the level of financial autonomy has increased in all of the aforementio-
ned dimensions, this is particularly the case in the use of block grants. On the
other hand, block grants have been accompanied by more stringent account-
ability measures, some of which have involved reducing the capacity of HEIs
to manage funds as they see fit.
•In most systems, HEIs are not required to return a surplus to the public funding
authority, although their ability to retain surpluses has also been questioned
lately as a result of the economic crisis.
•More European countries now allow their HEIs to borrow money on the financial
markets.
•HEIs in many systems have at least formally increased their financial autonomy
by gaining ownership of the buildings they occupy.
•In most European systems, HEI ability to freely set staff salaries remains restric-
ted.
•In a number of systems, there has been a noticeable move towards student
contributions in the form of tuition fees, although in some systems, fees have
also been abolished. Setting the level of fees is often regulated by external
authorities, especially in the case of domestic/EU students.
Compared to other European countries, Latvia scores high in the area of financial
autonomy. Currently, it is 4th among the ranked 28 European higher education
systems in EUA’s “University Autonomy Scorecard”. The financial autonomy of
higher education institutions is defined in the Law on Higher Education Institutions.
Institutions of higher education are financed by the founders. The funds of the State
general budget to state-founded institutions are allocated as one-year block grants
that are split into broad categories. The methodology of appropriating the state
budget funding is specified by the Cabinet of Ministers Regulations No. 994.
Latvian universities receive a one-year block grant that is split into broad catego-
ries. They may keep a surplus and borrow money, providing they have the approval
of an external authority16. That is, institutions of higher education report annually on
the implementation of the budget to the Minister for Education and Science and the
Minister of the relevant field, or the founder of the institution of higher education.
Latvian institutions are also free to set salaries for their staff and tuition fee levels for
all student groups. However, the Cabinet of Ministers Regulations No. 836 set
the minimum wage rate for academic staff. Institutions are also able to own
buildings. The Law on Higher Education Institutions states that the property of HEIs
may include land, movable property, immovable property and intellectual property.
State institutions of higher education have the right to make use of their property
in order to achieve the aims indicated in their statutes. The property of state institu-
tions of higher education is administrated separately from state property, which
has been transmitted into their possession by the Cabinet of Ministers.
16 In the case of Latvia, this would be the Ministry of Education and Science [authors].
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 41
Student funding
Student funding — that is, student contributions (mainly tuition fees or other fees
paid by the students) and student financial support systems (mainly grants, loans)
— is clearly among the most controversial issues in the sphere of financing higher
education. Questions about fees and loans tend to meet criticism in all countries
on the grounds of their expected negative effects on equity. On the other hand,
tuition fees and student loans (instead of grants) are also gaining popularity on
the grounds of equity in many countries. Tuition fees — combined with adequate
and well-targeted student support schemes — generate additional revenues for
HEIs, thus enabling increases in participation rates. Tuition fees and loans are
also regarded as more equitable by some authors since they transfer part of
the instruction costs to those who also will directly benefit from education
(Vossensteyn et al., 2013, p. 15).
Tuition fees: In general, tuition fee policies can be divided into (1) up-front tuition
fees vs. deferred tuition fees; and (2) universal tuition fees or no tuition fees
vs. dual track tuition fees (cf. Johnstone & Marcucci, 2010, pp. 104–107)17.
1. Up-front tuition fees are payable at the time of matriculation and fee levels
do not depend on a student’s (or his/her family’s) income level. Deferred tuition
fees, on the other hand, are often paid upon graduation on an income-contin-
gent basis once the graduates’ income has reached a certain agreed-upon
threshold. Income-contingent loans are the most frequently-used way of defer-
ring the tuition fee to the future. In addition, so-called “graduate tax” arrange-
ments might also be considered a variation of the income-contingent loan
scheme, whereby students who have attended higher education free of charge
are responsible for paying income surtax throughout their working lifetime
(Marcucci & Usher, 2012, p. 6). In Europe, at present only in the UK (England,
Wales, Northern Ireland) has a deferred tuition fee system in the form of
income-contingent loans been implemented (see Country Example 1).
2. In systems applying universal tuition fees or no tuition fees, all students either
pay or do not pay tuition fees regardless of their academic merit or income
level. However, in a dual track tuition fees system (a.k.a. “publicly subsidized
study places” or “state-funded study places”), a certain number of free or very
low cost study places are awarded to a selected number of students chosen by
the public authority, while other places are available to qualified, but aca-
demically lower performing students on a tuition fee-paying basis (Marcucci
& Usher, 2012, p. 6). Tuition fee-free study places are generally awarded on
the basis of academic merit, although financial need might also be taken into
account. In addition to Latvia, other European countries applying the study
place system include Hungary, Lithuania and Slovenia, where the majority of
students benefit from state-funded places. In Latvia, 55 percent of 1st cycle
students and 40 percent of 2nd cycle students pay fees (Eurydice, 2013).
17 Tuition fees are understood here as annual contributions paid by students to cover all or part of
tuition costs in higher education. They include also other contributions of students to different admi-
nistrative costs (known as “administrative fees” such as entrance fees, registration fees, certification
fees) (cf. Estermann & Bennetot Pruvot, 2011, p. 5).
42 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
Country example 1: England
Background
• Following the major transition in higher education funding that has been effective since September 2012, there have been systematic cuts
to public funding for higher education institutions.
• Underlying 2012 reforms is a two-pronged approach designed to (i) restructure higher education financing around tuition fees, and subsequently
(ii) increase the amount of financial support directly available to students, in the form of income-contingent loans and grants.
• These changes to the tuition fee and financial support system, have, among them, resulted in a three-fold increase in tuition fees in the year
2012/13.
Tuition Fees
• Prior to September 2012, fees for students pursuing 1st cycle programs were capped at GBP 3,375. Students enrolled as of September 2012
are required to pay fees ranging from GBP 6,000 (EUR 7,290) to GBP 9,000 (EUR 11,100) (maximum) per academic year, depending on
the level set by individual higher education institutions. Part-time students have their fees capped at GBP 6,750 (EUR 8,200). In 2nd cycle
programs, fees are unregulated.
• Students are not required to pay up front and can apply for a loan to cover the full fee. Repayments are income-contingent, and managed
automatically through the UK tax system (“Pay as You Earn-PAYE”) at a rate of 9 percent of income earned above GBP 21,000 (EUR 25,530)
per annum. Following a policy change in 2010, the student loan is indexed in line with inflation, with interest set at 3 percent (a change
from the previous 1.5 percent). Students can, however, make voluntary payments to repay the loan at any time.
• In contrast, students pursuing 2nd cycle programs face widely varying, unregulated fees and, with only some exceptions, do not have access
to financial support structures.
Financial support for students
• In addition to the basic tuition fee loan offered to students, they might also be eligible for a need-based grant of up to GBP 3,354 (EUR 4,080),
which is offered to full-time students from household incomes of less than GBP 25,000 (EUR 30,390). In 2012/13, 40 percent of first-cycle
applicants were awarded a full grant and 14 percent were awarded a partial grant.
• Full-time students are also entitled to apply for a maintenance loan, which is intended to cover living costs for students over a 10-month
period for the duration of their course or program. The maximum loan offered is between GBP 4,375 (EUR 5,320) and GBP 7,675 (EUR 9,330),
depending on whether the students live in or outside of the family home, and on whether or not they are based in London. The modality of
repayment is the same as for the tuition fee loans. In contrast to financial support for tuition fees, which, according to EU laws has to be
granted to all students from the EU, support for maintenance is restricted to students from England.
• For HEIs that charge more than GBP 6,000 (EUR 7,297), National Scholarship Program (NSP) awards must be offered alongside these pro-
grams in order to target students from disadvantaged backgrounds. These awards might take the form of bursaries, fee waivers and “in-kind”
support, such as access to personal laptops, etc. In addition to this, many institutions also offer other bursaries and scholarships for stu-
dents for students from underrepresented socioeconomic groups.
Sources: Eurydice, 2013; Vossensteyn et al., 2013
Although in the majority of European countries students pay tuition fees, there are
nevertheless great differences in terms of which students pay, what they receive
in return, and how much they pay. European countries fall into two groups when
considering tuition fees as an HEI income source (Estermann, Bennetot Pruvot
& Claeys-Kulik, 2013, pp. 7–8):
• Group 1. Tuition fees typically represent around 5 percent or less of HEIs
income in the Nordic countries (Iceland, Norway, Sweden, Finland, Denmark),
as well as in Austria, Belgium, the Czech Republic, France, and Germany.
Due to legislative restrictions, none of the Nordic countries collects fees from
domestic/EU students, although recent changes in national legislation across
Sweden, Finland (on an experimental basis), and Denmark mean that they are
now able to charge tuition fees from non-EU students.
• Group 2. Tuition fees typically represent around 10 percent or more of the HEI
average income, and, as such, constitute the most important income source
after public funding. Countries in this group are, e.g., Hungary, Ireland, Italy,
the Netherlands, Latvia, Poland, Slovakia, Spain, and the United Kingdom.
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 43
The highest maximum fees at Bachelor level (first cycle) reach more than
EUR 5,000 per year, e.g., in Ireland, Lithuania, Hungary, Slovenia, the United
Kingdom, and Turkey (Eurydice, 2013, p. 4).
Many European countries that have previously introduced tuition fees later
decided to abolish them either entirely or partly (see, e.g., Country Example 2).
For instance, although Hungary introduced tuition fees in 1994–95, it subsequent-
ly abolished them in 1998 while introducing a private income-contingent loan
scheme. Ireland also abolished its tuition fees in 1995, although reintroduced
them in 2008. In Austria tuition fees of EUR 727 per year were put in place
in 2001, but abolished again in 2008. Germany has moreover gradually given up
on charging tuition fees. After enabling states to introduce tuition fees in 2007,
those states that did introduce fees have been abandoning this practice in recent
years. Currently, 15 of the 16 German states enable studying to be free of charge
(Bavaria decided that fees are not in force as of the winter semester 2013/14).
Only in Lower Saxony must students pay fees of up to EUR 1,000 per academic
year, although it has decided to abolish them from the next academic year
(Vossensteyn et al., 2013, p. 18; Eurydice 2013).
Country example 2: Estonia
Background
• The Estonian higher education system was one of the European systems experiencing public funding cuts of up to 10 percent in the period
from 2008 to 2012. While recovering from the global recession, the higher education budget eventually stabilized in 2011 and even increased
in 2012. Since research funds have not yet returned to pre-crisis levels, the result has been a greater reliance on European funds.
State-funded study places
• In Estonia, higher education institutions — both public and private — are eligible to receive public funding from the state commission (“state-
commissioned places”). The state commission effectively operates through a contract between the Estonian government and any given higher
education institution, whereby the former purchases a certain number of graduates from the respective institution in question. Between 1995
and 2004, approximately 80 percent of public funding for these institutions was provided in the form of study places, which institutions
receive in the form of a block grant.
• State-funded places are allocated by higher education institutions on the basis of academic merit, whereby students who score above
a certain threshold in the entrance examinations qualify for these places at public HEIs. These places are set by the government as a function
of labor market demands.
Tuition Fees
• Prior to academic year 2013/2014, students in Estonia that qualified for a state-funded place did not have to pay fees, whereas all other
students had to cover the full costs of their tuition. Both public and private institutions were free to set their own fees; although, in the case of
the former, these were capped at an increase of 10 percent each year.
• As of 2013/14, however, the government introduced a new fee system, whereby students at public HEIs are able to study without any fees,
providing that they achieve at least 30 ECTS per semester and 60 ECTS per year. Anything short of this entitles HEIs to charge the student
for each ECTS not obtained, providing that the cost per ECTS does not exceed EUR 50 (EUR 100 for arts, medicine, veterinary, dentistry and
EUR 120 for aircraft piloting). Fees for private institutions are not regulated by the government.
Financial support for students
• In addition to state-funded places, the public sector also contributes to higher education funding in the form of direct student financial
support, such as grants and student loans. From 2013/2014, a new, less merit- and more need-oriented study grant system has been
implemented, whereby students are assessed on account of either (i) their household income or (ii) on academic merit. These grants –
ranging between EUR 750 and EUR 2,200 per academic year for need-based grants and EUR 559 and EUR 841 per academic year for
merit-based grants – are offered to approximately 17 percent of all students enrolled in state-funded places at HEIs, providing they are
either Estonian citizens or temporary residents whose stay does not exceed the designated period of study. Tax benefits for parents are also
available, depending on the status of the student concerned.
• Alongside grants, full-time students are also eligible to apply for state-guaranteed loans, whose maximum amount cannot exceed EUR 1,920
per academic year.
Sources: OECD, 2007; EUA, 2012; Eurydice, 2013
44 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
Student financial support: Many European countries mix and match different types
of grants (universal, merit-based, need-based) and loans (commercial or publicly
supported, mortgage-style, income-contingent), and so the relative importance of
different types of grants and loans varies significantly between the systems.
According to the Eurydice review (2011, pp. 61–62), grants schemes are rarely
universal, i.e., apply to all students in a given system (only in Denmark and
Sweden), and are provided on the basis of financial need or academic merit,
or a combination of both. Instead, need-based grants are most frequently
used in European higher education systems. In fact, among all countries offering
grants, only Iceland and Montenegro do not apply need-based grants. Although
merit-based grants appear less often in the higher education systems, 20 out of
39 European systems still apply some sort of merit-based schemes. However,
it should be noted that offering grants solely on the basis of academic merit
raises several equity concerns. It is quite unlikely that academically-gifted
students with relative financial ease would be dissuaded from attending higher
education on the exclusive basis of not having a merit-based grant. Grants are,
therefore, likely to serve as an effective policy instrument to promote equity of
access if they are used primarily to facilitate the access of students who are simul-
taneously academically-able and financially-needy. In countries where grants
(or state-funded places) conferred exclusively on a merit-basis are common (e.g.,
Eastern European countries), a reliance on pure academic merit is seen as the
only fair and proper criterion for student selection and financial support. However,
merit is hardly ever “pure”, i.e., completely independent from certain socio-eco-
nomic characteristics. It is quite well known that academic merit at the point of
entry into higher education often depends on prior educational opportunities,
which again, are often closely associated with the socioeconomic background of
the student (Santiago et al., 2008, p. 223).
A mixture of both need- and merit-based criteria for grants is present in some sys-
tems such as Belgium (Flemish Community), Greece, and Italy. The countries that
provide students with the highest amounts of need-based grants — with a maxi-
mum in excess of EUR 5,000 per academic year — are Belgium (Flemish Com-
munity), Denmark, Ireland, Spain, Italy, Austria, Portugal, Finland, UK (Wales),
and Switzerland. In Germany, Liechtenstein, and Norway, there is a mixed system
of grants and loans where part of the amount is given as a grant and part of it has
to be paid back as a loan (Eurydice, 2013, p. 5).
Table 4 Proportion of first Minority receives Majority receives
and second-cycle students GRANTS systems GRANTS systems
paying fees and receiving
Minority pays FEES systems 5 7
grants in academic year
2009/10 in 31 European HE Majority pays FEES systems 14 4
Source: Eurydice, 2011, p. 45
Table 4 above collates information from two key characteristics related to student
funding. The first is whether or not the majority of students pay fees, whilst the
second is whether or not the majority of students receive support in the form
of grants. By examining these two characteristics together, four main categories of
systems seem to emerge across the European landscape. First, there are systems
where the majority of students pay fees and also receive grants. There are four
national systems that occupy this category: Cyprus, Netherlands, Slovakia,
and the UK (Wales and Northern Ireland). Secondly, a category of systems that
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 45
is far more numerously populated refers to occasions where a majority of students
pay fees, while a minority receives grants. Altogether there are 14 systems cate-
gorized in this way, including, e.g., Ireland, France, Romania, Bulgaria, Belgium,
and Spain. The third model refers to instances where a minority of students pays
fees, while a majority receives grants. This model is in effect in seven European
systems: Denmark, Malta, Finland, Sweden, UK (Scotland), Liechtenstein, and
Norway. The final, fourth model comprises systems where only a minority of
students pay fees and receive grants. This group consists of five systems: Germa-
ny, Greece, Lithuania, Hungary, and Austria (Eurydice, 2011, pp. 45–47).
Publically-supported student loan systems exist in approximately two-thirds of
European countries while in 11 national systems student financial aid is based
exclusively on grants. In 10 systems, loans are universal: that is, they are made
available to all students (e.g., Denmark, Lithuania, the Netherlands, Slovakia,
Finland). One significant difference between grants and loans is that need-based
criteria are relevant in all except in two systems for grant allocation, but only con-
sidered in two loan systems (the Walloon Community of Belgium and Poland)
(Eurydice, 2011, pp. 52–54).
To summarize:
•Student funding continues to be among the most controversial issues in the
sphere of financing higher education in Europe. Political debates are quite often
more ideological than pragmatic. Due to the complexities related to tuition fees
(or absence of fees) and student support, more comprehensive and multi-
dimensional analysis are often needed in determining various equity aspects of
student funding arrangements.
•There is no general European trend. Some European countries that have pre-
viously introduced tuition fees, have later decided to abolish them either entirely
or partly. At the same time, other European countries have decided to increase
the share of private investment by allowing public HEIs to introduce fees
or charge higher fees while at the same time promoting equity of access by
restructuring their student support systems.
•Need-based grants are the most frequently used modes of student support
across European higher education systems.
Latvia applies a dual track tuition fee system with — in some cases — relatively
high fees and relatively many fee-paying students18. The Latvian higher education
system offers mainly merit-based support in the form of state funded study places,
and relies more on government-subsidized, mortgage-style loans offered by com-
mercial banks, rather than grants.
Overview of European trends and position of Latvia
Exploring the main European trends in higher education financing helps to posi-
` -vis these trends. Nevertheless, it should be
tion Latvian financing model vis-a
18 For details see Chapter 4.
46 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
emphasised that European trends are not the main criteria to evaluate the
strengths and weaknesses of Latvian financing model. What seems to be popular
or good in Europe does not automatically mean that it would be applicable
or good for Latvian higher education financing. European funding structures and
models are tightly bound to national features (society, economy, demographics,
etc.) of different countries, and it is reasonable to assume Latvia differs from
these features with many respects.
Drawing from the previous sections of this chapter and Appendix 1, the following
` -vis European
Tables (Tables 5 to 9) offer an overview of Latvia’s position vis-a
trends:
Table 5 Models of public funding — European trends and Latvia
Models of public funding European trend Current situation in Latvia Position of Latvia
Structure of funding model • Three typical pillars for • Latvia applies only the pillar of Inconsistent with European trend
allocating public funding “basic funding” in allocation of
for HEIs can be found from most core public funding to HEIs
of the European countries: • Performance contracts are
(1) basic funding; applied between HEIs and MoES
(2) performance funding; and
(3) innovation-/profile-
oriented funding
• Performance contracts /
target agreements are in use
in 15 out of 22 European
Basic funding • Basic funding: • Latvia applies formula funding Inconsistent / consistent
and performance-based Formula-based approaches mainly with input-oriented with European trend
funding: modalities with demand-based indicators (funded study places,
input-oriented indicators research equipment)
are substituting incremental • The overall public budget of
funding with historical the HEIs remains largely
emphasis (mixed approach constant and develops
is common) incrementally on a historical
• Performance-based funding: basis (rather than demand)
Majority of systems consider • Current funding model does
their funding allocation not offer significant incentives
mechanisms at least partially for greater performance- and
performance-based output-orientation
• In 2008, 24 European systems
considered output-related
drivers important or extremely
important (in 1995: 6 systems)
Innovation-/profile-oriented • Innovation-/profile-oriented • The innovation-/profile-oriented Inconsistent with European
funding: modalities funding is used more frequently funding component in Latvia trend
to support national policy is currently composed of
priorities and development of a number of different types of
institutional profiles smaller and larger third-party
• The relevance and weight of funding streams (including
the innovation-/profile-oriented EU Structural Funds) but not
funding component is likely included in the system of state
to increase; especially funding
in the form of competitive
and targeted funding
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 47
Table 6 Resource diversification — European trends and Latvia
Resource diversification European trend Current situation in Latvia Position of Latvia
Public / private funding • Private expenditure on HEIs • Private funds (tuition) Consistent with / ahead of
diversity has increased in 16 out of accounted total 23% European trend
the 19 European OECD countries and “other funds” (excluding
between 2000 and 2010 international/EU funding)
• EU21 average of private 20% of Latvian HEI revenue
expenditure on HEIs was 23% in 2012
in 2010 (Source: MoES, 2014)
Diversity of sources • Funding of European public HEIs • Latvian HEIs funding structure Inconsistent with / ahead of
in 2008: on average (2012): European trend
– 67% from public sources – 36% state budget funding
through operational grants – 23% tuition fees
(in 1995: 78%) – 41% “other sources”
– 12% from private (out of which 21% were
households as tuition fees from international funding,
(in 1995: 8%) mainly EU Structural Funds)
– 21% as third-party funds (Source: MoES, 2014)
(in 1995: 15%)
• On average, EU funding ranges
from 3–4% (Estermann
& Bennetot Pruvot, 2011)
to over 10% (Estermann,
Bennetot Pruvot & Claeys-Kulik,
2013) of the total income of HEIs
Table 7 Financial autonomy – European trends and Latvia
Financial autonomy European trend Current situation in Latvia Position of Latvia
HEIs freedom in internal • Block grants are used • One-year block grant split Consistent with European trend
allocation of public funding in 25 systems, line-item budgets into sub-categories
in 3 systems
• No restrictions on the internal
allocation of the block grant
in 14 systems
• Some restrictions for internal
allocations of the block grant
in 11 systems
HEIs ability to keep a surplus • HEIs are able to keep a surplus • State funded HEIs can keep Consistent with European trend
in 27 systems, not able to keep a surplus with an approval of
in 4 systems external authority
• No restrictions in keeping
a surplus in 15 systems
• Some restrictions in keeping
a surplus in 12 systems
HEIs ability to borrow money • HEIs are able to borrow money • Latvian HEIs are able borrow Consistent with European trend
from financial markets money with an approval of
in 23 systems, not able external authority
to borrow in 7 systems
• No restrictions for borrowing
in 7 systems
• Some restrictions for borrowing
in 16 systems
48 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
Financial autonomy European trend Current situation in Latvia Position of Latvia
HEIs ability to own their • HEIs are able to own their • Latvian HEIs own their buildings Consistent with / ahead of
buildings buildings in 22 systems, not able • Latvian HEIs can sell their European trend
to own in 6 systems buildings (restrictions apply
• No restrictions in selling assets in the case of State property)
in 8 systems
• Some restrictions in selling
assets in 14 systems
HEIs ability to set the salaries • HEIs are not able to set salaries • Latvian HEis are free to set Ahead of European trend
of their staff freely in 28 systems, salaries the salaries of their staff
can be set freely in 5 systems (above the minimum wage)
HEIs ability to set the level of • In most European systems, HEIs • Latvian HEIs are able to set Ahead of European trend
tuition fees ability to set the level of tuition their fees at all levels
fees is restricted by the external
authority, especially in the case
of domestic/EU students
Overview on financial • The overall level of financial • HEIs have a high level of Ahead of European trend
autonomy autonomy across Europe financial autonomy, Latvia
has increased significantly was ranked 4th position in EUA’s
over the last 15–20 years “University Autonomy
Scorecard”
Table 8 Student funding – European trends and Latvia
Student funding European trend Current situation in Latvia Position of Latvia
Tuition fees / fees • A large diversity of fee • Latvia applies a dual track No clear European trend
systems, no clear European tuition fee system
trend • 49% of all students
• Majority of students pay fees (full-time and part-time) pay
in 28 systems, minority of fees (37% of full-time and
students pay fees in 13 systems 97% of part-time students)
(2009/10) (Source: MoES, 2013a)
• During the past years, some • Compared to many other
systems have abolished fees, European systems, a relatively
whereas some systems have high fees are charged in Latvian
introduced fees or raised HEIs
the level of fees
Student support • A large diversity of student • Latvian higher education system No clear European trend
support systems, no clear offers mainly merit-based
European trend support in the form of state
• Need-based grants are most funded study places,
frequently used in European and relies more on government-
higher education systems, subsidized, mortgage-style
but still 20 out of 39 European loans offered by commercial
systems still apply also banks, rather than grants
merit-based schemes
• Publically-supported student
loan systems exist in 2/3 of
European countries
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 49
European trend Position of Latvia Table 9 European trends
and position of Latvia
Models of public funding Inconsistent with European trend — overview
Resource diversification Mixed
Financial autonomy Ahead of European trend
Student support No clear European trend
2.2 What do these trends mean for the further
analysis?
In the previous sections, European developments have been described. Although
sometimes there are clear tendencies, at other times, there are discernible
differences. The European trends will be further used in two ways:
•They are the starting point for criteria of assessment, which will be defined
in Chapter 4. Some of the trends are clearly seen as beneficial for higher educa-
tion, such as the trend towards increased autonomy, which is seen as a positive
development, since it allows HEIs to adapt flexibly to changing environments
while creating adequate incentive structures. The three-pillar model is also
a good standard and referent point for public funding models, as it balances
different functions of funding. The clear tendency towards performance-orienta-
tion, ex post and ex ante, is also seen as a positive development. Diversification
has different implications: on the one hand, it is positive, since it contributes
towards the improvement of financial situation and institutional risk spreading;
on the other, it might impose severe financial risks on HEIs.
•Tracing European developments also generates ideas for how Latvia might reform
the system. In the final proposal/recommendation, European benchmarks will be
taken into account; since there is both no need to repeat mistakes made in other
countries (for instance, political polarization on the tuition fee issue), and no need
to reinvent the wheel if a good solution has been successfully deployed in another
context that might also correspond to the Latvian profile.
2.3 Higher education as public and private good
From an economic perspective, HEIs produce outputs that can be categorized
as “public” or “private” goods. Using a standard economic definition, public
goods (e.g., products, services) are goods that are non-excludable and non-
rivalrous. Non-excludability means that a good cannot be provided exclusively
to only some individuals in a way that other individuals could be excluded from
consuming the same good. This therefore implies that consumption by some indi-
viduals does not diminish the consumption levels of others of the same good.
In the case of private goods, the situation is the opposite; individuals can be
excluded from consuming the service or product if they are not willing or able
to pay for it (i.e., a good is excludable), and consumption of a service or product
reduces the possibilities of others to consume the same good or service (i.e.,
50 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
a good is rivalrous). In addition, public goods create spillover effects. If they are
being offered, people who do not purchase the goods nevertheless enjoy their
benefits, e.g., dikes that are used to protect from water floods, etc. A public good
has to be provided by the state and funded by taxes, as private markets would not
lead to a sufficient provision of the good. A private good does not require state
intervention and should be provided by the market.
The public vs. private good argument regarding higher education is an explana-
tion for the diverse tuition fee developments in Europe. In many European coun-
tries, politicians tend to “buy” either one of the two positions, often leading to
a politically polarized debate where the two positions are opposed in contradic-
tion, leading either to political reform blockades or to an unreliable sequence of
introducing and later abolishing tuition fees.
This paper proposes economic analysis and rational arguments to overcome the
political impasse. Economists have been clear that there are private benefits to be
gained from higher education, meaning that there is rivalry and excludability.
But, they are also convinced that there are public benefits of higher education
(see Table 10). Public benefits refer to positive externalities of the good, i.e., bene-
fits for society not taken into account in the individual cost-benefit-analysis of the
student (hence justifying public funding)19.
Table 10 Potential private and public benefits from higher education
Benefits from higher education Private Public
Economic Higher salaries Greater national productivity and development
Employment Reduced reliance on public support
Higher savings Increased consumption
Improved working conditions Increased potential for transformation from low-skill industrial
to knowledge-based economy
Personal and professional mobility
Social Improved quality of life Nation-building and development of leadership
Better decision-making skills Democratic participation; increased consensus; perception that
society is based on fairness and opportunity for all citizens
Improved personal status Social mobility
Increased educational opportunities Greater social cohesion and reduced crime rates
Healthier lifestyle and higher life expectancy Improved health
Improved primary and secondary education
Source: Steier, 2003, p. 167
Higher education has elements of both private and public goods. People can be
excluded from higher education, from a particular institution, from a particular
program, or from a particular teacher. This exclusion can be based, for example,
19 Even different aspects of the same function can be both, rivalrous and non-rivalrous, as well as
excludable and non-excludable. For instance, basic research published freely in the public domain
is not excludable, or at least not secretive, while commercial research and development activity
is likely to be subject to both rivalry and excludability (Marginson, 2007, p. 312).
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 51
on differences in academic merit; i.e., given that an individual has to meet certain
conditions in order to have access to, and to graduate from, higher education
institutions. However, nobody can be excluded from the higher productivity
graduates exhibit at the labor market and the advancements made through their
creativity and application of skills after successfully completing quality higher edu-
cation. There is also wide agreement that higher education creates both public
and private benefits as well as costs, and that those who benefit from higher
education should also contribute to its costs (equity principle). Higher education
creates multiple social and economic public benefits thereby justifying significant
public investments in higher education. However, individuals (mainly graduates)
also receive significant private economic and social benefits, making the recom-
mendation that they bear directly at least part of the costs of their training, both
efficient and equitable.
Economic rationales provide no arguments for 100 percent public or private
funding. Differences in opinion nevertheless arise when determining what the
“right” balance might be between benefits and costs and on how to measure up
the benefits and costs (especially in terms of money). In any case, several
scholars consider the full public-funding model of higher education as inequitable
and regressive, based on the fact that higher education students are disproportio-
nately from middle- and higher-income families (e.g., Barr, 2004; Bevc & Uršiè,
2008; Johnstone & Marcucci, 2010)20.
OECD’s statistical yearbook Education at a Glance provides calculations annually
on the public and private costs and benefits of higher education. According
to OECD (2013, p. 135), it is very difficult to generate correct and comprehensive
estimates of public and private returns, meaning that rates of return must always
be interpreted with caution. Nevertheless, large discrepancies between private
and public returns “should prompt additional analysis to assess whether govern-
ment tax schemes or subsidies are strongly distortionary” (ibid., p. 135). Based on
OECD calculations, average net private returns in EU21 countries slightly exceed
public returns (ibid., pp. 144–147). However, in some specific countries (Estonia,
Turkey, Poland, Slovakia) private returns are considerably higher than public
returns. On the other hand, e.g. in Belgium, Greece and Italy public returns are
moderately higher than the private ones.
This leads to the following conclusions:
•Higher education is a “mixed good” creating both public and private costs and
benefits.
•Determining the exact public and private costs and benefits is difficult from
a conceptual and methodological perspective. However, one-sided financing
models emphasizing only public or only private dimensions (full public or full
private funding) are neither adequate nor equitable.
20 For instance, Hölttä, Jansson and Kivistö (2010) note problems related to equity in Finland where
higher education has been free of charge for all students for several decades. Despite the fact that
equal opportunity and equity have been the driving forces in higher education policy now for four
decades, the middle and upper classes are still year after year clearly overrepresented in the cohorts
obtaining higher education — especially in those disciplinary fields and programs that yield the
highest private rates of return (Medicine, Law, Business).
52 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
•Since the real balance between private and public costs and benefits is unclear,
there is a wide range of potential arrangements between private and public
funding that might be considered when developing an appropriate financing
model. However, neither a pure market model nor a 100 percent free higher edu-
cation model is within this range.
In the case of Latvia, the first conclusion would be that economic analysis provides
no basis for the polarized political discussions of the previous years, favoring either
the argument of the pure private or public good. Acknowledging economic argu-
ments might help in avoiding political reform blockades. Secondly, if we take the
mixed good approach to the individual level, the dual track model seems to be
problematic. Each student benefits from private returns and contributes to positive
externalities. The economic rationale would instead suggest a certain cost-sharing
for each student rather than an overall cost-sharing for all students combined.
Third, the major question for Latvia will be where to move from the current situa-
tion: towards greater private or public funding shares (or might the current situation
be adequate)? The status quo section analysis where public and private funding
in Latvia stand in comparison to other European countries, and concludes that,
at present, total societal investment in higher education is too low due to both
limited public funding for HE and R&D, as well as limited private contributions,
particularly in the R&D sector. Private contributions through tuition fees tend to
typically come from students who cannot attend HE on subsidized study places,
and have to pay the full costs. Analysis shows that it is in particular students from
more advantageous backgrounds that profit from the subsidized (tuition-free)
study places.
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 53
3 Methodology of analysis:
Criteria for Good Funding
Models
3.1 Methodology to assess strengths
and weaknesses
At first glance, the assessment of strengths and weaknesses of higher education
funding appears easy: review the performance of the Latvian higher education
sector, evaluate the ways HEIs are well- or under-performing, and relate the per-
formance to the underlying funding system. This sounds simple, however, there
is a major analytical problem: performance of higher education is not only deter-
mined by the level and the structures of funding, but also by many other factors,
such as human resource policies, systems of quality assurance, the Bologna pro-
cess, the governance structures, etc. Performance is a result of various factors,
and it is highly difficult to isolate the influence of funding from all other factors.
In order to identify the effects of the funding system on performance of the sector,
two approaches will be employed as part of this project:
•In the following analysis (component 1), the current funding model will be ana-
lyzed against criteria for good funding models that were derived from European
experiences. The analysis of European experiences leads to a catalogue of crite-
ria for which the assumption could be made “if the criterion X is fulfilled then
we could expect potential effects on performance in area Y”.
•In a subsequent component of this project, Latvia’s funding model will be ana-
lyzed to assess its alignment with national policy objectives for higher education.
From current strategic documents, a catalogue of strategic objectives will be
derived and an analysis will show if the current elements of the funding system
are consistent, neutral or inconsistent with the objectives. This will be done
in component 2 of this project.
54 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
3.2 Sources for the assessment criteria
In order to analyze the strengths and weaknesses of the current higher education
funding system in Latvia and recommend adequate reform strategies, one must
start with clear normative criteria representing the features of a “good” higher edu-
cation funding model. In other words, any recommendations should be based on
and justified by mutually agreed-to criteria. The criteria will then be transformed
into tools for empirical analysis, especially in the interview guidelines.
The responsibility for identifying the criteria is first assumed by the World Bank
team, and then subject to a feedback cycle with the MoES to ensure they are con-
sistent with the intentions. The criteria are derived from three different sources:
•International experiences and standards regarding the features of “good” funding
models;
•Feedback and approval from the MoES; and
•Stakeholder assessment of importance of the different criteria as obtained through
interviews.
A major source for the following criteria is the analysis of European trends in Chap-
ter 3, as the following two examples could illustrate:
•The European trend towards financial autonomy with lump sums, the right
to keep surpluses, ownership of buildings, etc. is regarded as good practice
and included in the set of criteria; and
•The practice of the “three-pillar models” of state funding (balancing stability,
performance-orientation, ex post and ex ante incentives) is also used to define
the criteria below.
Discussions with stakeholders revealed additional aspects, for instance, the impor-
tance to legitimize budgets by transparent calculations or the question of whether
the performance-orientation is feasible in terms of availability of performance indica-
tors.
From the various sources, we identified six major criteria to assess the financing
system of Latvian higher education:
•Strategic orientation;
•Incentive orientation;
•Sustainability;
•Legitimization;
•Autonomy and flexibility; and
•Practical feasibility.
These will now be explained in more detail and broken down into a checklist that
will be applied to analyze the Latvian higher education funding system. Some of
the criteria refer both to institutional funding of universities and individual funding
of students, while others are only relevant in the context of institutional funding
(see Table 6). The criteria will be explicitly used to identify strengths and weaknes-
ses of the Latvian funding system in Chapter 4.
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 55
3.3 Explanation of the assessment criteria
Strategic orientation
Promote national strategies. Higher education financing has to promote national
strategies and objectives. If a country, for instance, wants to focus on the interna-
tionalization of higher education, then institutions should be financially rewarded
if they contribute to this objective. Similarly, if a country wants to consolidate
its university sector, then financial structures should not lead to a fragmentation of
funds. If equal access is the top goal, then financial measures to attain this
are most important. In short, funding should serve the strategies. For individual
student funding, access and equity are major issues.
Promote institutional profiles. It is not, however, only about national strategies.
Within the framework of national goals, a higher education system has to develop
institutional diversity. The differentiation and specification of institutional profiles
should also be promoted by funding. The realization of institutional objectives
should be related to financial support.
A separate note (in the next phase of the project) will discuss specifically the
` -vis articulated strategic objectives.
‘strategic fit’ of the current funding model vis-a
For this reason, this paper only analyzes the strategic criteria in an abstract way,
investigating whether there are mechanisms able to link strategies and funding
together, rather than interrogating specific strategic objectives in Latvia.
Incentive orientation
Create performance rewards and sanctions. Funding should have links to institu-
tional performance; high performance should be rewarded, and sub-par perfor-
mance should be sanctioned. The measurement of performance should follow
political objectives and academic standards. Performance orientation induces
financial flexibility and supports change processes financially. It is also important
that the financial incentives reach the individual actors in teaching and research;
hence, the reward and sanction system of the state should somehow find equiva-
lents inside the higher education institutions. Regarding individual funding, there
should be incentives for the efficient completion of one’s studies.
Create a competitive environment. Performance-oriented funding is meant to indu-
ce healthy competition among universities.
Provide clear, non-fragmented incentives. From research on the effects of perfor-
mance-oriented funding, we know that it is important to send clear signals with
incentive systems. This is promoted by the simplicity and concentration of funding
models instead of creating overly complex systems with fragmented effects.
Each component of the incentive system and how performance against it will be
measured must be clear and mutually understood by the institutions and the
appropriate government agency.
Avoid undesired side effects. It could happen that institutions react to incentive
systems in a way that leads to undesired effects. For instance, contemporary
56 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
debate focuses on whether formula-funding systems that reward the number of
graduates might increase the number of graduates, but only at the expense of
quality, through “grade inflation”. Funding systems should therefore be analyzed
in terms of these potentially undesirable side effects to determine whether there
are measures that can expose and mitigate them.
Balance ex post and ex ante performance orientation. Funding could set perfor-
mance incentives in two ways: money can either be provided to support planned
future performance (ex ante reward) or else past performance is measured and
linked to funding (ex post reward). The instruments usually linked to ex ante per-
formance funding are target agreements, while the typical ex post instrument
is formula funding (leading to the conclusion that these two instrumental options
should be combined).
Sustainability
Stability. Freedom of teaching and research needs a stable financial basis.
Funding models, especially in the case of public funding, should, to a certain
extent, include base funding components which they build upon incrementally.
This would ensure a basic ability of the institutions to fulfill their academic tasks.
Base funding could, for instance, be linked to study places or staff numbers.
Guarantee continuity in funding mechanisms. A funding model is able to generate
the desired effects if its features are reliable over an extended period of time. If the
character of performance incentives is to permanently change, then the institu-
tions would expect changes and not adapt to the incentives. If there is not suffi-
cient time after a change in funding models before the next change is made,
then there is little chance to work with the system productively. Continuity also
applies to individual student funding.
Allow long-term planning. Universities have to engage in multi-period strategic
planning in order to develop their institutional profiles. Long-term planning
becomes feasible if there are also elements of multi-period financial stability.
Developments in teaching and research are furthered by the ability to predict
and calculate future budgets and to make plans on that basis.
Take into account cost differences. There are cost differences that need to be con-
sidered, especially between different academic fields. For instance, it is substan-
tially more expensive to “produce” a graduate in engineering than in business
studies. Basic funding should take into account these differentiated cost levels.
Promote risk spreading and management. Higher education institutions generate
income from a variety of financial sources. The diversification of sources could
lead to effective risk spreading instead of, for example, over reliance on a single
major sponsor or revenue stream. A funding system should promote diversifica-
tion and create incentives for the institutions to engage in financial risk manage-
ment. Revealing financial risks and developing strategies for risk mitigation could
also support financial stability.
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Legitimization
Provide unambiguous and balanced funding structures. The funding mechanisms
should be understood by all relevant decision-makers in the higher education
system. Definitions and indicators should be clear, and the components of the
funding system should not include contradictions; in other words, different
incentives should lead in opposing directions. The clear orientation promotes
legitimacy of the system, as it will appear linked to clear messages and policy
objectives. A further, crucial criterion for the legitimacy of funding systems
is “keeping the balance” in different respects. Conflicting objectives in funding
systems should be balanced; for instance, in an indicator-based funding element
there should not be too few indicators (as this could be seen as unfair) but also
not too many indicators (as this could lead to fragmented incentives). In a typical
“three-pillar model” (see also Chapter 2) there should be a legitimate balance
between basic funding, performance-oriented funding, and innovation-oriented
funding of future developments. Finally, performance-driven state funding models
need a balance between automatic, indicator-based allocations and discretionary
funding, including negotiations about specific funds.
Make funding transparent. Understandable and predictable funding is not
possible without transparency of the funding mechanisms. Allocation models
should explain budgets and why one institution receives more or less funding
than others. If discretionary funding decisions are made, everyone should know
how these decisions are made, who decides, and based on which criteria.
Accountability standards should include instruments to make the balance sheets
of institutions and all kinds of funding streams transparent.
Support the perception of fairness. Funding systems should lead to a perception
of fairness (with the above mentioned transparency as precondition). Fairness
depends on the perceptions actors have about the criteria. In the case of higher
education funding, fairness typically implies that the different situations of
institutions have been taken into account when allocating funds (for instance,
differences in profiles/subject structures) and that funding mechanisms should
not merely perpetuate the historical distribution of funds among institutions,
especially if these distributions were based on decisions made a long time ago
with no connection to current circumstances. Fairness is also a major issue in the
context of individual student funding.
Autonomy and flexibility
Allocate lump-sums. Financial autonomy means that higher education institutions
should be able to spend their money flexibly and according to their own deci-
sions. Full autonomy includes the lack of line-item allocations, the ability to build
financial reserves and borrow money in the capital market, the financial responsi-
bility for infrastructure and buildings, and the freedom to decide on salary issues.
Public funds should come as a lump-sum, and the institutions should have
all rights to generate private funds. From the perspective of individual student
funding, autonomy for students’ decisions should be guaranteed.
Guarantee academic freedom. Funding mechanisms must not restrict academic
freedom. Public and private funding of teaching has to be without influence on
58 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
the specific content of teaching (that said, a government could prioritize a number
of students in different fields or universities, and industry could decide to develop
a study program together to train staff academically). Research funding should
not determine the outcomes of research (but of course there could, for instance,
be target agreements related to research funding explicitly identifying publications
and dissemination activities as desired outcomes)21.
Implement an adequate level of regulation. Financial autonomy should not lead to
a situation without any financial rules. Rules should help prevent the misuse of
funds and could also set common standards. Regulation has to create transpa-
rency and foster trust but should not restrict the necessary flexibility.
Guarantee autonomy of internal resource allocation. In the previous criterion on
incentive orientation, we argued that incentives of state funding models should be
perpetuated inside the university to reach the individual researcher or teacher.
The design of these internal allocation models, however, should be determined by
the university and unregulated by the state. This allows higher education institu-
tions to link incentive mechanisms to their own specific profiles and strategic
priorities.
Promote accessibility of diverse income sources. Regulation should allow access-
ibility to all kinds of funding sources. State universities should be allowed to
acquire all kinds of resources. This could, for instance, imply the right to establish
private commercial enterprises by public universities. Another relevant issue
is the promotion of philanthropy through (tax) legislation. Accessibility to various
sources is also an issue for individual student funding.
Practical feasibility
Use available data. Funding models might require new or enhanced data; for
instance, new performance indicators may need to be gathered if performance-
oriented elements are introduced or new cost data may be needed to support
a field-oriented differentiation of funding. Such models could only be introduced
if the necessary data is available. Formula funding could be difficult to implement
if no data is available to adequately represent the political objectives included
in the formula. If, for example, there are no country-wide statistics on outgoing
or incoming students, it will be difficult to integrate student mobility in formula
funding, representing the goal of internationalization. There are also examples
in the context of student funding: if a country has problems generating income
data, this has an effect on the construction of student loan access or repayment
criteria.
Ensure administrative efficiency. The development and administration of allocation
models is costly. For instance, the introduction of target agreements can lead to
a cost-intensive process of negotiations. Additionally, the development and main-
tenance of required data could demand intensive data collection efforts. Efficiency
(or one could also say the minimization of transaction costs) of funding tools is
an important criterion that has to be balanced against other priorities; for example,
21 In this context, it is interesting to note that the EUA scorecard ranks Latvia 4th in financial autonomy
but 20th in academic autonomy (Estermann, T., Nokkala, T. And Steinel, M., 2011).
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 59
the level of precision employed to measure progress towards political objectives
must be balanced with the efficiency of developing and monitoring the indi-
cator(s).
Respect methodological standards. Modern funding instruments, such as perfor-
mance-oriented funding of target agreements, have been implemented in many
countries in recent years. This has led to a backlog of experience and lessons
learned from various methodologies. For target agreements, one could set
standards for templates to be used, funding mechanisms, reporting duties, etc.
The developments of Latvian models should take into account methodological
standards for institutional and individual student funding.
Ensure coherence with funding levels and steering approaches. The reform of
funding models should not be undertaken independent of the broader environ-
ment. This means that, on the one hand, the combination of all instruments of
governance in the higher education sector should result in a coherent approach
to steering the system. Funding, quality assurance, student access, regulations,
etc. have to be harmonized and lead to a clear idea of steering. On the other
hand, the funding model must also be realistic about the revenue levels that could
be generated. A differentiated model of resource diversification would make little
sense if the government is the only realistic funding source.
3.4 Overview on the assessment criteria applied
Table 11 provided below summarizes the intentions of each assessment criterion.
In subsequent stages of the engagement, these criteria were confirmed with
representatives of the MoES and discussed in interviews with representative
stakeholders of Latvia’s higher education system. In Chapter 4, these criteria
are applied to Latvia’s current higher education funding model to determine its
strengths and weaknesses.
Table 11 Overview assessment
Strategic orientation Promote national strategies
criteria
Promote institutional profiles * Only relevant for institution, not for
student funding.
Create performance rewards and sanctions
Create a competitive environment
Incentive orientation Provide clear, non-fragmented incentives
Avoid undesired effects
Balance ex post and ex ante performance orientation*
Sustainability Stability*
Guarantee continuity in funding mechanisms
Allow long-term planning*
Take into account cost differences
Promote risk-spreading and management*
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Legitimization Provide unambiguous and balanced funding structures
Make funding transparent
Support the perception of fairness
Allocate lump sums*
Guarantee academic freedom
Autonomy and freedom Implement an adequate level of regulation
Guarantee autonomy of internal resource allocation*
Promote accessibility of diverse income sources*
Practical feasibility Use available data
Ensure administrative efficiency
Respect methodological standards
Ensure coherence with funding levels and steering approaches
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4 Strengths and Weaknesses of
Latvia’s Current Funding
Model
As mentioned before, the four elements of the funding system to be analyzed are
state funding (teaching and research), diversification of financial resources, finan-
cial autonomy, and student funding. This chapter analyzing the strengths and
weaknesses of the system will follow the same four-element structure used both
for the European trends in Chapter 2 and the description of the Latvia’s current
funding model in Appendix 1.
We will begin by presenting a general overview of the strengths and weaknesses
of the Latvian higher education funding system, sorted by the list of criteria
in Table 11, including a context analysis. After this we will provide a more detailed
analysis of the specific elements of the funding system. In this latter part, each
single strength/weakness is presented in the following way: (i) the issue is first
briefly mentioned in a box, as well as the assessment criteria from Table 11
in Chapter 3 (section 3.4) that applies is mentioned in brackets; (ii) then
a text is added to explain the assessment as a strength or weakness; and
(iii) an assumption about potential performance effects is made.
At the end of the analysis of each of the four elements of the funding model,
a brief overall assessment is generated, which already indicate potential orienta-
tions for reforms at this early stage.
In quite a number of cases, the same issue could be considered both a strength
and a weakness, depending on the criteria established. When it comes to design-
ing proposals for reform at a later stage, we will need to make trade-offs in order
to try and achieve the right balance.
Before the four elements of the funding system are analyzed, section 4.2 provides
an overview and analysis of the “political climate for change” in the Latvian higher
education system, as a positive climate for change could be seen as a precondi-
tion for all the detailed needs to realize change. Section 4.1 starts off with a short
tabular summary of the main strengths and weaknesses observed.
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4.1 General assessment of the higher education
funding system and its context
The following table provides an overview of the strengths and weaknesses of
the Latvian higher education and research funding system. It distinguishes be-
tween the context of the funding system and the features of the funding system
itself structured by the main criteria for assessment as presented in Chapter 3.
Table 12 outlines major issues that are subsequently addressed in greater detail
in the following analysis.
Table 12 Overview of strengths Strengths Weaknesses
and weaknesses
Context: Strategic orientation
Source: Authors
• Diverse system of HE (many institutions, niche • Decreasing population
players, different profiles, public-private) • Apparently low political priority given to HE
• Substantial number of private HEIs and science (regarding low spending on HE
• Start-up of quality assurance for study programs and R&D)
and research institutes • No clear higher education and R&D strategies
• Research institutes with more mass and focus and priorities
• High percentage of young people who qualify • Inconsistent policy measures and political reform
for HE blockade because of polarized discussions
• Strong autonomous position of HEIs (public vs. private good)
• Principle openness towards mobility — many • Many relatively small study programs
students interested in study abroad • High proportion of drop-outs
• High employment rate and high rate of • Limited opportunities for excellent students
return on HE (graduates earn on average • Tendency to study abroad
EUR 1,000 per month; 40 percent of employees • Opaque HR structures in HE, with opportunities
only the minimum wage of EUR 285 per month) to have more than one job
• A functioning data monitoring system • High teaching loads for staff, little time for
(including performance and financial data) research
• High adaptability of system and HEIs • Quality assurance for teaching and research only
demonstrated in times of economic crisis in start-up phase
• MoES and line ministries are multiple voices for • Low return rates of students who study abroad
the interests of HEIs • Many graduates seeking employment abroad
• Low attention for practice oriented competencies
• Limited (project) management capacity in HEIs
• No annual (financial) report of HEIs
• No clear way to consolidation vs. competition yet
Financing: Incentive orientation
• Study places allow national planning according to • One-pillar model of state funding instead of
labor market needs several pillars with balanced functions
• Study places offered on basis of merit including • No real performance orientation in state funding
rotation possibilities stimulate competition (hence also weak links to national or institutional
• EU structural funds for research allocated strategies)
with some form of competition • No funding for innovative initiatives
• Attract many fee paying students (willingness • No clear approach to the role of state money
to pay/additional resources for HEIs) for private HEIs
• Competition for subsidized study places • No funding options for research-related
and scholarships developments such as post-docs, knowledge
• Existence of performance contracts between transfer activities etc.
HEIs and ministry
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Strengths Weaknesses
Financing: Sustainability
• Study places funding provides cost-oriented • Underfunding of the HE and research system
stability in the system, but with a “money follows compared to most other European countries
student” element and to own governmental objectives
• Availability of substantial EU structural funds for • Promised funding increase not yet effectuated
HE and R&D (reason for survival in economic • Lower funding tariffs for HE students compared to
crisis) primary and secondary education
• Cost basis for subsidized study places outdated
Financing: Legitimization
• Availability of student loans for many students • Many competing needs in case of budget
with attractive repayment conditions increases (more quality in teaching, PhD schools,
• Full-fee paying option creates access post-doc careers, triple helix, etc.)
opportunities • Opaqueness and subjectivity in allocation of
subsidized study places, planning problems
through yearly interventions
• Subsidized study places particularly benefit
students from better socio-economic
backgrounds
• No subsidized study places for part-time students
• Full-fee paying option and dual track system
creates social inequalities
• Scholarships only available to very few and only
very best students, not motivating and effective
• Student loans not attractive to large groups, e.g.,
the “guarantor requirement” forms a big hurdle
• Hardly any need-based support nor
means-testing mechanism for students from
low-income families
Financing: Autonomy and freedom
• Large degree of (spending) autonomy of HEIs • Heavy reliance on EU structural funds for R&D,
• Financial autonomy allows entrepreneurial which may not be a sustainable long-term
freedom situation (plus co-funding problem in case of
• Substantial level and good framework conditions matching funds)
of resource diversification • Instead of diversification there is rather
replacement of one large source through
the other (with increased risk)
• Relatively low funding from industry/companies
Financing: Practical feasibility
• Substantial outward international student • Decentralized system for student loans and
mobility (many systems have problems to send scholarships (efficiency risks and problems
students abroad). This means other countries pay for HEI with needs assessment)
for the instruction costs. • Debt cancellation mechanisms too generous
• Mismatch between academic year and fiscal year
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4.2 Political climate for change
Strengths (political climate)
Higher education institutions and policies in Latvia are highly adaptive to changing
environments.
(Criterion: practical feasibility)
The Latvian higher education sector has been affected by public budget cuts of
around 50 percent since 2008. Nevertheless, the higher education sector has
seemingly endured. Although EU funds have played a major role in this respect,
this fact might also be attributed to the ability of HEIs to adapt to the cuts by
reducing their costs and by generating new revenues. In general, the Latvian
higher education system is able to undergo widespread changes.
Potential performance impacts: Efficiency.
Weaknesses (political climate)
The debate about education as a public or a private good is emotional and leads to political
blockades.
(Criterion: practical feasibility)
In economic terms, higher education is a “mixed” good, leading to the necessity
of public and private cost-sharing. Contemporary debates in Latvia tend to ignore
these facts to a certain extent, adopting polarized normative positions of either
complete marketization (private good) or free access for all (public good). These
normative positions ultimately lead to political blockades, as they are neither ratio-
nal nor really feasible. For instance, the 100 percent free access-solution for all
students would require substantially greater funds and would enable all students
from a more favorable socio-economic background to study for free. This is not
realistic in a situation of competing demands for public resources, such as re-
search, health care, or even social security.
Potential performance impacts: Stagnation, necessary changes blocked.
The higher education sector is in a situation of drastic underfunding, leading to deficiencies
in many respects and consequently to competing demands for higher funding.
(Criteria: practical feasibility, strategic orientation)
Higher education in Latvia is underfunded. This became clear from the longitu-
dinal analysis of funding in Latvia (having not recovered from financial crisis)
in comparison to (i) other European countries and (ii) the government’s own tar-
gets (documented in “optimal” and “minimum” prices for study places). This leads
to deficiencies in many respects: there are doubts concerning the quality of
studies, the decreasing quality of services (sometimes universities are even not
adequately heated in winter), no time for professors to conduct research, and
almost no funding for “triple helix” developments (as suggested by the Higher
Education Council). Given this situation, it is quite clear that any proposed higher
education financing reform must create a kind of “package” involving an improve-
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 65
ment of the system and its effects and an increase in public funding. Instead of
“public good” discussions, reform proposals will have to focus on creating added
value, with more public funds. A major task in the future strategic development of
HE in Latvia must strike a balance between setting policy priorities and address-
ing the financial consequences that this will have for the public budget. Strategic
choices must be made, and incentives must be set to achieve ambitions.
Potential performance impacts: Restrictions to performance in all respects, quality
problems, problems with international competitiveness of the sector.
Politically the whole education sector is often seen as one unit in terms of funding.
This is a problem for the higher education sector.
(Criterion: practical feasibility)
Taking into account the budget for the entire education system, it seems to be
argued that Latvia is not below the EU average. Although this might be the case,
this still remains a major problem for higher education, which remains sub-
stantially below average. In a situation where (higher) education is a key driver
in knowledge-based societies, the current approach of generating funds for new
educational purposes from only within the education sector is highly problematic.
Potential performance impacts: Same as previous weakness, as underfunding is per-
petuated.
Overall conclusions (political climate for change)
•The higher education sector in Latvia is highly adaptive and capable of dealing
with drastic changes in funding. But the political climate for change in higher
education funding is difficult: there are polarized normative positions and a ten-
dency to reallocate funding only within the overall education budget.
•The higher education sector in Latvia is massively and systematically underfun-
ded. The way out lies in a paradigmatic shift towards higher education as a key
to economic development and in a “package” of additional funding and added
value through the funding system. HE stakeholders would need to agree to
a “social contract” in which a more explicit strategic orientation is underpinned
by new funding elements that stimulate working towards national objectives
in higher education and research.
4.3 Instruments of state funding: funding of teaching
— study place model
State funding of teaching and research will be analyzed separately, as the current
Latvian system for funding separates these two core functions of HEIs as well.
This does not mean that there is no relation between the two; the section on Euro-
pean trends has shown that in many countries basic funding of universities and
also performance-oriented funding uses an integrated model including teaching
and research funding. In the strengths and weaknesses such relations between
teaching and research will not be neglected.
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Strengths (study place model)
With the study place model the “money-follows-the-student” principle is introduced
into public funding. The link to accreditation promotes quality.
(Criteria: create a competitive environment, coherence of steering approaches)
Similar to some European countries, basic public funding in Latvia is based on
a formula model using a student-based indicator and a price-per-student approach.
This leads to a situation where funding is oriented towards the “money-follows-
the-student” principle. Instead of funding according to staff numbers, a first step
towards a “quasi-market” is taken, by basing financial allocations on the “product”
of the higher education institution and by assigning a specific “price” to it. In ge-
neral, this tends to promote competition between universities. In such a model,
it is important that study places are allocated to HEIs on the basis of some notion of
quality and competitive behavior. If new fields or study programs of high impor-
tance arise (from the perspective of students or from the perspective of national
needs), funding of study places could be adapted to this. Yet, because of the use
of planned parameters, it is not a fully demand-driven model. Without the decision
of the central planner, adaptation cannot take place.
The funding of study places requires accreditation to ensure a minimum quality
standard for publicly-funded study places. Different steering approaches are
linked in a coherent way.
Potential performance impacts: Promotion of quality.
The study place system allows to plan [sic] national priorities and helps to satisfy
labor market requirements in terms of graduates needed in different fields.
The consultation and analytical process linked to planning helps to come to valid
planning outcomes and represent a cooperative culture.
(Criterion: promote national strategies)
In general, there are two options for a student-based public funding formula:
(i) to follow real student demand for study places; or (ii) to fund according to
greater central planning, including a structure of study places based on specific
subject disciplines. Latvia primarily follows the second path: the number of study
places per field and university is determined through a planning process. In the
Latvian context, where a certain priority for STEM graduates is assumed (for
instance because fee-paying students choose “cheaper”, affordable fields with
questionable labor market expectations), the planning approach enables the pro-
motion of national priorities, ultimately leading to a certain steering effect into
fields relevant for the Latvian economy.
If a ministry engages in the planning of student places, it requires objective infor-
mation to underpin such plans, since a central planner does not necessarily make
the right decisions. It seems to be very positive that the MoES bases its decisions
on a couple of information-gathering processes, such as analyzing parameters
like the real demand or the number of graduates, stakeholder consultations,
with a particular focus on labor market needs, and negotiations with universities.
Such a process could lead to well-informed decisions and could relate student
places to the requirements of labor markets. It also enables a kind of mixed
approach between planning and real demand: planning parameters could adapt
to the real demand situation. Another positive aspect of the process has been the
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 67
high-level discussions between the minister, ministry representatives, and rectors
regarding the principles of the study place allocation model which were particular-
ly prominent in the process of planning study places in 2012 and 2013 (such
discussions did not exist before). This leads to a cooperative culture and should
be continued.
Potential performance impacts: Orientation to labor market needs.
The study place model differentiates prices per study place according to cost of different
academic levels and different disciplines.
(Criterion: take into account cost differences)
The cost per study place varies between Bachelor, Master and Doctoral level and
also between different fields. A funding model has to take into account the cost
situation and differentiate between the prices per study place. The Latvian model
seems to be doing exactly this and is based on a detailed, empirically-founded
cost calculation (which is not regularly updated, see weaknesses). For higher
education institutions that fall under the responsibility of the MoES, the current
differentiation in prices generally appears to be reasonable.
Potential performance impacts: Promotion of quality and proper funding levels.
The way in which the study places model is applied leads to a quite stable basic funding:
The funding volume resulting from study places for each university remains largely
the same. This is based on a three-year contract updated yearly through a specially
agreed document. The fact that the budget results from a price*student place
calculation also leads to transparency of allocations.
(Criteria: stability, make funding transparent)
The study place model is used in a way that does not (or only marginally) change
the budget for a HEI. MoES and the university sign a three-year contract defining
budget volumes. This means that, on the one hand, there are yearly planning
processes, stakeholder consultations, etc., but on the other, this largely leads to
a mere shift of study places within an institution. The budgets resulting from study
places are ultimately largely historical. This is an advantage in terms of stability:
the university could rely on a certain amount of public basic funding that promotes
long-term planning for institutions (for the downside of this, see weaknesses).
Furthermore, the public allocation process is also transparent: the number of stu-
dy places and the prices are multiplied, determining the budget. This simple
algorithm clearly explains the rationale behind the ministry’s decision to allocate
funds.
Potential performance impacts: Promotion of quality.
The study place model does not restrict flexible allocation of funds inside
the university.
(Criterion: autonomy of internal allocation)
Latvian universities are used to dealing with a lump sum budget. During the inter-
views, the team heard about models that deal with the budget centrally: public
funds do not go directly to the faculties but are instead initially centralized at
the rectorate level. Following this, they are then allocated to faculties, but not
necessarily 1:1 according to the student place model. Since internal autonomy of
68 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
resource allocation is not restricted, universities are able to choose internal
allocation models according to their needs.
Potential performance impacts: Performance according to HEIs profiles.
The study place system introduces a strong merit-based element into the funding
system. This leads to high performance incentives on the side of the students.
(Criterion: create performance rewards and sanctions)
Study places are allocated to students according to their academic performance,
meaning that the allocation principle is merit-based. Aspects of social need only
become relevant as a second order criterion once two equally-achieving students
are compared. The result is a highly competitive situation between students, and
high incentives and rewards for individual performance. It appears that this logic
in Latvia is perceived to be a fair way of distributing subsidized study places.
The incentives become even stronger once, as in the University of Latvia or the
University of Agriculture, the “rotation principle” is applied: study place allocation
is reconsidered for students every year such that students with low performance
in their university courses might cede their free study place to students who,
having previously paid tuition fees, have now improved in their performance.
Strong performance incentives are then not only realized at the time of entry to
the university, but indeed throughout the study process.
Potential performance impacts: Student performance, competition and efficiency.
The study place system involves a number of line ministries in higher education funding.
This is beneficial for the reputation of higher education in the government.
(Criterion: promote institutional profiles)
The study place system does not only work within the scope of MoES but also for
the universities that fall under the responsibility of different line ministries (health,
defense, etc.). Although this structure has its drawbacks, it also has a couple of
advantages: there is close contact between the universities and the respective line
ministries (i.e., those that correspond to their disciplinary profiles). Furthermore,
there are opportunities to establish specific regulations that fit with the respective
sector; for instance, study places funded by the Ministry of Interior are linked to
the obligation to work at least 5 years as a civil servant (so the state has a guaran-
teed return on the investment in study places). Subsequently, a major effect is that
there are “many advocates” for higher education — not only MoES, but also line
ministries — which have an insight into the culture, logic, and needs of HEIs.
It should also not be forgotten that some line ministries are able to generate more
favorable conditions for HEIs in the form of higher prices per study place.
Potential performance impacts: Investment in human capital, shared responsibility,
recognition of public value of HE.
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Weaknesses
The study place model is underfunded. In stakeholder consultations this was connected
with two different issues: on the one hand, people said that the number of study places
funded is not sufficient, leading to access problems; on the other hand, the price
per study place was criticized as being too low, leading to quality issues.
We see the second problem as the first priority (but there is a weakness in the one-sided
focus on merit-based instead of means-tested allocation).
(Criteria: guarantee continuity in funding mechanisms, perception of fairness)
As previously stated, there are two relevant benchmarks with regards to assessing
the situation of public funding in Latvia: (i) GDP statistics compared to other
European countries, and (ii) the Latvian government’s own targets documented
in the normative definition of “minimum” and “optimum” prices per study place.
In terms of both benchmarks, however, the current state of play is characterized
by insufficient funds. Insufficient public budgets can refer to both teaching and
research expenditures, since, through the teaching side, the study place model
is affected. Examining the features of the study place model raises the following
questions: What does underfunding actually mean? Is the share of study places
related to the total number of students too low, or is the price per study place
too low (or both)?
The price per study place is an issue of quality, but is also related to the existence
of research opportunities. Following drastic cutbacks of public funding and study
place prices, some universities reacted by reducing service staff, enlarging
student groups, and increasing teaching hours per academic staff such that,
in some universities, there was almost no time for research (in Latvia there
is a span of yearly teaching hours; cutbacks had the effect of approaching the
upper level of this span to be able to fulfill teaching obligations with reduced
funding). These are clear weaknesses in terms of the quality of and available time
for research. Financial cutbacks minimized the potentials to generate a kind of
basic funding for research through the study place model (since with lower
teaching hours a certain involvement of teachers in research activities would be
possible). Acknowledging that public funds per student place are too low does
not necessarily mean that the model should just inflate prices: instead, it might be
a good idea to link added value to increased funding (e.g., by introducing clear
incentives according to state objectives, see further weaknesses below), rather
than to just “throw money” into the existing system.
As previously discussed, the team does not necessarily regard the lack of a free
study place model as a weakness. First, in the chapter on European trends, it was
argued that there is no economic rationale behind a full publicly- (or privately-)
funded model of higher education — as this typically leads to blocked reforms.
Second, in a situation where there are numerous competing funding requirements
and scarce resources, it would not be helpful to give up one of the funding
streams, since the diversification of financial resources helps to divide the risk.
Third, with the students’ veto right on tuition fee issues in the academic senate,
there is a restriction in the governance structure preventing excessive tuition
fee levels. Fourth, the universities we talked to seemed to have adequately adap-
ted their tuition fee policies according to their situation (for instance, the University
of Latvia charges average study place prices and the University of Daugavpils
charges almost no tuition fees because of the difficult economic and social
situation in the region). Fifth, even if the absolute number of study places is not
70 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
increased, the percentage of free places will rise due to demographic changes.
Last, it is questionable whether or not the problem of students potentially leaving
the country to study abroad (often used to justify models of 100 percent public
funding) is a matter of tuition fees, or whether it is instead a matter of the attrac-
tiveness of higher quality programs elsewhere. In the case of the latter, it would
again be better to invest additional money in higher state subsidies per study
place. One also has to bear in mind that, in general, studying abroad is relatively
costly compared to studying at home.
In Chapter 4.4 on student funding, we analyze the weaknesses of this part of the
system and show that the Latvian system results in serious disadvantages for
potential students with lower socio-economic status. The mainly merit-based
allocation of study places generates a social problem; differences in income only
feature as a second-order criterion when distinguishing between equally-perfor-
ming applicants. The unspecific increase to 100 percent free study places is not,
however, the adequate instrument to overcome this, since it fails to collect a con-
tribution from those students who could afford it. One should look for more targe-
ted approaches to promote students in a needs-based manner.
Potential performance impacts: Quality problems and intransparencies.
Rewarding the number of study places is purely input-oriented; the system does not
create performance incentives in teaching and research (neither ex ante nor ex post).
A balanced three-pillar model is not realized.
(Criterion: create performance rewards and sanctions)
Thinking through the dimensions of the three-pillar model of public funding,
two of the columns do not exist in Latvia, leading to an imbalance in the fun-
ding system. Study-place funding is an adequate instrument for basic funding
— the first column exists. However, a missing element involves ex post rewards
and sanctions that can stimulate performance. This leads to a problem in funding
for teaching, as student retention and successful graduation are not rewarded.
The overall incentive results in the maximizing of study places, not improvements
in performance. With respect to research funding, we will, in the next section,
argue that basic public funding for professors is missing; and, that should this be
created, it would seem more reasonable to do that not according to study places,
but instead in line with research performance, generating more opportunities
to fund research for successful universities on the basis of research indicators.
Also in the third column, performance-oriented pre-funding of new initiatives has
not yet been realized. Although target agreements between MoES and universities
exist, they are not used for investments in innovations. If universities create new
study programs, they can only create new study places by deducting these from
their own traditional programs; curriculum innovations are thus always at the
expense of other programs within the university, and creative ideas do not allow
additional funding. It is almost impossible to generate additional funding with new
programs or other innovations. Although the study place model enables top-down
innovations initiated by the MoES, it does not give equal chances to universities
for bottom-up initiatives.
Potential performance impacts: Problems for performance according to objectives,
for quality and for innovativeness.
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Despite the lack of separate performance-oriented funding pillars, there are
performance considerations in the decision process on numbers of study places.
But this discretionary, non-automatic system does not lead to performance incentives;
in fact, funding remains historical.
(Criterion: create performance rewards and sanctions)
Performance aspects like labor market perspectives, dropout and graduation
rates, or the relationship between planned study places and actual demand are
taken into account during the process of allocating study places numbers (in the
three-year agreements and also in the annual protocol concerning university-
internal shifts of study places). This, however, restricts budget place reallocations
to within universities and results in the involvement of MoES in micro-managing
study places. The overall public budget of the universities remains largely con-
stant and develops incrementally on a historical basis. Ultimately, therefore,
there is a lot of regulation but no financial incentive. Performance considerations
are thus too dependent on negotiations and discretionary decisions (and not
on automatic mechanisms).
The technical reason behind these problems is that all kinds of purposes are mixed
within the study place model, as this is the only state funding component for higher
education. It should lead to stability, but also to performance orientation. It should
guarantee state influence on field structure, but without compromising inter-institu-
tional allocation. These goals should be reconciled in one funding component.
Potential performance impacts: Problems for performance according to objectives
and for transparency.
The budgets are largely historical, but there could be annual shifts in study places
(whereas academic and fiscal year are not harmonized). This leads to instability for HEIs.
(Criteria: limited budgetary changes, non-fragmented incentives)
The allocation of budget places is reconsidered annually by the state. This leads
to a problematic instability in the internal planning of field structures, such that
the number of state sponsored study places in specific programs is not reliable
enough. This becomes even more complicated taking into account the fact that
academic year and fiscal year do not correspond to one another. The detailed
steering of study places in specific programs also sometimes leads to very few
subsidized study places for certain programs, inducing fragmentary effects.
Potential performance impacts: Quality problem and intransparency.
Despite the ongoing discussions about diversity of institutional profiles in the university
sector, public higher education funding does not provide incentives to develop specific
profiles.
(Criterion: promote institutional profiles)
Many European countries intend to create a HE sector with institutions pursuing
differentiated missions. Mission-diversity helps to serve the various needs of
stakeholders. An excellent HE system needs internationally-competitive research
universities, but also universities that serve regional needs or focus on knowledge
transfer as “innovative universities”. Institutions should build on their strengths
and develop clear profiles. The current funding system provides only a very vague
mechanism for this (taking profiles into account in determining the study places,
72 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
but without considering the effects on historical institutional funding, see previous
weakness). There are no indicators measuring profiles and no encouragement
from a central HE strategy or through incentives for the institutions to actively
promote their profiles.
Potential performance impacts: Not addressing the diverse needs of different tar-
get groups and insufficient profiling of HEIs.
Though the analysis of the relationship between major state objectives and funding of
HEI still has to be done in the second step of our project, the interviews already
demonstrated that the state funding system is not based on national priorities.
Promoting priorities through funding is not an easy task as the example of consolidation
of the sector shows.
(Criterion: promote national strategies)
We already mentioned that clear rewards of adhering to state objectives on fund-
ing are missing, especially once the objectives of promoting institutional profiles
and minimizing drop-outs are taken into account. The public HE funding also
does not help generating critical masses or reducing unnecessary duplications
in study programs. We could neither find incentives for the development of the
regional mission of universities, nor for engagements in knowledge transfer.
The MoES has already started to relate incentives to the idea of consolidating
the higher education sector through the study place allocation criteria. In the
stakeholder interviews, some interviewees voted for the establishment of large
units, such as merging programs in the same disciplines, etc. Others warned of
the danger of over-consolidation, since too great a focus on minimizing duplica-
tions might substantially reduce competition in the system and subsequently lead
to monopolies. Centralization programs in one place could endanger regional
access and interdisciplinary collaboration at a specific site. Others argue that
a decentralized, regional choice of specific programs across a number of univer-
sities would promote the ability to adapt to (regional) labor market needs.
It becomes clear that potential initiatives for consolidation have to be examined criti-
cally from the perspectives of monopolization and access (in the region). It is also
clear that funding mechanisms to promote consolidation are not easy to implement.
A suitable approach might be a mixed top-down and bottom-up approach, whereby
the state provides incentives for consolidation, but the suggestions where and what
to consolidate are made by the institutions. Then they could for instance take
into account the regional aspects. A well-functioning mechanism that promotes
desirable forms of consolidation is an important task for funding reforms.
Potential performance impacts: Not enough support for national priorities.
A system with a simple formula and a “price list” has the potential to be very fair,
but there are different cases where the system is not coherently used.
This endangers the reliability of the system and creates the impression the system
could adapt to political considerations and that the rules of the game are unstable
(or not the same for everyone).
(Criterion: support perception of fairness)
In general the study place system is highly rational: there are numbers of student
places, a transparent price system and a very simple algorithm to calculate budgets
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 73
using these parameters. It could easily be justified and understood why an institu-
tion gets a certain sum of money out of the system. Applying the same algorithm
to every university could also be perceived as a kind of fair solution. This position
was supported by the interviews, where interviewees regarded the principles of
the study place system as adequate.
The mechanism is nevertheless not applied in a coherent way. First, universities
receiving their budgets from different ministries (for example, the case for medici-
ne under the MoES and Ministry of Health) get different prices. Second, in certain
cases, a reduction in study places was compensated by a university-specific price
increase in order to stabilize the overall budget. In other cases, students with
factor 6 (for defense) and factor 3 (for engineering) are effectively sitting together
in the same classroom. In general, the allocation of study places does not adhere
to a consistent rational logic and, from the perspective of some interviewees,
ultimately results in a certain degree of subjectivity (for instance, in some cases
it seems difficult to explain why one university receives study places in a specific
field, but others in the same fields do not).
Given that the strength of such a formula system is based on its reliability and
coherence, such specific exceptions endanger trust in the system or might lead
to losing the competitive element. The strength of formula systems lies in their
automatic character; the coherent use of the model parameters should not be
compromised according to discretionary political decisions. If the rules of the
game are adaptive, then this creates the tendency to put efforts into influencing
the rules instead of following the rules.
The conclusions from this have to be carefully analyzed; if a recommendation
to harmonize the field coefficients between all ministries were made, this might
increase the underfunding if the solution were to take the lowest price (see the
advantages of involving line ministries above).
Potential performance impacts: Problems with (public) trust, intransparency and
feeling of fairness.
Excluding part-time students from the budget places model is problematic
in a situation of demographic change with declining numbers of traditional students.
Particularly then, increasing the number of non-traditional students, especially
in part-time studies, can be attractive.
(Criterion: avoid undesired effects)
The initial rationale behind excluding part-time students from free study places
was the assumption that part-time students are in a more favorable financial situa-
tion. However, even students from low-income families with free study places
might have the need to work during their studies; and there could potentially be
students with children that look for part-time places. As the demographic tran-
sition leads to lower numbers of traditional students, the funding system should
seek to promote as much accessibility as possible, especially for non-traditional
students (such as those aforementioned). There is no reason why a student
eligible for a free study place should not be able to choose between full-time
and part-time study.
Potential performance impacts: Access problems.
74 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
There was almost no update of the cost coefficients and the basic price since 2002.
Current studies offer the opportunity to check and correct the prices.
It is more important to focus on relative than absolute prices.
(Criterion: take into account cost differences)
Generally, the rationale behind calculating costs within the study place model
is accepted in Latvia. However, the parameters used were calculated in 2002, if not
before; of which there has been almost no update and revision of prices since. Since
2002, there have also been major technological changes, for example, especially
regarding IT technology; indicating that it might be time to reconsider existing prices.
A study seeking to update the cost parameters was undertaken last year, calcula-
ting the coefficient for computer sciences (Erins, 2013). This is a good starting
point to check and update the price structure of the model, which could generate
similar considerations across all study areas. The logical approach of the study
is sufficient: it attempts to calculate the cost determinants from empirical findings
(on student-staff-ratios, technological features of teaching, etc.), but at the same
time makes clear that any such cost factors are ultimately normative. For example,
with respect to the student-staff-ratio, the study states that in 1992 the ratio
was 9.2; in 2001 it was 15; and, at present, we can assume it is 19 given efficiency
savings generated from developments in IT. Though the starting point is empirical
one, ultimately there is a normative assumption made. Hence, it is important
that these normative decisions are made transparent and are discussed with
the HE community before being set by the MoES.
The student-staff-ratio example also makes clear that the relevance of absolute prices
should not be overestimated: if we take the status quo of a specific year as a starting
point, then this is determined by the level of state funding. The cost will change pro-
viding there is the decision to increase quality by better ratios — and, as such, one
does not have an objective picture of the one-and-only real cost. This means funding
levels are ultimately always determined politically. The calculated price does not justi-
fy underfunding as “the state does not cover the real cost”; underfunding always has
to refer (as argued before) to the benchmarks of international comparisons and politi-
cal objectives. This means that the major value of recalculation lies in the decision of
whether the relative prices between the disciplines are still valid or ought to be adap-
ted to technological changes across the disciplines. Nevertheless, an additional
aspect that could be taken into account by further cost calculations, and which refers
to the absolute level, is whether there have been general developments in the last
few years that have increased costs, which have not been taken into account in the
old prices. For instance, changes in energy costs might be a major issue. This could
lead to messages such as “compared to the old price model there were general
cost increases by XY”, which could then be used as an information source for the de-
cision on the development of public budgets.
Potential performance impacts: Quality problems.
Many of the weaknesses mentioned before together lead to the fact that the study place
system is not transparent (despite its general nature of being an easy calculable model).
(Criterion: make funding transparent)
Multiplying study place numbers with a price from a published list seems to be
very transparent — but the factual use of the system substantially reduces this
transparency. The complex and implicit value-judgment laden process of taking
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 75
into account performance in calculating student numbers, the involvement of
numerous ministries and the practice of granting exceptions to the rules, all lead
to lack of transparency. The model should change in a way that reflects how
clear it seemingly is at first glance.
Potential performance impacts: Lack of trust in the system, also among the main
funders and therefore less political support for new investments in the sector.
There are single cases of funding student places in private higher education institutions,
but no systematic approach to the eligibility of private institutions to receive money
from the study places model.
(Criteria: support perception of fairness, create a competitive environment)
In some very few cases, student places are also allocated to private higher
education institutions. This is the outcome of single, specific decisions based on
three criteria: higher quality, no accredited programs in the public sector, and
an insufficient number of specialists. This means that study places in private HEIs
are a kind of exception and effectively the second-best option, providing public
institutions are unable to supply the desired places. It would be better to have
a systematic approach with clear “rules of the game” for competition between
public and private HEIs. Two options for a general position seem to be possible:
either the allocation of study places is completely up to the choice of the best
students, whether they are private or public universities (meaning that private uni-
versities would receive the same price), providing that quality standards are met;
or alternatively, as the study place system, factually-speaking, is a system of basic
funding, that this basic budget is only given to public institutions, on account that
states should not engage in the basic funding of private institutions. In the latter
case, the only option to allocate study places to private institutions would be to enable
study places to feature as part of the innovation-oriented component of the funding
model: if the government would grant money towards innovative new study pro-
grams and there would be a competitive process between the best concepts,
then there is no reason why private institutions could not be a part of that process.
Further developing the model would require choosing between these approaches.
Potential performance impacts: Intransparency and lack of coherent public policy
approach undermines trust in the system.
Overall conclusions (instruments of state funding)
•Having an element of planned study places with differentiated prices is generally
a positive and desirable element in the funding system. It orients the focus
towards the tasks of a higher education institution, enables strategic state plan-
ning, is stable and transparent, and represents a cooperative culture between
ministry and HEIs. It also incentivizes efficient student behavior and leaves some
leeway for the discretion for internal university budgeting. Specific problems
arise from the way in which this system is handled in Latvia.
•A major problem is that study places constitute the only component of public
higher education funding. This means that the system is subsequently over-
burdened by having to link this funding to target agreements and performance
data, both of which effectively contradict the objective of stability behind basic
funding. Using performance data as an implicit mechanism in the background of
76 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
the study place calculations does not lead to real performance orientation,
something that could instead be solved by separating performance-oriented
funding — ex post and ex ante — from basic study place funding.
•Since there is currently a “one-pillar” model, the current system is not sufficiently
output-oriented and does not adequately promote the differentiation of university
profiles. It could also already be seen that important state goals are not trans-
formed into financial incentives (a comprehensive analysis of this will follow
in a separate paper in the next part of the project). A tricky issue is sector-conso-
lidation, where interviews revealed the contradicting arguments for cooperation
and large units vs. competition and decentralization.
•If this separation of funding pillars is done, it should reflect the fact that the study
place model is to a certain extent historic and incremental. The planning should
explicitly address study places numbers of the previous planning period as
the starting point for the new period, devising very clear arguments for limited
and focused deviations from the status quo.
•The planning process leading to these deviations is not yet sufficiently focused.
If the performance issue is separated from study places and made more explicit
in a different component of the public funding model, then there are two
remaining aspects that should determine the study place planning. On the one
hand, it seems reasonable to plan the overall student numbers in terms of major
subject areas, including stakeholder consultation and labor market analysis.
This leads to an overall idea in which disciplinary fields study places have to be
increased or reduced. On the other hand, the issue of real demand remains.
If, over a certain period, study places do not lead to actual demand (but still
are maintained), this should lead to a correction in student places assigned to
the institution. With focused mechanisms, study place budgets, on the one
hand, imply a historical development, but on the other, offer opportunities
to arrive at rational reallocations between institutions.
•The study place model is not entirely used in a coherent way, which reduces
both its objectivity and trust in the system. Yearly state interventions by shifting
budget places within the HEI create problematic instability.
•It is also problematic that study places are limited to full-time students and that
outdated cost coefficients are used.
•A restructuring of the model and the implementation of new funding elements
could go some way in overcoming the current underfunding of the Latvian
system: new elements could create added value that makes additional financial
investment attractive. Underfunding in terms of quality-related issues (resulting
from low prices) is more severe than the fact that some parts of study places
are free (i.e., without tuition fees).
•Restructuring is also necessary in order to increase transparency in the model
and to relate it to clear “messages” for fund-recipients; in particular through
clear pillars of the funding model with established functions, and more focused
calculation rules and procedures.
•A systematic approach for (or against) the inclusion of private higher education
institutions into the budget place system is necessary.
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 77
4.4 Instruments of state funding:
funding of research
Though this section primarily focuses on state funding for research, given that
many EU funds (particularly the EU structural funds) are allocated through a state
agency and constitute a large share of research funding, the section addresses
both funding sources. As such, the following section, focusing on “resource
diversification” is limited.
Strengths (funding of research)
The integrated funding of universities and non-university research institutes creates
competition within the whole research sector. In addition, EU research funds as well as
the funds awarded through various competitive research programs, require institutions
to compete with other national and international HEIs and other research organizations.
(Criteria: create a competitive environment; national strategies)
The current funding model for research in Latvia depends, to a large extent, on
EU resources, which, though allocated competitively, are contingent on criteria
that are not very transparent. Until now, the State Education Development Agency
has distributed structural funds in such a way that all HEIs effectively, in some
way, benefit. Other external funds, often from EU sponsors as well as industry,
put HEIs in direct competition to other (inter)national research institutions.
The principle to fund institutes, both within and outside, of universities leads to
competition in the research sector as a whole. The same goes for the funds that
are allocated through the public research programs, such as the State Research
Program, the Commercially Oriented Research Program and the Fundamental
and Applied Research Program, based on competitive evaluations of research
proposals by committees installed by ministries, the Latvian Council of Sciences
and the National Academy of Sciences using criteria that reflect national research
priorities.
Potential performance impacts: Quality and adherence to national strategies.
In order to use the very limited resources available, HEIs must set their own priorities
to wisely spend the money and to do research that can have an impact.
A strong initiative is the support given to young talented researchers to establish
their own research groups.
(Criterion: Promote national/institutional strategies)
Due to a relatively limited research budget that is allocated largely by a compe-
titive mechanism, i.e., EU structural funds, institutions and the allocating agency
(State Education Development Agency) can be encouraged to link research fund-
ing to national research priorities and/or their own strengths. A positive develop-
ment is the initiative to support young talented researchers to establish their own
research groups with EU structural funds.
Potential performance impacts: Promotion of quality, research careers and long-
term planning.
78 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
The cost of research differs between the disciplines; the allocation mechanisms
take this into account, at least to a certain extent. For instance Riga Technical University
with an expensive cost structure receives a relatively large part of the research funds.
(Criterion: take into account cost differences)
Cost differences between disciplines are acknowledged in the state research
funding, and, as such, an engineering university (like Riga Technical University,
RTU) benefits from this, by way of investing and maintaining a more expensive
research infrastructure. Research funding includes components explicitly dealing
with infrastructure maintenance cost and there is a coefficient differentiating
between disciplines. Nevertheless, the RTU example shows that there are still
difficulties in financing expensive research equipment necessary to conducting
engineering research at an internationally-competitive level across their research
areas. This compels RTU to prioritize those areas in which it would like to achieve
such an internationally-competitive position, and deprioritize others. This is a ge-
neral development in many countries and institutions. The question is how many
priority areas Latvia and Latvian HEIs can, and are allowed to, afford.
Potential performance impacts: Quality and guarantee continuity.
Basic research funding is predominantly based on historical developments and as such
provides financial stability. However, the lack of transparency about the exact allocation
weakens this a bit. The research funding, particularly coming through EU funding
sources, has made Latvian universities survive in times of heavy economic recession
and strong budget cuts for teaching.
(Criteria: stability, make funding transparent)
Basically, research funding through EU structural funds and infrastructure funds
have enabled most Latvian HEIs to survive, compensating budget cuts in teach-
ing, which had subsequently left few resources for research. However, the way
these research funds are allocated is unclear and does not provide a stable basis
for the sustainable development of the research sector. The same goes for the
allocation of state research funds. None of the stakeholders were able to provide
clear information about the way in which it is allocated. There is a coefficient for
the development of scientific institutions which depends on performance criteria,
but from the perspective of stakeholders this is handled in a rather implicit way
and does not lead to major financial effects. Nevertheless, research funding
is motivated by a strong historical basis, which, by definition, preserves stability
for the institutions.
Potential performance impacts: Quality and space for long-term planning.
Institutions have large autonomy to invest their resources, which enables them to set
priorities and underpin their own strategies.
(Criterion: autonomy of internal allocation)
It appears that HEIs, to a large extent, are able to use research funding to support
their own internal research priorities and strengths. This enables HEIs and re-
search centers to focus on their strengths while leaving other research domains
to other HEIs. However, there are concerns at the ministry and agency that HEIs
may also cross-subsidize teaching activities with research funding, whereas HEIs
complain that EU research funding often requires matching the funding from their
own resources (including for teaching), which are already scarce.
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 79
Potential performance impacts: Research performance and longer term research
strategies.
Strong dependence on external research funds, like EU structural funds but also
the public research funds available through the State Research Program/ Commercially
Oriented Research Program and the Fundamental and Applied Research Program,
provide ample opportunities for performance incentives. This is further supported by
the recent research evaluation process.
(Criterion: create performance rewards and sanctions)
The allocation of research funding through external funds (mostly EU) implicitly
provides performance incentives. Though no explicit transparent allocation or per-
formance criteria are currently applied, if HEIs do not perform well, they may
lose credibility in subsequent rounds, and not be awarded such funds anymore.
The recent research evaluation process provides better insights into research per-
formance across the many research institutes in Latvia. This can encourage HEIs,
research institutes, the government and the Agency to search for proper indica-
tors that can be applied, if one wants to strengthen the performance dimension
in research-funding mechanisms. In this respect, further steps could be taken
in the Latvian higher education system.
Potential performance impacts: Research performance, innovation and internatio-
nal competitiveness.
Weaknesses (funding of research)
Though the mostly historically based state research funding provides stability for HEIs,
amounts are relatively limited and the matching requirements of EU funds as well as
the dominance of research funding from EU structural funds endanger a stable financial
foundation for the Latvian research system. The public underfunding of the Latvian
system also refers to research.
(Criteria: stability, perception of fairness)
A strong reliance on EU structural funds in order to support university research
has ensured the financial viability of Latvian research during the period of econo-
mic crisis. Though this funding stream may be available in forthcoming years,
the dominance over regular state research funds as well as private research capi-
tal provides future uncertainties for the research system from a financial point of
view. The different funding streams produce irrationalities in planning: for instan-
ce, although machinery is financed by EU funds, its maintenance costs have
to come from state funding, which might not be available or foreseen, since
there is no integrated planning process. Another problem lies in the co-funding
approach of European funds: successes in external funding competition might
“eat up” all flexibility in state funds as more and more state money is bound
in co-funding obligations.
In general, there are not enough elements of long-term, stable public funding
sources for research (for instance looking at the EUR 13 million state science
funding in 2011 compared with EUR 69 million EU funds in the same year (MoES,
2012)). Like with the study place system, also the funding of research covers only
a part of a defined “optimal” base funding. The state funding component for scien-
tific development of universities allocated no funds from 2009 onwards (in 2014
80 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
only as small ad-hoc funding with a specific purpose). The funding of research
development is largely left to the EU funds.
Potential performance impacts: Low funding levels and uncertainty about the fund-
ing may create problems with the quantity and quality of research.
The mainly historical approach to distribute basic state research funds,
together with perceived opaque criteria for the allocation of “additional” funds
(e.g., through the EU structural funds and the competitive public research programs)
does not breathe a performance oriented atmosphere. The performance oriented
coefficient also does not create such a climate.
(Criterion: create performance rewards and sanctions)
Though competition is available — particularly for EU funds — state funds for
basic research appear to be in the end allocated based on historical distribution.
Similar to the study place system there is a use of performance indicators “behind
the scenes” which does not become transparent and hence does not lead to sub-
stantial impact. EU structural funds are also distributed on the basis of relatively
unclear criteria from the perspective of stakeholders. Until now, EU structural
funds were distributed among all HEIs and research institutes according to a lo-
gic, which included relative size. Though some equality was applied, the exact
criteria were opaque which hampers (performance based) competition.
The competitive public research programs invite proposals from universities,
enterprise, research institutions and non-governmental organizations that address
research topics meeting the goals of the research programs in line with national
research priorities, scientific and national importance and innovation. However,
stakeholders could not immediately indicate the importance and working of these
programs, which raises the impression that most institutions are not familiar with
the exact rules of the game and opportunities of these programs.
Basic state funding for equipment is, according to the MoES, related to indicators,
such as the number of state-funded students, graduates, publications and pa-
tents, faculty holding doctoral degrees and professorship. In fact, it is not induc-
tive to creating a performance-oriented climate, as the criteria and their applica-
tion do not seem to be transparent to stakeholders.
Potential performance impacts: Research performance problems in terms of the
quality and quantity of the outputs and potential underemployment of potentially
available resources.
The historical allocation of basic state research funding and the relatively equal
distribution of EU funds among various HEIs without using explicit performance
measures create an atmosphere in which the allocation is not considered fair.
(Criterion: support perception of fairness/make funding transparent)
Though the aforementioned strengths hinted at the potential for explicit perfor-
mance orientation in the allocation of EU funds, this opportunity has not yet been
exploited. HEIs seem to perceive the current distribution of research funding
(including EU funds) as non-transparent because of a lack of clear awarding
and performance criteria. Given that funds are not explicitly allocated on the basis
of performance strengthens this perception. Moreover, although EU-funds are
currently distributed in a “relatively equal way” (since everybody gets something),
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 81
without clear objectives or criteria, institutions are left with the feeling that the
allocation just follows historical balances, rather than openness, competition,
quality, or performance. This might be regarded as unfair, and as not addressing
well the needs of the country.
Potential performance impacts: Quality problems and lack of competition based on
quality.
There is a felt lack of a national research strategy among stakeholders.
This results in a research system that does not focus strongly enough on national
research priorities as well as the needs of society. They also feel no support to
accomplish such a strategy.
(Criteria: promote national strategies; promote institutional profiles)
There is a general feeling among HEIs, the Ministry and the Agency that there
is no real national research strategy with national research priorities that universi-
ties and research centers must adhere to. The national research system is instead
largely driven by bottom-up initiatives from HEIs (rather than a top-down govern-
ment steering mechanism). In cases where it becomes clear that Latvia receives
fewer funds from the EU Horizon2020 funds than it invests, the Agency is then
asked to turn this situation around. As HEIs feel neither a strong push towards
a national research strategy nor towards particular research priorities, they
attempt to build their own research profiles. The first, and recent, research evalua-
tion indicated that only a limited number of research institutes/centers demon-
strate international competitiveness (15 out of 76). This could provide a basis
for stronger research prioritization, with HEIs focusing more closely on their
strengths, and funding agencies correspondingly allocating the available funds
more selectively; i.e., the basis for the establishment of places for research
excellence is there, but it is not yet used to promote such a development.
Potential performance impacts: Quality problems and lack of competition.
There is no integrated system of basic funding of teaching and research. This means that
research funding is coming as a kind of top-up funding despite the fact that it’s basic
funding. In the logic of the three-pillar model basic funding is put into the third pillar
with no funds left for focused priorities.
(Criteria: stability, balanced system)
The general idea of close interactions between teaching and research within
a university usually leads to an integrated basic funding of teaching and research.
Basic funding then allows a very basic realization of the two core tasks, with flexi-
bility in using the funds for one or the other (restricted by defined teaching loads).
As has been shown in the section on state funding of teaching, this is not done
in Latvia: basic funding is not sufficient to engage substantially in research;
no research driven criteria are applied to determine basic funding; and with
the university and the research institute there are even two separate artificial units
to receive funds for teaching and research, leading to a complete separation of
the revenue streams. In terms of the three-pillar model the funding of research
institutes gets the character of on-top funding in the third pillar, creating the
impression that research is not a basic task. This also leads to the effect that
institutional public funding of research is not targeted and focused as one would
expect from the third pillar. Instead of a limited basic research funding as part of
a general basic budget to fulfill all tasks of a university plus a targeted investment
82 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
in promising research areas and national research priorities Latvia realizes a lack
of integrated basic funding and a non-targeted top-up funding of research infra-
structure.
Potential performance impacts: Problems with research quantity and quality.
There is a lack of stimulation of important elements for the advancement of research
and innovation.
(Criterion: avoid undesired effects)
To develop research areas at levels that are internationally competitive, it is,
for example, inevitable that post-doc career opportunities are made available.
There are currently no systematic funding mechanisms promoting this. Despite
the Higher Education Council putting forth a “triple helix” model of research,
knowledge transfer and industry relations, there are only very limited competitive
funds available to promote these kinds of developments. Furthermore, HEIs that
seek to develop innovative new study programs or research lines have to finance
pre-investments largely by themselves, since there are no “innovation funds”
available at either the ministry or institutional level.
Potential performance impacts: Lack of a competitive environment to stimulate
innovative, excellent and internationally competitive research.
Scholarships from EU structural funds given to Master and PhD students/researchers
may not always lead to successful completion or to stimulate an innovative research
labor force.
(Criterion: avoid undesired effects)
Not all Master and PhD graduates will go on to work in academia or in research-
intensive jobs. Many students/graduates with scholarships that were intended
to train them as specialists for the (academic) labor force might drop out of their
studies or choose jobs outside the “innovation sector”. This is likely to be a “loss
or risk” that one has to take. In addition, the criteria for allocating these scholars-
hips ultimately lie with the universities, and, as such neither the state nor the
Agency has control over the use of the instrument. Finally, the structure of the
research sector includes non-university research institutes that offer attractive
working conditions for PhD candidates. However, only universities can award
PhDs. This requires smooth collaboration, which is currently not supported by
the funding mechanisms.
Potential performance impacts: Potentially high drop-out rates for Master and PhD
programs and problems with performance of young researchers.
Academics working in HEIs can earn substantially different salaries based on the types
of activities they are involved in (teaching and research) or where they work.
(Criterion: perception of fairness)
Academics can earn different salaries based on the activities they are involved in.
Teachers earn less than researchers working on EU-funded research projects.
Depending on the number of research projects a professor is engaged in,
the salaries might substantially increase. For a well-operating academic labor
market, it appears problematic that the salary can so heavily depend on the type
of activity one does. Although some form of salary rewards might be stimulating,
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 83
differences that are too large may harm the employee-motivation, especially for
young researchers with limited access to larger research projects.
Academics from Riga working in the region require substantial financial compen-
sation for both any additional costs they accrue (e.g., travel) and for the fact that
they are willing to work for a regional institution. The autonomy of institutions
to respond to such demands may put financial pressure on regional HEIs, while
creating a situation of (substantial) inequalities in employment conditions between
employees working at the same institution.
Potential performance impacts: This provides labor market distortions with a high
risk to lose young academic talents for science.
Overall conclusions (funding of research)
•Overall research funding levels are relatively low in Latvia compared to most
other European countries. Basic state funding for public research is particularly
limited, leading to a situation of austerity and an R&D system that is not competi-
tive internationally. State research funding needs a good balance between basic
funding of research (which should be integrated with basic funding of the
teaching mission) and targeted, focused funding of research priorities. This
balance does not exist in Latvian state funding which is characterized by non-
focused top-up funding of research.
•Research funding from EU structural funds constitutes the main research income
of research institutes/centers and enabled universities to survive financially
since the economic crisis hit Latvia in 2008. One could ask the question whether
EU-structural funds will endure and offer sufficient financial viability for the R&D
system in the long run.
•Most stakeholders indicate a lack of any national research strategy, and suggest
that research funding is not currently linked to national research priorities. They
are therefore able to set their priorities and strategies (which, though necessary,
results in possible fragmentation of research efforts). The institutions realize,
however, that they have to compete for research funding from EU structural
funds. This puts the Agency in a position to formulate priorities and national
research strategy that institutions can then adhere to. However, the allocation
criteria used by the Agency are not perceived as transparent and, as such,
the Agency misses out on the opportunity to firmly set the agenda. Also, the cri-
teria of the national competitive research programs appear to not be fully known
among stakeholders.
•The way in which basic state research funds are distributed among HEIs and
research institutes/centers is, to a large extent, non-transparent, and creates
the perception of an atmosphere of unfairness, despite the fact that there seems
to be a kind of formula system including performance indicators (in an implicit
way).
•Many stakeholders indicate that a stronger performance orientation could help
the system. If additional resources could be opened up, than a transparent rela-
tionship to explicit performance criteria would be welcomed. The idea of joint
funding of the two core missions of the university could also require an inte-
84 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
grated system of performance indicators in teaching and research, leading to
a flexible lump sum from the performance oriented funding pillar.
•The evaluation process recently conducted provides a good basis for a selective
research funding system that is potentially more aligned with national research
priorities, competition, and focus on strength areas. The quality process can be
used to formulate quality-oriented (performance) indicators that may be integra-
ted into the research funding systems of the Ministry and the Agency, e.g., inclu-
ding performance agreements.
4.5 Diversification of financial resources for HEIs
Strengths (diversification of resources)
The legal structures enable resource diversification.
(Criterion: promote accessibility of income sources)
The legal framework in Latvia allows HEIs to diversify their resource base and
to look for all kinds of income streams with only very few restrictions. They are
allowed to charge tuition fees, principally without regulation of their volume. They
are also able to generate profits from professional training or commercial compa-
nies. They might also establish foundations and rent out their facilities (for educa-
tional purposes). Overall, the system enables HEI institutions to generate specific
revenues according to their particular situations (for instance, the University of
Latvia owns a lot of real estate and possesses endowments).
Potential performance impacts: This autonomy is expected to generate an outside
orientation of HEIs.
There are many fee paying students who are willing to invest in higher education.
(Criteria: stability create a competitive environment)
Many students are apparently willing to invest in higher education and collectively
create a substantial resource base for HEIs. These additional revenues for HEIs
would help them survive and to start up new initiatives, such as new teaching pro-
grams (especially as public funding through the study place model does not
stimulate program innovations).
Potential performance impacts: Innovativeness and orientation towards the market
(“relevance”).
Substantial funding from EU structural funds for HE and research is a major source of
diversification.
(Criteria: financial sustainability; promote national strategies; competitive environment)
EU structural funds enabled the HE sector in Latvia to survive in the period of
economic crisis since 2008 and, helped to further develop the Latvian R&D sector.
Given that these funds are allocated through a special agency provides the oppor-
tunity to promote national research priorities, stimulate competition, and enhance
performance orientation. HEIs are strongly aware of the importance of their
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 85
income from EU structural funds (allocated within Latvia) and other potential
EU-research funding (allocated though EU agencies), and, as such, will be res-
ponsive to criteria related to such funds.
Potential performance impacts: Quantity and quality of activities.
Latvia has a substantial private higher education sector which offers students
alternatives next to the full-fee paying opportunities of the public institutions.
(Criterion: stimulate a competitive environment)
The existence of a substantial private higher education sector offers students
additional choice, provides them with access opportunities beyond the scope of
the public budget, and enables more professionally-oriented programs to flourish.
In addition, this challenges public HEIs to offer relevant, good-quality education.
This of course requires institutions some level playing field for private higher edu-
cation to compete in terms of diplomas and degrees that are offered. Since private
HEIs often offer more professionally-oriented programs, they also stimulate diver-
sity in the system and foster close cooperation with industry.
Potential performance impacts: Quality, satisfaction of diverse needs, relieve of
the public budget.
Weaknesses (diversification of resources)
There is strong reliance on tuition fees and EU structural funds rather than on a stable
state budget for teaching and research (about 1/3 of total funding).
(Criteria: guarantee continuity in funding mechanisms, promote risk spreading
and management)
Alongside the positive effects in terms of creating a competitive environment
through income diversification, the strong reliance on tuition revenues and
EU-structural funds for research instead of stable basic funding from the govern-
ment may harm the long-term financial viability of HEIs in case these revenue
streams are not very reliable. Due to demographic decline, it is well-known that
tuition fee-revenues are under pressure. In addition, structural funds may not be
eternal, either (though they appear stable in the mid-long-term). As such, it would
be good if HEIs intensify their pursuit for further resource diversification in order
to further spread the risk. At the moment, financial sources outside the state
budget typically lead to new dependencies and risks, instead of addressing these
risks by spreading them across a balanced set of income streams.
Potential performance impacts: Quality problems and a potentially shrinking HE
system.
Income from private sources like industry or community services appears to be
underdeveloped.
(Criterion: promote risk spreading)
Both stakeholder interviews and research suggest that revenues from other
sources (like business and industry, but also from research and services for pub-
lic sector organizations and international sponsors) are limited. So on the one
hand the share of diversified funds seems to be high and does not necessarily
86 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
have to be increased, but on the other hand the degree of diversification within
these funds is not sufficient.
Though HEIs receive about 15 percent of their revenues from other income sour-
ces, it is not known how much of these revenues are linked to educational “servi-
ces”, donations, or, for instance, renting out facilities, etc.
Potential performance impacts: Insufficient transparency and explicit risk manage-
ment.
A variety of funders may distract HEIs from setting their own research priorities.
(Criterion: promote institutional profiles; avoid undesired effects)
Though it is good that institutions are sensitized to external incentives around per-
forming in certain areas through resource-competition, such competition may
have adverse effects if the performance criteria are not steering the institution
in the right way. It can thus either contribute towards, or distract from, HEIs setting
“the right” priorities. In the Latvian case, where EU structural funds for HEIs are
so significant, it is important that these allow or stimulate institutions to develop
their own (research) profiles, providing they fit with national strategic priorities for
higher education. Without well-established priorities, the system can easily dege-
nerate into ad hoc activities, which are contingent on available financing. The role
of “other sources” is substantial (around 15 percent) but is not transparent.
Potential performance impacts: Less strategic focus and as a result intransparen-
cy, less mass and reduced quality.
National data as well as institutional information demonstrate the there are many
resources, which are defined “other”. This lack of transparency harms a full
understanding of the funding and financial situation of HEIs.
(Criterion: make funding transparent)
At both the national level and the institutional level, there appear to be substantial
financial flows labeled as “other revenues”, which might correspond to endow-
ments, income from rental activities or anything else. It is encouraging to see that
— at least the largest universities — are capable of generating additional revenu-
es. The risk, however, is that society cannot be easily convinced that HE is under-
funded. Not knowing where these resources come from and what they are spent
on makes HE out to be a bit of a “black box”. Although strong institutional autono-
my easily allows for cross-subsidizing between various types of activities, it does
so only at the expense of the real cost calculation of education and research.
Potential performance impacts: This decreases trust in the HE system and a redu-
ced likelihood of increased public spending on HE and research.
Despite the positive general assessment of state regulations in the context of
diversification, there are a few minor (perceived) restrictions for generating income
from diversified sources.
(Criterion: promote accessibility of diverse income sources)
Although current regulation for public universities enables them to achieve com-
prehensive revenue generation, there are some exceptions. Yet there is no reason
why, for example, conference facilities cannot be rented out for purposes other
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 87
than education; something that is presently prohibited. Similarly, machinery fun-
ded by EU structural funds cannot currently be used for commercial purposes
in the first 5 years; curtailing the possibility to generate additional income.
Potential performance impacts: Underemployment of premises, equipment and re-
sources as well as suboptimal university engagement with society.
Overall conclusions (diversification of resources)
•The Latvian HE sector has made a number of strong steps in the direction of
resource diversification: the legal framework for this is favorable (with very few
exceptions). As such, HEIs have become less dependent on state budgets
and thus can survive political-economic shocks like the recent financial crisis.
The major external resources appear to be tuition revenues for teaching and
nationally-allocated EU structural funds for investment and research. However,
further revenues from private resources like industry and public organizations
appear to be underdeveloped. The share of diversified resource seems to be
fine, but the degree of diversification through spreading revenue over a variety of
sources could be increased.
•Tuition fees for additional student places may be an unreliable source of income
in Latvia due to demographic decline. In addition, the strong outward internatio-
nal student mobility may impact on these resources. As such, HEIs must offer
students attractive and good-quality education to ensure this income stream
is as viable as possible. Moreover, EU structural funds may also not be an ever-
lasting revenue base: although there is mid-term stability, countries and HEIs
must also forecast and prepare for long-term research revenues.
•Latvia shows that many people are willing and capable to invest in higher edu-
cation. However, the best students, who often come from more advantaged
groups in society and are likely to have the best employment opportunities,
are exempted from making private contributions. This means that Latvian HE
is missing out on an additional revenue stream.
•Finally, there is an issue concerning transparency, particularly with regards to
the relatively large portion of resources labeled as “other revenues”, particularly
for a few universities. If the HE sector wants to plea for additional resources
to overcome a situation of underfunding, one has to clearly demonstrate what
is meant by “other resources” and how these are allocated.
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4.6 Financial autonomy of HEIs
Strengths (financial autonomy)
There is strong institutional autonomy to internally distribute resources and also to build
financial reserves.
(Criteria: guarantee autonomy of internal resource allocation; guarantee academic
freedom)
Latvian higher education institutions exercise a large degree of autonomy with
respect to the internal allocation of financial resources. This implies that they are
relatively able to reallocate resources between departments and different activi-
ties. As such, cross-subsidization is possible in cases where an institution wants
or needs to do so, e.g., in order to maintain a study program with relatively low
student numbers. Aside from money, state-funded student places are also able
to be reallocated by the HEI, up to 10 percent of student places. Although HEIs
are allowed to build reserves for future periods, this remains a theoretical propo-
sition, since financial constraints do not allow substantial sums to be carried over
to the next year.
Potential performance impacts: Strategic focus and quality.
The financial autonomy provides a prerequisite for developing institutional strategies
and profiles.
(Criterion: promote institutional profiles and strategies)
Within the limits of total resources, HEIs can mobilize the financial resources
necessary to develop and realize their own strategies and profiles. They have
the freedom to allocate funds according to their own research and teaching prio-
rities. This is a necessary condition for HEIs in becoming successful; particularly
in teaching and research areas. It sets incentives for the efficient use of resources.
Potential performance impacts: Strategic focus on strengths creates mquality
(excellence) and efficiency.
Higher education institutions also have the autonomy to set the tuition levels
for fee-paying students.
(Criteria: stability; promote accessibility of income sources; take into account cost
differences)
With the freedom to determine their own tuition levels, institutions are also able
to determine which student markets they want to serve. This will help them to
financially sustain particular study programs or to generate resources necessary
for new initiatives and innovations. It also enables institutions to distinguish
between low- and high-cost programs, and to use tuition fees as price signals on
the student market. Finally, it enables HEIs to pursue their own plans for study
offers, beyond those study places determined by the state.
Potential performance impacts: Satisfaction of society’s needs for relevant qualifi-
cations.
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Higher education institutions also have the autonomy to borrow money at the capital
market for investing in infrastructure, like buildings or expensive research equipment.
(Criteria: stability; take into account cost differences)
HEIs are given the freedom to borrow money on capital markets to invest in re-
search infrastructure or “housing”. Since capital markets use strict criteria, HEIs
seeking to invest often also need complementary financial support via govern-
ment or EU structural funds. But this autonomy provides more flexibility for long-
term investments in innovative ideas.
Potential performance impacts: Innovativeness.
Weaknesses (financial autonomy)
Institutions are not fully aware of the degree of autonomy they have.
(Criteria: transparency; provide clear and non-fragmented incentives)
Following stakeholder interviews, it became clear that neither representatives
from HEIs, nor from the Ministry, nor the Agency knew exactly the precise limits of
the financial autonomy of HEIs. Can they use teaching resources for research
or the other way around? Can they cross-subsidize teaching with research grants
from EU-structural funds projects? Are they able to set their own tuition levels
beyond the levels of state subsidies for study places, or even beyond the actual /
normative costs calculated by the ministry?
Potential performance impacts: Intransparency can lead to suboptimal levels of
quality and efficiency.
The financial autonomy of HEIs can raise issues with external partners whether
resources are used for what they were meant to do.
(Criteria: transparency; unambiguous and balanced funding)
During the stakeholder interviews, some external partners of HEIs raised the point
of questioning whether some funds are used appropriately for their intended
activities. Are teaching funds used for research, or are EU structural funds for
research used to maintain low tuition fees? It seemed as though there were con-
cerns about what happens with the money given to HEIs. Such non-transparency
may be harmful for public trust in HEIs. However, rather than enforcing spending
and autonomy limitations, the issue of trust should could instead be resolved
through more transparent performance relationships and greater transparency
with regard to the volume and quality of teaching and research. It would be fatal if,
given the impression of the misuse of funds, the situation returned to earmarking
and specific line-items. The focus should be on the transparency of income
streams and on the effects the use of money has in terms of academic per-
formance.
Potential performance impacts: Intransparency can lead to reduced trust and
therefore suboptimal investments by government, industry and students in HE.
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Financial autonomy of HEIs may prevent them from aligning with a national strategy.
(Criterion: promote national strategies)
If HEIs enjoy a large degree of (financial) autonomy, they may not feel strong
incentives to adhere to national priorities and strategies. One can think of the
number and vast diversity of study programs, e.g., leading to duplications of pro-
grams in particular fields, while leaving other fields under-served. One might also
conceive of situations where strategic research orientations of various universities
overlap or are not adequately filled. As a result, the ministry may have lesser grip
on the HE and research landscape than they might wish for. On the other hand,
activities could be organized in a more efficient and flexible way compared to
a situation in which the ministry defines everything. Decentralized decisions
usually benefit from better information. Finding the right balance is thus an art.
Potential performance impacts: Problems with national priorities.
Overall conclusions (financial autonomy)
•Higher education institutions enjoy a great deal of (financial) autonomy and,
as such, can flexibly, efficiently and effectively spend their resources. They can
also use this spending freedom to develop their own strategies and priorities for
teaching and research.
•Whereas HEIs often appear to be unaware of their real autonomy — potentially
leading to a sub-optimal allocation of resources — some external stakeholders
perceive that they have too little influence on what universities can or can’t do.
Somehow the opaqueness about this situation will have an impact on the trust-
relationships HEIs have with their external partners, like the Ministry, the Agency
as well as industry, etc. Transparency, rather than returning to a state of greater
finance regulation, should be the answer to this emerging problem.
•The freedom to make their own decisions, e.g., with respect to tuition fees, educa-
tion offerings, research priorities, financial reserves or capital investments, enable
universities to behave as competitive organizations. However, the rules of the
game must be transparent and the system needs to be guided by some national
strategies or priorities in order to generate a more effective HE system as a whole.
4.7 Student financing (tuition fees; study costs,
student loans and scholarships)
Strengths (student financing)
Latvia has many tuition fee paying students.
(Criteria: create a competitive environment; promote accessibility of diverse income sources)
Latvia has a very high proportion of full fee-paying students compared to many
other European countries. This indicates that many people attach substantial
value to higher education and are willing to bear the financial burden of the tuition
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 91
fees. It also provides HEIs with substantial additional revenue to contribute
towards the maintenance of their institutions, offer a wide array of study programs,
and launch new initiatives. The fact that many students need to pay may also
stimulate a more customer- oriented attitude among students and institutions,
which may result in higher quality services.
Potential performance impacts: Investments in higher education, quality.
Tuition fees are often related to the amount of government funding provided for various
study programs (disciplines) and as such also take into account cost differences.
They also can take into account capability to pay.
(Criterion: take into account cost differences)
Students in more expensive study programs (e.g., science and engineering) often
pay higher tuition fees than those in lower-cost studies, such as law, business
administration and social sciences. Since full-tuition students constitute the majo-
rity of students, this also guarantees that more expensive studies will not be
underfunded. This may create a good signal to the market, although might also
incentivize students to opt for cheaper programs at the expense of more expen-
sive (and sometimes national priority) programs (what is currently counterbalan-
ced by the distribution of state-financed study places). The University of Latvia
reacts to these potential problems by setting a flat fee for all students (average of
prices for study places, this also guarantees affordability of expensive programs).
Some programs or institutions in the region use their autonomy to exempt stu-
dents from paying the tuition fees, since many of them are from poor back-
grounds (e.g., at the University of Daugavpils). These students will then have
to be cross-subsidized by other students or revenues (which are also limited
as seen above).
Potential performance impacts: Quality, access and well-considered/cost-oriented
study choices.
Student loans are in general available to a substantial number of students covering
tuition fees, living expenses, other study costs as well as study abroad. Repayment
conditions are favorable.
(Criterion: perceived fairness)
All students who want to borrow and who have relatives or friends that can act
as their guarantors are able to take up student loans for tuition fees and living
expenses. As such, most students should be able to pay for their costs of study
and repay them after graduation. The loans include relatively favorable repayment
conditions, such as no interest during studies, a one-year grace period, relatively
low interest during repayment, and various government debt cancellation arrange-
ments (in case of having a child or working in “socially desirable” jobs). This sti-
mulates education investments by young people, guarantees access, and helps
Latvia to attract relatively many people to higher education regardless of the very
low public investments in HE. Student loans can also support students seeking
to study abroad.
Potential performance impacts: Access.
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Merit based scholarships for very few absolute top performing students on publicly
subsidized student places create a positive climate for top-performance.
(Criterion: create performance rewards and sanctions)
Students on publicly-subsidized full-time study places can compete for a relatively
small number of scholarships (14 percent of them receive one, about 5 percent of
all students). These scholarships (of EUR 100 per month) cover a substantial part of
the monthly expenses of a student. Only the top-performing students are eligible
and awarded the scholarship, thus generating a pursuit towards excellence among
the top-performing students. This is another element that proves that overall the
Latvian funding system is largely merit-focused, rather than means-based.
Potential performance impacts: Student performance (excellence), efficiency.
Weaknesses (student financing)
Heavy reliance on fee paying students in connection with demographic change creates
access issues and endangers financial viability of HEIs in the long run.
(Criteria: stability, perception of fairness)
Due to demographic developments that exhibit a declining trend in Latvia,
the strong reliance on tuition fee-revenues poses a threat to the financial viability of
many HEIs in the long run. In any case, it calls for a greater emphasis on efficiency
in the system in terms of minimum numbers of students in study programs and
classes, teaching methods, etc. The combination of a reliance on tuition fees
and strongly merit-based (and not means-/needs-based) subsidization leads to
problems in terms of access for students from lower socio-economic backgrounds.
Sometimes the high share of fee-paying students is declared responsible for “brain
drain” from Latvia, which, in particular, occurs to tuition-free countries in Northern
Europe. This is nevertheless an assumption and there is no empirical evidence
confirming or rejecting this argument. Taking into account the fact that attractive-
ness of studies (in terms of funding) is not only related to tuition fees, but to the
whole financial situation (including living costs), it is not fully plausible that tuition
fees in Latvia results in students migrating to Scandinavian countries. Many stake-
holders confirmed that those students choosing to study abroad do so, on the
basis of expected quality outcomes and the reputation at universities in European
countries, compounded by a lack of trust in the quality in Latvia. As such, this will
not be used here to criticize the tuition fee situation.
Potential performance impacts: Reduced income may endanger the quality and
efficiency of education.
Distinction between publicly subsidized students and full-cost fee paying students based
on grade point average in secondary education (dual-track system) creates a potential loss
of income for the HE system and could endanger fairness and hence access to higher
education for lower socio-economic classes. It also forces many students to work.
(Criteria: promote risk sharing; promote accessibility, fairness)
The one-third discrepancy between students who get on publicly-subsidized study
places and those who have to pay for their own education (which is first of all based
on merit, i.e., success in secondary education), though a good mechanism to sti-
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 93
mulate high-quality students to enter HE, might also generate conditions of social
unfairness. In general, all around the globe, children of richer (and often higher-
educated families) tend to show substantially better results in secondary education.
As such, giving the tuition-free study places to the best students in practice means
that these places will most likely be given to children from the better-educated and
more affluent parts of Latvian society. Rewarding excellence implicitly means sanc-
tioning lower socio-economic classes, even when they qualify for higher education.
As a result, students from poorer backgrounds more often than not have to pay for
higher education. This leads to inequalities and raises concerns about the criterion
of fair access to higher education. Interestingly, one can also argue that if so many
students from less educated and less affluent backgrounds are prepared to pay for
HE through tuition fees (currently two-thirds of the student body), then HEIs lose
tuition revenues from the other third of the student population who in most cases
could afford to make these payments.
The aforementioned situation leads to a high percentage of students working,
many of them even full-time (stakeholders also reported students taking one year
off from their studies to earn money). This calls for target-oriented and efficient
study processes.
Potential performance impacts: Access/equity problems as well unexploited reve-
nue generation capacity.
Calculation of tuition fees is often based on the ministerial prices from the study place
system. The real cost of education is perceived to differ from this.
(Criteria: take into account cost differences; financial sustainability; promote diverse
income sources; transparency)
HEIs can charge full tuition fees and are in principle free to determine the maxi-
mum. In practice, institutions tend to charge the value that is allocated by
the Ministry for the state-funded places, as this is also the amount that students
can borrow through the “study loan” scheme available for study fees. Institutions
nevertheless differ: for example, the University of Latvia charges every student
the average amount of the various “study place subsidies” they receive from
the government, while some regional HEIs substantially reduce their tuition rates
or charge no fees at all because their “experience” informs them that students
cannot afford to pay tuition fees. Altogether this means that the system is opaque,
and that HEIs often do not charge the full costs of education to their fee-paying
students. If this is true (i.e., that they are underfunded through the state study
place funding model), then they are also charging tuition fees that are too low
from their “full-cost paying tuition students”. These then also need to be cross-
subsidized from some other revenues, which endangers financial sustainability
and transparency. In addition, by failing to distinguish between fees for students
in different study programs results in a situation whereby some students “over-
pay” while others “underpay” for their program, with respect to the full costs.
Finally, the full fee-paying model does not appear to work for many regional insti-
tutions. On the one hand, they feel they are not able to charge full fees to students
as they will then lose their market share. On the other hand, they experience diffe-
rent cost structures than universities in larger cities. Since regional institutions
are generally smaller and have fewer state-funded study places, they expressed
that they tend to reduce the wages for “local teachers”. If they attract particular
teachers/researchers from larger cities, they then have to pay them higher wages
(comparable to what they could receive in the cities) in order to come work for
94 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
them. All in all, cost structures are not transparent and are not well-matched to
full-cost tuition policies.
Potential performance impacts: Problems with teaching quality and access levels
in programs that charge the full costs.
The scholarships for the best publicly funded students are only available to the “happy
few” and are so much focused on a very small group of excellent students that they
do not create incentives for the large majority of students.
(Criteria: create performance rewards and sanctions; perception of fairness)
Offering scholarships to only the few very best students is intended to help
students with their costs of living, while stimulating excellence. Since the scholar-
ships only serve very few students on publicly-funded places, and only the top
5 percent of students, these subsidies are only helping students who have already
been awarded a subsidized study place — those most probably given to students
from better socio-economic classes (see above). In addition, the envisaged com-
petition for excellence will only happen among the few already top students on
publicly-subsidized study places. All other students will consider themselves
ineligible, and thus will not strive towards excellence.
Potential performance impacts: Access problems, less performance effects than
advocated.
Student loans are offered by the institutions using government guarantees for private
banks to lend the money. Also the scholarships are offered via the HEIs.
(Criteria: transparency, ensure administrative efficiency, fairness)
Given that loans are offered on an individual basis by HEIs, one runs the risk that
administrative systems differ among them; meaning that student loans are not pro-
moted and communicated in the same way as might have been possible through
one administering body. This could also lead to a situation in which students at one
HEI are informed differently from students elsewhere, in the sense that they could
be better helped. A strictly decentralized system is also likely to be more expensive
in terms of operation costs, since HEIs have to probably each perform particular
administrative actions that are then duplicated across HEIs, e.g., making arrange-
ments with private banks; leading to inefficiencies. The same goes for the decentra-
lized administration of merit-based scholarships. The decentralized approach —
according to the stakeholders — also does not seem to work for means-testing,
meaning that universities felt they were unable to adequately assess student needs.
Potential performance impacts: Access/equity problems and efficiency losses (mo-
ney that could be better spent).
To obtain a tuition fee loan or a student loan one needs to have a guarantor guaranteeing
collateral in case the student/graduate cannot repay his/her debt. But many Latvian
school leavers are not able to provide such a person.
(Criteria: promote national strategies; fairness)
In countries where a large part of the labor force earns a salary close to the social
minimum (around EUR 285 per month), demanding a guarantor who can repay
the debt in case of default seems to be a particularly stringent criterion. This po-
tentially results in excluding the poorest part of the population from one of the few
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 95
available funding sources, in cases where one would like to study on a fee-paying
basis. This strong push towards a guarantee that student loans — rightfully — are
to be repaid appears to be at odds with the various ways in which graduates can
later have part, or all, of their debts written off, such as those who have children
(30 percent debt cancellation for each child) as well as those working in “socially
desirable jobs” (in which case the state covers the repayments).
In some cases, there are alternatives to seeking guarantors; for instance, munici-
palities can sometimes act as guarantors (motivated by the desire to recruit local
labor force) or else there may be funds from donations. These options, however,
are not widely available.
Potential performance impacts: Access/equity problems and potential loss of talen-
ted people.
Student loans for other costs than tuition fees (like living expenses and other
study-related costs) also are merit based. Need based student loans are missing.
(Criteria: promote national objectives; fairness)
Student loans (for living expenses and non-tuition study-related costs) can only
be taken up by students on state-subsidized study places. Full-tuition students
cannot take up such a loan; nor are they entitled to any scholarships. The norma-
tive approach behind the merit-based model permeates the entire system, and
stakeholder interviews indicated that this is based on a widely-accepted social
concept. This implies that parts of the student population most in need of finan-
cial support are denied such support. This creates a situation of inequity and
disables access for students from lower socio-economic backgrounds. Since
Latvia aims at increasing participation in order to generate a highly-educated
labor force — expressed through its adherence to the European ambition to have
40 percent of the employees aged 25 to 34 that have been educated to degree-
level — one could assume that there were stronger need-based policies to sup-
port students from disadvantaged backgrounds. This, of course, requires instru-
ments that are able to measure financial need, which interviewees suggested,
though not necessarily easy to implement (e.g., because of an extensive shadow
economy in the country) are neither impossible. If it is estimated that 40 percent of
the labor force has an income at the level of the social minimum of EUR 285 per
month and graduates on average earn EUR 1,000 per month, there must be some
basic data available to gauge income levels.
Potential performance impacts: Access/equity problems, potential loss of talents.
Students seem not to be well informed; they need more information for rational study decisions.
(Criterion: promote national objectives)
It is also often the case across many countries that students make ill-informed
decisions. This seems to also be true in Latvia: going abroad because of doubts
about quality, debt aversion because of unclear labor market prospects, a multi-
tude of study fee calculations, special systems such as the “rotation” of state
study places, etc. Accessibility, especially for students who can’t seek help from
their parents since they do not have an academic background, demands that
there is an information system in place to support study choices.
Potential performance impacts: Access/equity problems; loss of talented students.
96 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
Overall conclusions (student financing)
•The high proportion of fee-paying students constitutes a considerable resource
to the system. HEIs get substantial additional revenues, which they can spend
according to their own priorities, such as underpinning basic operational costs
or funding new initiatives. However, in certain regions, people are often so poor
that they cannot afford to pay the full tuition fees, resulting in some institutions
dropping their prices. The fact that this occurs demonstrates that HEIs are able
to adapt and respond to social issues.
•With a declining demographic tendency, the forecasted number of fee-paying
students will decline, resulting in diminishing revenue possibilities for HEIs.
•Since many students have to pay full tuition fees if they want to study, this
means that not all capable youngsters will enroll in higher education; or else will
drop out at a later stage, due to the costs. This means that the full potential of
people capable of achieving higher education may be underexploited, which
ultimately might result in lower participation rates than anticipated by the govern-
ment (e.g., the 40 percent ambition for the proportion of the higher educated
in the 25–34 age cohort participating in the labor force).
•One can also argue that the fact that so many students in Latvia are willing and
able to pay tuition fees means that the system misses out on some revenues that
could be generated from other students (i.e., one-third of the student popula-
tion), for whom tuition fees would likely be affordable (see next bullet).
•Problems with access to higher education are compounded by the strong merit-
orientation of the system. Although it is good to stimulate student performance
with merit-based elements, in the Latvian system this tends to lead to cumulative
benefits for the very best: they land themselves free study places, receive scho-
larships, and are then able to take out an additional loan to cover living expen-
ses. It is moreover well-known (and well-documented) that the highest-achieving
students generally come from the better-educated and more affluent. Neverthe-
less, means-/need-based elements also play a minor role, but only as second-
order criteria for the allocation of study places.
•It is very positive that Latvia appears to have a well-functioning student loans
system with relatively favorable repayment conditions, since this helps about
20 percent of the fee-paying students with their tuition costs, as well as suppor-
ting 15 percent of subsidized students with their living expenses.
•However, for several reasons, large numbers of students cannot or do not want
to use the loan facilities. This might be due to the “guarantor” requirement
and non-availability of student loans (for living expenses) for students on fee-
paying places. As such, many students need to take on jobs alongside their
studies in order to pay for their costs, or else ask for support from their families.
•Scholarships are only available to the very best students on subsidized places.
As such, they only reach a very small select group of students who are likely
to belong to the wealthier parts of society. This is not a very effective way of sti-
mulating excellence, and fails to create incentives for the majority of students
who will never be able to attain top performance.
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 97
Appendices
Appendix 1
Latvia’s Current Funding Model
1.A Relevant framework conditions in Latvia
The development of the Latvian higher education funding model will need to take
into account relevant framework conditions in the country. Latvia had one of the
fastest growing economies in Europe over the past decades; however, it has also
seen a dramatic contraction during the economic crisis. Annual GDP growth was
cumulatively at 33 percent during the years of accession to the European Union
(2004–07); the cumulative decline from 2008–10 was at minus 25 percent (Aslund
& Dombrovskis, 2011, p.12). After the phase of contraction due to the economic
crisis, annual GDP growth has since been picking up, reaching 5.3 percent
in 2011 and 5.0 in 2012 respectively.
Unemployment fell from 16.3 percent in Q2 in 2012 to 11.3 percent in Q4 2013
(Central Statistical Bureau of Latvia). However, unemployment of tertiary educa-
tion graduates is at 6 percent, significantly lower than the average rate. The indivi-
dual and societal benefits of tertiary education have been extensively discussed
elsewhere (see e.g., Arnhold & Kwiek, 2011, pp. 88–92); however, as for neigh-
boring countries, tertiary education in Latvia can also be considered “the best
unemployment insurance”. The most recent comprehensive research on the gra-
duate employment is dated 2007. From the data available it seems that there are
comparable employment outcomes for different subject areas, with the exception
of graduates of humanities and social science which have slightly lower employ-
ment outcomes three months after graduation (Ministry of Welfare 2007, p. 78).
At-risk-of-poverty rate, which is the share of people with an equalized disposable
income (after social transfers) below the at-risk-of-poverty threshold, for the age
cohort 18–24 peaked in 2010 at 22.3 percent; slightly decreasing to 19.7 percent
in 2012; with the rate being significantly higher across some regions in 2012 (e.g.,
30.2 percent in Vidzeme, 30 percent in Latgale and 20.4 percent in Zemgale re-
gions (Central Statistical Bureau of Latvia). The rate for students of that age cohort
who are in tertiary education is slightly lower, as the following graph shows
(Figure 3).
98 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
Figure 3 Tertiary education
students at risk of poverty
or social exclusion
Source: Authors’ calculations, based
on Eurostat, SILC database
However, approximately 16 out of 100 students are at risk of poverty and social
exclusion. In 2012, the guaranteed minimum include (GMI) benefit was scaled
back by 12.5 percent, from LVL 40 (EUR 57) per month to 35 (EUR 50) per month.
Responsibility for providing the GMI benefit was devolved to local government.
Latvia is one of the countries in Europe that has experienced and continues to
experience significant demographic decline as a consequence of both lower birth-
rates and migration trends. The net migration trend, for example, has continued
since 2009; in 2012 it was minus 11,890 (Central Statistical Bureau of Latvia). More-
over, the effect has been widespread across different regions (Table 13).
Table 13 Long-term net Region Net migration of population (number of persons)
migration of population,
by region (2012) Riga -4,056
Source: Central Statistical Bureau of Riga region 240
Latvia
Vidzeme -1,589
Kurzeme -2,334
Zemgale -1,544
Latgale -2,577
Total -11,680
Alongside these trends in migration, the school age population has also been
rapidly declining since 2008 (Figure 4); however, anecdotal evidence indicates
that a large share in particular of well-performing students emigrate at the end of
secondary schooling22.
22 In a survey on their plans to study abroad, 50 percent of high school students in Latvia said they
had such aspirations (Dream Foundation, 2011).
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 99
Figure 4 Evolution of total
post-secondary school-age
population in Latvia 2002–12
Source: World Bank; Graph compiled
by authors
Over the next decades, Latvia will thus be confronted with the challenge to increase
productivity as the basis for continuous growth, given its fast and significantly
shrinking population. The higher education sector will play a paramount role in pre-
paring highly skilled individuals that are able to address these challenges.
1.B Description of the higher education sector in Latvia
Performance of Higher Education in Latvia
Higher education systems across the world have different missions and strategic
goals; however, in one way or another all systems strive to transmit high-level
skills to young people, prepare students for the labor market (including the aca-
demic labor market), contribute to research and development and the ‘third
mission’ of universities which can be defined as their role in regional develop-
ment and societies as a whole. A full discussion of the performance of the Latvian
higher education system would be beyond the scope of this report; however,
a short overview focusing on select indicators seems helpful for the following
discussion.
As an EU member state Latvia has defined national targets for Europe 2020,
the European Union’s competitiveness strategy. Two out of the five headline
targets pertain to higher education (http://epp.eurostat.ec.europa.eu/portal/page/
portal/europe_2020_indicators/headline_indicators):
•3 percent of the EU’s GDP should be invested in R&D. While 3 percent is
the overall EU target, the national target for Latvia is 1.5 percent. Latest available
Eurostat data show that in 2012 Latvia allocated just 0.66 percent of its GDP
to R&D.
•At least 40 percent of 30–34 years olds in EU member states should have
completed a tertiary or equivalent education according to the other headline
target related to higher education. The national target for Latvia is 34 percent;
according to Eurostat 2013 data, 40.6 percent of Latvia’s 30–34 year olds
have completed a tertiary education, so the overall EU target has already been
attained.
100 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
In the context of the EU and the aforementioned indicators, enrollment and attain-
ment rates, on the whole, do not seem to pose a serious problem. Tertiary level
attainment has continuously increased since 2005 when it was at just 18.5 per-
cent. The percentage of female students has also been continuously above
60 percent in recent years23. The latest available Eurostat data on graduates
in science, technology, engineering, and math (STEM) are from 2012, and Latvia
had 13.7 STEM graduates per 1.000 inhabitants in the 20–29 age cohort which
seems low in the European comparison (EU 27 average was 16.8 in 201124.
However, this issue already receives significant attention by policy makers
in Latvia.
Figure 5 shows that the distribution of students across ISCED levels (or levels
according to the European Qualifications Framework)25 follows what can be
considered a typical Northern European and UK pattern with a significant share
of students being enrolled at the Bachelors level. There is a higher percentage
of doctoral candidates in Latvia than in neighboring Lithuania; however, overall
the percentage is lower than in comparator countries, perhaps pointing at possi-
ble issues concerning the professional ‘pipeline’ for academia and also innova-
tion-related professions that require skills at the academically advanced level.
Figure 5 Distribution of
students by the level of studies
(2010)
Source: UNESCO Institute for
Statistics (2014), accessed on
March 14, 2014 at
http://stats.uis.unesco.org/
unesco/tableviewer/
document.aspx?ReportId=143
Vibrant higher education systems tend to have a high degree of internationaliza-
tion and strive to attract renowned international scholars and talented students
from other countries. However, also outward mobility can be highly beneficial,
in particular if students return after a mobility period and become “agents of
change” in their own evolving higher education systems and contribute as gra-
duates to the labor market of their home country.
23 http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&language=en&pcode=
tps00063&plugin=1
24 http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&plugin=1&language=en&pcode=
tps00188
25 ISCED is an abbreviation for the International Standard Classification of Education, an instrument
for compiling internationally comparable education statistics. http://epp.eurostat.ec.europa.eu/
statistics_explained/index.php/Glossary:International_standard_classification_of_education_(ISCED)
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 101
Figure 6 Outbound student
mobility ratio
Source: UNESCO Institute for
Statistics (2014), accessed on
March 14, 2014 at
http://stats.uis.unesco.org/
unesco/tableviewer/
document.aspx?ReportId=143
While stakeholders in Latvia raise concerns about outbound student mobility,
this type of mobility in Latvia is comparable to neighboring Lithuania and signifi-
cantly lower than in Estonia. From the data at hand alone, outbound student
mobility should not be a great source of concern in the Latvian sector.
However, as in neighboring Baltic countries, outbound mobility of students does
not seem sufficiently balanced by inbound mobility, which can be considered
a proxy for system attractiveness in a European and international context. Scandi-
navian countries and the United Kingdom, in particular, are much more successful
at attracting foreign students, who often pay significant fees for their education
abroad. Through these fees as well as through the transfer of know-how and
more generally the inflow of talent, these students contribute to the increasing
attractiveness of their receiving higher education systems.
Figure 7 Inbound student
mobility ratio
Source: UNESCO Institute for
Statistics (2014), accessed on
March 14, 2014 at
http://stats.uis.unesco.org/
unesco/tableviewer/
document.aspx?ReportId=143
As previously mentioned, investment in R&D is very low in Latvia. In 2005, it was
at 0.56 percent of GDP, and it has fluctuated between 0.46 and 0.70 percent since
200926.
26 http://epp.eurostat.ec.europa.eu/portal/page/portal/europe_2020_indicators/headline_indicators.
102 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
Accordingly, Latvia, overall, does not perform well in the area of research and
development in comparison with neighboring countries. This applies in particular
to indicators like the number of peer-reviewed articles published, though langua-
ge barriers and preferences might also play a role. As Figure 8 shows, Latvia
performs significantly lower than comparator countries.
Figure 8 Number of
peer-reviewed articles
published
Source: Scopus (2014) accessed on
March 14, 2014 at
http://www.scopus.com/
The number of patent applications has been fluctuating in recent years. Signifi-
cantly less patent applications have been originating from Latvia during the years
of the economic crisis (Table 14).
Table 14 Breakdown of Invention Patent Applications by Categories and Years, 2007–2013
Total
2007 2008 2009 2010 2011 2012 2013 2007–2013
National applications 147 215 243 185 183 205 233 1411
Including domestic applications 139 206 240 178 173 193 224 1353
International applications (PCT) 15 7 – – – – – 22
Total number of applications 162 222 243 185 183 205 233 1433
Source: Patent Office of the Republic of Latvia, http://www.lrpv.gov.lv/en/patent-office/statistics/inventions
The number of patent applications originating from Latvia that have been filed
with the European Patent Office tended to be lower than those from neighboring
Estonia, as illustrated in Table 15, with the exception of a substantial increase
in 2013:
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 103
2011 2012 2013 Table 15 European patent
applications by country of
Estonia 29 42 41 origin
Latvia 27 25 80 Source: European Patent Office
Lithuania 14 19 22
Romania 20 35 30
UK 4,753 4,717 4,567
Czech Republic 164 139 149
Poland 247 385 371
Germany 26,226 27,276 26,645
Austria 1,735 1,874 1,995
Netherlands 5,619 5,063 5,826
To summarize, while the low level of funding for higher education does not seem
to affect the mere number of students and graduates (the section does not dis-
cuss the quality of provision), there might be a negative impact on research
outcomes as illustrated by low number of articles in peer reviewed journals.
This coincides with a comparatively low percentage of doctoral candidates out of
the overall student population. These trends may negatively impact the future
research capacity of Latvia, which may affect the viability of R&D as well as the
overall attractiveness of the Latvian higher education system.
Development of the Current System of Higher Education in Latvia
The Latvian higher education system evolved in accordance with legislative
changes introduced since 1991. In 1991, the legislative body of Latvia passed
the Law on Education, which provided the legal basis for the introduction of tuition
fees in higher education. This was a move from a fully state-regulated higher edu-
cation system towards a system characterized by the interplay between the state,
market and academia (Goedegebuure, Kaiser, Maassen & de Weert, 1994, p. 4).
This development was further supported in 1995, when the national legislative
body — Saeima — passed the Law on Higher Education Establishments. This law
outlined the current structure in higher education and established the framework
for institutional autonomy in higher education. In effect, higher education institu-
tions were able to determine their internal structure, develop and adopt their own
internal codes of conduct and procedures, establish academic programs, deter-
mine the levels of pay above governmentally-established minimums for academic
staff, and set tuition-fee levels at the institution. These changes were in line with
the overall liberalization and democratization reforms taking place in the country
following the collapse of the Soviet Union. Reforms in higher education thus
aimed to modernize the sector, in order to meet the needs of a democratic society
and market economy. The move from a fully state-regulated system towards
a market-based and autonomous one changed the landscape of the sector.
104 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
In the reforms, significant emphasis was placed on the provision of enhanced
educational mobility opportunities. Accordingly, the degree structure in the Lat-
vian higher education system adheres to the three-cycle system of the Bologna
Process, comprising Bachelors (undergraduate), Masters (graduate), and Docto-
ral-level studies. Within this three-cycle system, study programs can be of either
professional or academic orientation. Programs of both orientations are offered
by university and non-university types of public and private tertiary institutions
(Eurydice, n.d.). Universities administer programs on the level of Bachelors,
Masters, and Doctoral or their equivalent level of studies. Non-university types of
institutions offer Bachelors and Masters degree programs.
The distinction between university and non-university types of HEIs in Latvia
is stipulated by the Law on Higher Education Establishments (Saeima, 1995).
The main distinction between the two types of institutions, as mentioned above,
is that while universities offer Doctoral study programs, non-university HEIs do not
have such study programs. Non-university HEI status can, however, change
their status and become universities by developing and receiving accreditation
for a particular Doctoral study program. Colleges are distinct types of non-univer-
sity institutions that offer first-cycle professional higher education programs,
in accordance with what was described as ‘short higher education’ in the Bologna
context. The full duration of these programs is between two and three years.
The funding formula in the case of these institutions is similar to the one applied
for public HEIs, whose allocation is done on a per-capita basis, per study pro-
gram. College graduates may continue pursuing higher education, should they
wish to obtain higher professional or academic degrees. Holders of academic and
professional bachelor degrees are eligible for admission to both types of master
studies, whose paths make them also eligible for doctoral studies, resulting
in the promotion of upwards educational mobility.
Another significant outcome of higher education reforms was the expansion of
the sector. The number of institutions of higher education grew from 10 state-
owned institutions in 1988, to 34 public HEIs and 27 private HEIs; including both
colleges, and three branches of foreign HEIs (Central Statistics Bureau, 1989;
MoES, 2012). To provide quality assurance in higher education, it was stipulated
that only state-accredited HEIs and study programs were able to graduate stu-
dents and issue a corresponding diploma recognized by the state (Saeima, 1995).
The condition of accreditation of tertiary institutions and study programs was
extended to accessibility of public funding for higher education, such that only
accredited study programs are eligible for state funding, and only students
in these programs can receive student loans that are subsidized by the govern-
ment.
One element of continuity from the previous era is the multi-ministerial oversight of
the sector. There are currently seven ministries that oversee at least one of the
institutions of higher education in Latvia (Table 16). The most recently established
institutions of higher education operate under the oversight of the Ministry of Edu-
cation and Science (MoES), together with some older institutions.
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 105
Table 16 Supervision of ministries over public HEIs and colleges
Ministry Institutions of Higher Education Colleges
University of Latvia Riga Building College
Riga Technical University Riga Business College
Daugavpils University Riga Technical College
Liepaja University Olaine College of Mechanics and Technology
Latvia Academy of Sports Education Liepaja Maritime College
Ministry of Education Latvia Maritime Academy Jekabpils Agrobusiness College
and Science
Riga Teacher Training and Educational
Daugavpils Medical College
Management Academy
Rezekne Higher Education Institution Malnava College
Ventspils University College P.Stradins Medical College of the University of Latvia
Vidzeme University of Aplied Sciences Riga 1st Medical College
BA School of Business and Finance Riga Medical College of the University of Latvia
Ministry of Health Riga Stradins University Red Cross Medical College of Riga Stradins University
Ministry of Agriculture Latvia University of Agriculture –
Latvia Academy of Culture
Ministry of Culture Latvia Academy of Arts Latvia Culture College of Latvia Academy of Culture
J.Vitols Latvia Academy of Music
Ministry of Defense National Defense Academy of Latvia –
Fire Safety and Civil Protection College
Ministry of Interior – State Border Guarding College
State Police College
Ministry of Welfare – Social Integration State Agency
Source: Authors, based on data provided by MoES, 2014
The majority of HEIs established after 1990 is privately funded, and primarily loca-
ted in Riga. However, several public higher education institutions that receive
direct public subsidies have also been established; among which are regional
public non-university type HEIs in Valmiera, Rezekne and Ventspils, established
in 1996, 1993 and 1997 respectively. All institutions of higher education — univer-
sity and non-university type institutions including colleges, which offer short cycle
professionally oriented higher education — receive public funding according to
the same set of rules, elaborated in greater detail later.
In 2012/2013, Latvian HEIs together offered a total of 910 study programs across
eight subject areas and 29 study directions. The majority of study programs is
implemented in Social Sciences, Commercial Sciences and Law: 316; followed by
106 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
Engineering, Manufacturing and Construction: 160; and Arts and Humanities: 110.
The distribution of the total number of students (99,474 students) across subject
areas differs slightly from that of study programs, i.e., the largest share of students
study Social Sciences, Commercial Sciences and Law: 39,252; Engineering,
Manufacturing and Construction: 13,751; Health and Social Welfare: 11,832;
which points to differences as to the average number of students per study pro-
gram in various subject areas (MoES 2012).
The most recent data on higher education published by MoES display the ten-
dency of a decreasing number of students within a relatively stable number of stu-
dy programs. At the beginning of the academic year 2013/2014, the number of
study programs was close to the previous reporting year — 901; in state HEIs and
colleges, 700, and in private HEIs and colleges, 201. The distribution of programs
across subject areas has not significantly changed: Social Sciences, Commercial
Sciences and Law: 310; followed by Engineering, Manufacturing and Construc-
tion: 159; Arts and Humanities: 122; Health and Social Welfare: 83; Natural Scien-
ces, Mathematics and Information Technology: 82; Services: 68; Education: 63;
and Agriculture: 14. The most notable changes of the program structure have
taken place in Arts and Humanities which gained 12 study programs and in Edu-
cation which lost 15 study programs.
Table 17 Study Programs offered by HEIs in Latvia, 2013/2014
Number of Number of Proportion Proportion
programs Number of programs Number of of of
No. Total administered students carried out students programs students
Subject Number of number of by public at public by private at private at public at public
Area Subject area programs students HEIs HEIs HEIs HEIs HEIs (%) HEIs (%)
1 Education 63 5,435 63 5,435 0 0 100 100
2 Arts and Humanities 122 8,119 98 6,441 24 1,678 80 79
3 Social Sciences, Commercial
310 36,317 186 18,380 124 17,937 60 51
Sciences and Law
4 Natural Sciences,
Mathematics and Information 82 6,636 73 5,451 9 1,185 90 82
Technology
5 Engineering, Manufacturing
159 13,786 144 13,127 15 659 91 95
and Construction
6 Agriculture 14 1,559 14 1,559 0 0 100 100
7 Health and Social Welfare 83 10,977 69 10,118 14 859 83 92
8 Services 68 6,834 53 4,899 15 1,935 78 72
Total in HEIs and Colleges 901 89,663 700 65,410 201 24,253 78 73
Of Undergraduate Studies
which (College, Bachelor, 504 72,650 368 51,233 136 21,417 73 71
Professional)
Graduate Studies
397 17,013 332 14,177 65 2,835 84 83
(Master and Doctorate)
Including Doctoral Studies 93 2,404 85 2,198 8 206 91 91
Source: Authors, based on data provided by MoES, 2014
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 107
Student numbers have, however, changed more prominently: in 2013/14, the total
number of students is 89,663, which represents a decrease of about 6 percent
compared to the previous year. Again, the distribution of students across subject
areas does not match that of study programs. The number of students in both
public and private HEIs studying Social Sciences, Commercial Sciences and Law
is 36,317; Engineering, Manufacturing and Construction: 13,786; Health and
Social Welfare: 10,977; Arts and Humanities: 8,119; Services: 6,834; Natural
Sciences, Mathematics and Information Technology: 6,636; Education: 5,435;
and Agriculture: 1,559 (MoES, 2014).
Higher Education Students in Latvia
Entrance to tertiary education in the form of first level professional education
(i.e., short cycle) and Bachelor degree programs is granted to secondary educa-
tion degree holders who meet the admission criteria set by the relevant higher
education institution(s). Since 2006, most higher education institutions in Latvia
admit students on the basis of the national centralized high-school graduation
exams (Cabinet of Ministers Regulations No. 846, adopted on October 10, 2006,
“Regulations Regarding the Requirements, Criteria and Procedures for Admission
to Study Programmes”) in which students are selected competitively based on
their results in national exams as per their chosen field of higher education study.
Institutions of higher education are free to set additional student selection criteria
should they wish.
In principle, students are able to study in either full-time or part-time mode, provi-
ding that part-time study programs are offered by tertiary institutions in the res-
pective area of studies. Not surprisingly, the proportion of students in full-time
study programs at public institutions of higher education has always been bigger
than in part-time study mode. In 2013/14, 80 percent of all students at public HEIs
were in full-time education (MoES, 2014).
While in full-time study programs at public HEIs, a proportion of students are able
to study in the state-funded study places without paying tuition, in part-time study
programs, students are almost without exception charged tuition fees. That is,
only full-time students in Latvia are eligible to compete for fully state-funded study
places (Cabinet of Ministers Regulations No. 994, 2006). In 2013/14, 35 percent of
full-time students at public HEIs, including colleges, paid tuition fees (MoES,
2014). For part-time studies, nearly all students paid tuition.
Data from 2013/14 show that the majority of students, 73 percent, study at public
HEIs, colleges included (MoES, 2014). Of the 65,410 students enrolled in public
higher education sector, 56 percent paid tuition fees, charged by their institution.
Depending on the institution and study program, tuition fees at public institutions
of higher education in Latvia in 2013/14 ranged: from EUR 882 to EUR 5,208
per academic year for Bachelor degree students; from EUR 384 to EUR 15,000
in Masters’ degree study programs; and from EUR 1,067 to EUR 9,135 in Doctoral
degree study programs (MoES, 2014, p. 77).
108 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
Figure 9 Students by mode,
level and financing of their
studies at public HEIs,
2013/2014
Source: Authors, based on data
provided by MoES, 2014
Table 18 summarizes the latest information on tuition fees and other fees collected
in public or government-dependent private higher education institutions in Europe27.
Across eight countries in the first cycle of higher education, and five countries in the
second cycle, no fees are collected. Compared to other European countries shown
in Table 18, where fees are collected, tuition fees in Latvia (as well as in Lithuania
and Hungary) are relatively high (even in nominal value), both in the first and second
cycles. However, because of the dual track tuition fee system applied in Latvia,
the proportion of students paying fees is to some extent lower, when compared with
those European countries where other than nominal (< EUR 500) fees are collected.
The primary pool of students for HEIs in Latvia is local residents. At the same time,
institutions of higher education seek to increase the number of international stu-
dents. According to the Guidelines for the Development of Education 2014–20,
the Government of Latvia aims to increase the number of foreign students
in higher education institutions so that by year 2020 8 percent of the total number
of students are foreign students studying for obtaining a degree or qualification
(project approved by the Cabinet of Ministers on January 7, 2014). Admission
requirements for international students include completed prior education which
would qualify them for admission to tertiary education programs in their country of
origin. An additional requirement is a good command of English. International
degree seeking students in Latvia are only able to study in full-time mode.
International students studying in Latvia pay tuition fees. Some institutions of
higher education set higher tuition fees to non-EU students, while others charge
the same amount of money across all students on the program. Students who are
also citizens of the European Union are eligible to compete with local students
for state budget places at public HEIs if they are able to study in the Latvian
language28.
27 Information in Table 18 refers to fees collected in public or government-dependent private higher
education institutions and covers fees of domestic/EU students in the first and second cycles only
(Eurydice, 2013, p. 2). All fees are in nominal value (EUR).
28 However, state funded study places are also provided in programs which are either fully implemen-
ted in an EU language or for programs where the majority of courses are in an EU language/-es (e.g.,
English philology or modern languages).
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 109
Table 18 Tuition fees and other fees in European higher education systems in 2013–14
1st cycle min. 1st cycle max. Most common 2nd cycle min. 2nd cycle max. Most common Proportion of students
Country (EUR) (EUR) fee (EUR) (EUR) (EUR) fee (EUR) paying fees (%)
Belgium (Flemish) 80 611 611 80 611 611 70 pay fees
Bulgaria 59 741 59 793 Almost all pay max. fees
All students pay
Czech Republic 20 21 20 21
admission fees
Denmark no fees no fees no fees no fees no fees no fees no fees
Majority pay minimum
Germany 200 1,000 200 1,000
fee
Fees mainly charged
Estonia 0 7,200 0 7,200
for incomplete ECTS
60% pay fees, all 1st
Ireland 2,500 6,000 2,500 4,000 30,000 6,000 cycle pay 2500 EUR
student contribution
Greece no fees no fees no fees no fees no fees no fees no fees
Spain 713 2,011 1,074 1,052 4,734 1,074 70% pay fees
France 183 2,000 254 10,000 65% pay fees
Croatia 665 1,329 665 1,329 61% pay fees
Italy 1,300 1,300 88% pay fees
Cyprus no fees no fees no fees no fees no fees no fees no fees
55% of 1st cycle and
Latvia 903 4,876 918 6,571
40% of 2nd cycle pay fees
Lithuania 625 5,260 1,411 6,249 48% pay fees
Hungary 795 5,532 1,556 6,569 43% pay fees
Malta no fees no fees no fees no fees no fees no fees no fees
Austria no fees no fees no fees no fees no fees no fees no fees
Poland 41 41 41 41
Portugal 631 1,066 631 1,066 All pay fees
45% of 1st cycle and
Romania 525 2,819 525 2,819
37% of 2nd cycle pay fees
Slovenia 1,210 9,375 2,800 1,250 12,462 2,800 Less than 20% pay fees
All pay registration fees
Slovakia 10 1,960 10 2,940
(10–100 EUR)
Finland no fees no fees no fees no fees no fees no fees no fees
Sweden no fees no fees no fees no fees no fees no fees no fees
England 11,099 11,099 4,810 All 1st cycle pay fees
All students pay fixed
Iceland 373 373
fees
Norway no fees no fees no fees no fees no fees no fees no fees
Switzerland 830 3,319 830 3,319 Almost all pay fees
Source: Authors’ calculations, based on data provided by Eurydice National Student Fee and Support Systems, 2014
* The range of tuition fees at public HEIs in 2013/14 according to data from the Ministry of Education and Science is slightly different. The lowest fee
for part time Bachelor degree studies was EUR 882, for full time studies – EUR 968. The highest fees respectively were EUR 2077 and EUR 5208.
In Masters’ degree programs the least tuition in part-time studies reported was EUR 384, in full time studies – EUR 818. The highest tuition in part time
Masters’ degree study programs was EUR 3256, and in full time studies – EUR 15,000 (MoES, 2014, p. 77).
110 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
In addition, since 2012, international students in Latvia, together with students
residing in countries that offer scholarships to Latvian students, can apply for
a scholarship within the framework of intergovernmental agreements (as per Cabi-
net of Ministers Regulations No. 68, 2012, “Procedures for Granting Scholarships
to Foreigners”). Scholarships are allocated to students for study programs and
research as specified by intergovernmental agreements. If the study program
is not specified, international students in undergraduate and graduate study pro-
grams studying in Latvian or some other official EU language may apply for one
year of scholarship. For students in study programs administered in the Latvian
language, Baltic philology, literature and culture or Master level studies in Latvian
history, the scholarship can be awarded for two consecutive academic years,
providing all course requirements are met. The minimum amount of the scholar-
ship for international students in college, Bachelor and Masters degree programs
is EUR 498, and EUR 669 a month in Doctoral programs. At the same time,
governmental regulations might also mean that no scholarships are awarded if
there is no sufficient funding for this purpose in the state budget for the respective
academic year (Cabinet of Ministers Regulations No. 68, 2012). In 2012/2013,
there were 88 scholarships distributed to foreign students, researchers, and facul-
ty — 58 scholarships of which were for studies and research, and 30 of which
were for participation in summer schools (MoES, 2013a).
With respect to international full-time students in Latvia, most of them pursue a de-
gree in the field of medicine and health care (MoES, 2012, p. 92). Among local
students, however, enrollment is highest in the areas of social and commercial
studies and law (MoES, 2013a). Overall, 42 percent of students were studying
in these subject areas. Half of the students in social and commercial studies and
law were enrolled at public HEIs. The majority of these students studied full time
and independently financed their studies.
Table 19 Students by subject area at public institutions of higher education in 2013/14
Proportion of
Proportion Government government
of students Proportion Proportion funded funded
No. Total in the of students Full time of full time students at students at
Subject number of thematic at public students at students at public HEIs public HEIs
Area Subject area students group HEIs public HEIs public HEIs (no tuition) (no tuition)
1 Education 5,435 8% 100% 2,812 52% 2,308 42%
2 Arts and Humanities 6,441 10% 79% 6,184 96% 4,424 69%
3 Social Sciences, Commercial
18,380 28% 50% 13,152 71% 4,617 25%
Sciences and Law
4 Natural Sciences, Mathematics
5,451 8% 82% 5,356 98% 4,676 86%
and Information Technology
5 Engineering, Manufacturing
13,127 20% 95% 10,774 82% 8,854 67%
and Construction
6 Agriculture 1,559 2% 100% 1,025 66% 807 52%
7 Health and Social Welfare 10,118 15% 92% 9,549 94% 6,200 61%
8 Services 4,899 7% 71% 3,125 64% 2,605 53%
Total in HEIs and Colleges 65,410 100% 51,977 34,491
Source: Authors’ calculations, based on data provided by MoES, 2014
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 111
There are some differences in terms of enrollment by subject area when Latvia
is compared to EU27; however, the differences are less pronounced than
one could expect from public debate which tend to highlight low(er) enrollment
in STEM subjects in Latvia. Enrollment in humanities and social sciences combi-
ned in Latvia accounts for 49 percent of all students enrolled; it is on average
46 percent in EU27. The STEM subjects account for 22 percent of all stu-
dents enrolled in Latvia; the corresponding figure is 24 percent for EU27 (see
Figure 10).
Figure 10 EU-27 Tertiary
Students (ISCED 5-6) by field
of education (2010)
Source: Authors’ calculations, based
on Eurostat database
While across law, social and business studies, there is a strong competition for
local students between private and public HEIs, applicants in other subjects
mostly study at public institutions. Across all study programs for services,
arts and humanities, 71 and 79 percent of all students, respectively, are enrolled
in the public sector. Public institutions enroll 82 percent of students in the area of
natural sciences, mathematics and IT; 92 percent in health and social welfare;
and 95 percent in engineering, manufacturing and construction. Agriculture stu-
dents are exclusively enrolled in public institutions.
Public funding covering tuition fees by subject area is most available to full-time
students in natural sciences, mathematics and IT programs — 86 percent of
which study free of charge. This is also the subject area with the highest pro-
portion of full time students. The next top two subject areas with nearly a total full-
time student enrollment are (i) health and social welfare and (ii) arts and humani-
ties. However, in these subject areas, the government funds between 61 and
69 percent of tuition fees. Social and business studies and law are the most com-
petitive in terms of publicly-funded study places, since the government covers
tuition fees for only 25 percent of full time students (MoES, 2014).
The aforementioned migration issues might possibly trigger questions about
repayment modalities of migrating students. However, students who have studied
free of charge in Latvia and have subsequently decided to move to another coun-
try are not required to repay part of their study-costs. They would only need
to pay back a government-guaranteed loan to cover the costs of their studies,
if applicable. At the moment, no data are available for Latvia on the proportion of
higher education graduates who have received state-funded higher education
and have moved on to pursue professional careers in other countries (however,
general data on migration are provided in the initial part of this section).
112 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
Across Latvia, a high number of students pursue work alongside their studies.
A representative survey of students in Latvia reveals that almost half of full time
students in Latvia are employed besides their studies (Koroleva et al., 2013). Of all
students, 37 percent said they work full time, spending on average 30 hours per
week working in their jobs (Koroleva et al., 2013, p. 51). The same study reports
that in 2013 on study-related activities, full-time students spent about 34 hours
a week on average (p. 56). On the one hand, this work experience might contribu-
te to the development of skills and practical competences of students. However,
a study on undergraduate student employment in Latvia finds that working while
studying has a negative effect on their academic achievement (Auers, Rostoks,
& Smith, 2007). An empirical study undertaken by these authors confirm that
the majority of working students also pay tuition fees.
While it seems likely that the high number of students working alongside their
studies is related to the issue of drop-outs, further research is needed in Latvia
to determine to what extent the inability to finance studies contributes to students
dropping out of higher education. According to statistics provided by the Ministry
of Education and Science (2013b), the drop-out rate at public institutions of higher
education, (excluding colleges), has fluctuated between 12 percent and 18 per-
cent during the years 2000 to 2010. The drop-out rate has been the same
as in public institutions, on average, at private institutions of higher education.
1.C Funding levels of higher education and research
in Latvia
The focus of the following analysis is on the technical features of funding instru-
ments. It is nevertheless also relevant to examine the Latvian situation of higher
education with respect to funding levels; especially since there are recurrent dis-
cussions regarding Latvia being an “underfunded” system. In order to analyze
the validity of this argument, Latvia is once again compared against European
benchmarks.
The higher education sector in Latvia is funded from public and private sources.
The total spending for higher education in 2012 was 1.4 percent of GDP
or EUR 311.2 million (MoES, 2014). The state budget contributed 34 percent of
the total funding. Private funding from students paying tuition fees paid con-
stituted 24 percent. Other sources (where half of the funding comes from EU
structural funds), constituted 42 percent of the total higher education revenue.
As a proportion of GDP, higher education funding has not changed across
the past decade, although there has been an increase in terms of the absolute
budget. In 2001, the total higher education sector budget was LVL 68 million
(EUR 99 million) and constituted 1.5 percent of GDP (MoES, 2002).
As shown in Figure 11, the level of public expenditure on higher education in Lat-
via (expressed as a percentage of GDP) was clearly lower than the EU-27 average
— and was, in fact, the lowest across the Baltic countries — between 2001–2010.
In 2010 (most recent data), public expenditure on higher education represented
only 0.8 percent of GDP in Latvia, versus an average of 1.26 percent in the EU-27
countries and 1.23–1.27 percent in Estonia and Lithuania respectively. Unlike
in Latvia, public expenditure has been constantly increasing in Estonia and Lithua-
nia between the years 2006–2010. In 2008, just before the financial and econo-
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 113
mic crisis, Latvian public expenditures accounted already for 1.0 percent of GDP
before the budget cuts in 2009 and 2010 returned it to the lowest levels in Europe.
Among all EU-27 countries in 2010, only Bulgaria (0.61 percent of GDP) exhibited
a lower level of public expenditure on higher education than Latvia.
Figure 11 Total public
expenditure on higher
education
Source: Authors’ calculations, based
on Eurostat database
Figure 12 Public funding
in 2012 compared with 2008,
adjusted for inflation
Source: EUA – Nazare & Estermann,
2013
(http://www.auth.gr/sites/default/
files/eua_presentation-_autonomy
_greece.pdf)
The above graph (Figure 12) illustrates another perspective on the dramatic
decline in public funding for higher education during the crisis years.
114 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
Figure 13 Annual expenditure
on public and private
educational institutions
in 2001–2010 per student
(purchasing parity standard
based on full-time equivalent
students, ISCED 5-6)
Source: Authors’ calculations, based
on Eurostat database
When expenditures (both public and private) on higher education are measured
per full-time equivalent student in purchasing parity standard (PPS), Latvia’s
expenditure levels are close to the expenditure levels of Estonia and Lithuania
throughout the period of 2001–08 (Figure 13)29. However, due to the economic
and financial crisis, annual expenditure per student in Latvia fell behind the levels
of the two other Baltic countries, especially in 2009 and in 2010. Overall, annual
expenditure on HEIs per student is very low across all Baltic countries in compa-
rison to other European countries. Over the years 2001–10, expenditure per stu-
dent in Baltic countries has been only half of the EU-27 average (the difference
has been around EUR 4,800–5,900 per annum depending on the year). In 2010,
Latvia’s annual public and private expenditure per student was third lowest
in among all EU-27 countries after Bulgaria (EUR 3,763) and Romania
(EUR 2,956). If one would take a look only at the public expenditures per student,
Latvia would again drastically fall behind the two other Baltic countries.
The situation remains similar, even if we make similar comparisons for R&D
expenditures in Figure 14.
In 2011, R&D expenditure in Latvia’s higher education sector was still clearly
behind other Baltic countries and the EU-27 average, but has been steadily
increasing following the significant drop in 2009 (Figure 14). From 2001 to 2011,
Latvia has been able to increase the expenditure levels in total by 0.17 percentage
points. This increase is lower than the respective increase of Lithuania (0.29 per-
centage points), and Estonia (0.31 percentage points), but higher than the
increase in the average of EU-27 countries (0.08 percentage points). Furthermore,
it should be noted that, in 2011, expenditure for R&D in the higher education
(0.34 percent of GDP) sector constituted almost half (0.34 percent) of the total
Latvian expenditure for R&D (0.7 percent of GDP) (see Figure 9).
29 Expenditure per student in public and private institutions measures how much central, regional and
local levels of government, private households, religious institutions and firms spent per student.
It includes expenditure for personnel, other current and capital expenditure (Eurostat).
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 115
Figure 14 Expenditure for R&D
in higher education sector
as percentage of GDP
Source: Authors calculations, based
on Eurostat database
To summarize:
The higher education and R&D system in Latvia is significantly underfunded, com-
pared with both EU averages as well as Baltic countries, who are close neighbors
and competitors. In the higher education sector, the drastic underfunding in pub-
lic budgets is compensated only partly by private contributions. Given the magni-
tude of this problem, one would expect repercussions concerning the quality of
higher education. It would be desirable if transparency initiatives like the new
U-Multi-rank project, in which Latvian universities participate, would shed more
light on this particular issue30.
1.D Financial autonomy of HEIs in Latvia
Institutions of higher education in Latvia are autonomous, in accordance with
the Law on Higher Education Establishments (Saeima, 1995) which provides them
with the status of public authority. This means that the government has no right
to intervene in the way public and private HEIs manage their budgets, beyond
the scope of the regulations in the framework of which public funds to HEIs are
allocated. According to the law, institutions of higher education in Latvia can
acquire and manage their property, as well as take out loans for institutional
purposes from commercial banks and other lending institutions. They may receive
donations from legal and private entities, in which case they need to deposit this
funding in a special budget account of the institution (Saeima, 1995). Higher edu-
cation institutions are free to determine their tuition fees and the total number of
students that can be admitted annually. Overall, HEIs in Latvia enjoy a significant
amount of financial autonomy (see Chapter 2 and Table 20), as the EUA auto-
nomy scorecard exercise highlighted:
30 http://www.umultirank.org/
116 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
Table 20 Latvia’s position Rank System Score
in the EUA financial autonomy
scorecard 1 Luxembourg 91%
Source: EUA, in Estermann 2 Estonia 90%
& Bennetot (2011)
3 United Kingdom 80%
4 Latvia 80%
5 Netherlands 77%
6 Hungary 71%
7 Italy 70%
Portugal 70%
Slovakia 70%
10 Denmark 69%
11 Ireland 66%
12 Switzerland 65%
13 Austria 59%
14 North Rhine-Westphalia 58%
15 Finland 56%
Sweden 56%
17 Spain 55%
18 Poland 54%
19 Lithuania 51%
20 Norway 48%
21 Czech Republic 46%
22 France 45%
Turkey 45%
24 Brandenburg 44%
25 Iceland 43%
26 Greece 36%
27 Hesse 35%
28 Cyprus 23%
Source: EUA, in Estermann & Bennetot (2011)
However, institutions of higher education are responsible for the rational and pur-
poseful use of their financial resources as stipulated by the law.
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 117
The Ministry of Education and Science only regulates how many students are
going to study on government-funded study places. This precise number is stipu-
lated in an annual protocol that complements a “performance agreement” (run-
ning over a 3-4-year period) between the HEIs and the MoES31.
The Law on Higher Education Establishments (Saeima, 1995) stipulates that
the founder of a HEI is responsible for financing its operations. In the case of
a private HEI, this means that the institution is financed from private contributions.
In the case of public institution, this generally means that the government
is responsible for allocating funds to support operations of the HEI. Looking at
the total budget of public HEIs, about 31 percent come from the national budget
designated to cover the expenses of educating a certain number of students
in government-funded budget places (MoES, 2014). This funding is allocated to
the institution as a lump sum. In instances where a public HEI does not spend
all the money allocated for the running year, it is not required to return these
funds to the state budget. Thus, in principle, public HEIs can build reserves.
The MoES is also involved with monitoring whether or not the public HEI in que-
stion has met the terms of agreement for which the state funding was allocated
— i.e., regarding the number of specialists that must be educated32. In cases
where the HEI has failed to uphold this part of the agreement, it must justify its
reasons for doing so. If the MoES considers that the public HEI did not adequately
meet the terms of agreement and did not, moreover, spend the money as per
the designated purpose, it does not budget free study places in the respective
program for the particular public HEI for the following year. Thus, when allocating
the state budget funds for free study places at public HEIs, the Ministry of Educa-
tion and Science reacts to the behavior of the HEIs in a prospective manner.
Incorporated within the agreements between MoES and HEIs concerning the
number of specialists that must be educated in the scope of state budget places,
is a provision enabling HEIs to reallocate public funds up to the amount of
10 percent to other programs than the ones for which the amount allocated by
the MoES33. Thus, institutions of higher education have some flexibility with regard
to funds allocated. The MoEs is currently considering whether or not to remove
this 10 percent flexibility margin, in order to ensure that HEIs do not spend public
funds on educating specialists for which no public funding is usually foreseen.
Some aspects of institutional autonomy are nevertheless regulated, such as
in respect to setting wages and to hiring staff. The law on higher education
establishments stipulates that at least 65 percent of academic personnel need
to have a doctoral degree (Saeima, 1995) at universities (i.e., institutions confer-
ring doctorate degrees). At academies, this proportion must be at least 50 per
cent, whilst at other HEIs, this figure drops to 40 per cent. The government also
regulates the thresholds of the minimum monthly compensation for academic staff
at public institutions of higher education (Cabinet of Ministers Regulations
No. 836, 2009).
31 Agreement Protocol updated annually as an Annex to the Contract between the HEIs and Ministry
on the preparation of a certain number of graduates and scientific activity.
32 For a discussion on available “performance” data (in fact, input and output related data), see
Appendix 2.
33 Interview with MoES expert.
118 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
Table 21 Minimum wage Average remuneration of
thresholds for academic staff Minimum monthly wage academic staff at
at institutions of higher in EUR as required by public HEIs in 2011
education No. Academic position regulations (EUR/per month)
Source: Cabinet of Ministers 1. Rector 1,410.07 n/a
Regulations, 2009; MoES, 2013c
2. Professor 1,175.29 1791
Note: n/a = not available.
3. Vice-Rector 940.52 n/a
4. Associate Professor 940.52 1371
5. Dean 940.52 n/a
6. Assistant Professor 752.7 1028
7. Department Chair 752.7 n/a
8. Vice-Dean 601.87 n/a
9. Lecturer 601.87 747
10. Assistant 480.93 421
Higher education institutions are able to pay higher salaries to their academic staff
than the minimum stipulated by the government. The average compensation of
the academic staff at public HEIs in 2011 for the most part was moderately higher
than the minimum set by the government. However, there is significant variation
between institutions, as the following Figure 15 shows.
Figure 15 Remuneration of
academic staff at public HEIs
in 2011
Source: MoES, 2013c
In most cases, about 40 to 50 percent of the institutional budget is spent on remu-
neration of faculty and staff. The exceptions to this is Ventspils University College
(VeA), which, in 2012, spent only 24 percent of their budgets on salaries (MoES,
2014). A further breakdown of this compensation expenditure shows that the
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 119
majority of higher education institutions spent 40 percent or more of their salary
budget on the wages of academic staff; the only exception to which was the Latvia
Academy of Arts which spent 28 percent on the wages of faculty in 2012 (MoES,
2014). The largest share of the salaries budget at this institution, 66 percent,
was allocated for the wages of general personnel; administrative personnel re-
ceived the remaining 6 percent of the remunerations budget at Latvian Academy
of Arts in 2012.
Table 22 Expenditure of public institutions of higher education on wages in 2014
Academic staff Administrative staff General staff
Expenditure Remuneration (of remuneration (of remuneration (of remuneration
total total total) total) total)
thousand thousand thousand thousand thousand
No. HEI Euro Euro % Euro % Euro % Euro %
1 LU 68,703 28,006 40.8% 14,355 51.3% 3,470 12.4% 10,181 36.4%
2 RTU 59,233 22,119 37.3% 12,749 57.6% 4,260 19.3% 5,110 23.1%
3 LLU 28,068 10,230 36.4% 4,550 44.5% 619 6.1% 5,061 49.5%
4 DU 11,929 4,629 38.8% 2,702 58.4% 1,106 23.9% 821 17.7%
5 RSU 43,822 14,444 33.0% 6,130 42.4% 4,367 30.2% 3,947 27.3%
6 LiepU 4,619 2,262 49.0% 1,551 68.6% 168 7.4% 544 24.0%
7 LKuA 3,486 1,325 38.0% 717 54.1% 108 8.2% 499 37.7%
8 LMâA 5,075 2,015 39.7% 561 27.8% 124 6.2% 1,330 66.0%
9 LMûA 4,323 1,796 41.5% 1,147 63.9% 649 36.1% 0 0.0%
10 LSPA 2,830 1,521 53.7% 839 55.2% 240 15.8% 441 29.0%
11 LJA 2,376 1,178 49.6% 747 63.4% 134 11.4% 297 25.2%
12 RPIVA 4,048 2,187 54.0% 1,015 46.4% 235 10.7% 938 42.9%
13 RA 5,965 2,271 38.1% 1,340 59.0% 0 0.0% 931 41.0%
14 VeA 7,688 1,877 24.4% 992 52.9% 740 39.4% 145 7.7%
15 ViA 2,968 1,254 42.3% 862 68.7% 57 4.5% 334 26.6%
16 BA 3,476 1,642 47.2% 871 53.0% 515 31.4% 256 15.6%
Source: MoES, 2014
For Vidzeme University of Applied Sciences and University of Liepaja, the largest
share in wages was spent on administration — 68 percent. Rezekne Higher Edu-
cation Institution, on the other hand, did not report any budget spent on the
wages on administration.
One reason for variation in the distribution of the salaries’ budget appears to be
that wages of academic staff at public HEIs reflect only compensation for teaching
workload. Although there is an expectation that academic staff at public HEIs per-
120 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
form research, the scientific activity is not accounted for in the workload of acade-
mic staff at institutions of higher education. Additional compensation for academic
staff is possible in the scope of research projects in which case the compensation
is covered from project funding and, in principle, signifies a different status for
the recipient (e.g., assistant professor vs. researcher).
Figure 16 Distribution of
expenditure at public HEIs,
2012
Source: MoES, 2014
Institutions of higher education also have flexibility regarding other lines of
expenditure. The second largest category of expenditures in 2012 at public
institutions of higher education was on goods and services, for which public
HEIs spent between 10 and 29 percent (MoES, 2014). Capital investment was
the third ranked, where some public institutions of higher education were
allocated sizeable amounts. The three largest expenditures on this position
were made by Latvia Academy of Culture (to the amount of 30 percent of the total
institutional budget expenditure in 2012); Jazeps Vitols Latvian Academy of Music
(27 percent); and several institutions spent about 25 percent on this expenditure
line.
Institutions of higher education have some autonomy to influence which students
are able to study free of charge in state budget places. Several institutions prac-
tice a so-called ‘student rotation’ one-in, one-out scheme of state budget places,
based on students’ results in semi-annual exams (although there is no law
requiring this practice). The underlying principle is that state budget places are
allocated on the strict basis of academic merit, such that students who were
initially admitted to a budget place and yet perform lower in semi-annual exams
might have to forfeit their place to a higher-performing student who initially had
to pay tuition fees. This student rotation takes place twice a year based on the
overall exam performance. At the University of Latvia — which is the largest HEI
implementing student rotation of budget places based on academic results
— changes affect less than 10 percent of students that were initially admitted to
budget places34.
In contrast, government directives are relatively strict with regard to the distri-
bution of governmental stipends for students in budget-funded places. Based on
government regulations, publicly-funded monthly stipends are awarded to the
34 Stakeholder interviews.
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 121
highest academic-achieving students on the program (Cabinet of Ministers
Regulations No. 740, 2004). Criteria such as need, disability and other socio-
economic factors are only taken into account in instances where two candidates
have the same academic results. These are taken into account in cases where
a single payment stipend for which students facing some extraordinary personal
hardships can apply. On these stipends, higher education institutions are only
entitled to spend up to 5 percent of their annual publicly-funded stipend budget
line.
As mentioned above, higher education institutions in Latvia enjoy considerable
financial autonomy. The main criterion against which they are held accountable
for spending public funds is linked to the number of specialists educated under
the framework of agreement between the MoES and a given institution. Another
aspect of their institutional accountability is their compliance with the require-
ments of private donors regarding the use of their donations. Conditions for spen-
ding these funds are usually set out in the terms of donation.
Assessing financial operations of public HEIs in Latvia from 2009 to 2012 exhibits
an annual growth in public HEIs assets (Civitta, 2014). However, the fixed costs
coverage ratio has gradually been declining since 2009. This means that the pro-
portion of costs has been growing in relation to HEI revenues. At the same time,
there is an acceptable level of debt to capital ratio at public HEIs that does not
raise concerns in the short term. The analysis of public HEIs financial operations
by Civitta (2014) indicates that liquidity is one of the strengths of public higher
education institutions in Latvia: public tertiary institutions are able to meet their
short-term obligations; a phenomenon which Civitta explains by the fact that pub-
lic HEIs have large financial reserves. Nevertheless, from 2009 to 2012, the public
higher education sector operated without profit with EBIT margin before tax,
and with interest rate payments standing close to zero.
1.E Public state funding to higher education in Latvia
General Overview of Public Funding for Higher Education
The government determines how public funds are distributed to institutions of
higher education. There are two ways that determine this. The first is via direct
allocations from the state budget to the institutions (Cabinet of Ministers Regula-
tions No. 994, 2006). The second is via indirect subsidies through the govern-
ment-guaranteed student loan system, whereby the state subsidizes the interest
on student loans issued by commercial banks, covers the grace period, finances
loan forgiveness, and acts as a secondary guarantor for the loans issued by com-
mercial banks within the scope of its student loans scheme (Cabinet of Ministers
Regulations No. 220, 2001).
Direct allocation of public funds to institutions of higher education falls under
the remit of general funding that covers the study process for a certain number of
students in free budget places and science funding. In 2012, these direct subsi-
dies constituted about 31 percent of the total higher education budget (MoES,
2014). The funding allocated directly from the national budget to science was
about 5 percent of the total higher education budget.
122 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
Indirect subsidies to higher education via the publically subsidized student loans
scheme constituted LVL 2.7 million (EUR 3.8 million) in 2012 (Studiju un zinâ tnes
administrâcija, 2012). This component of higher education funding is primarily
concerned with ensuring access to higher education for students. State support to
student borrowing enables a larger group of students to cover their tuition fees.
There is no readily available information on the total proportion of higher educa-
tion graduates and current students who hold outstanding student debt from
the government’s loan scheme either for tuition or for student living costs loan.
However, the annual borrowing rate to cover tuition fee among students who pay
tuition since 2009 has been 4 percent, on average. The average borrowing rate of
governmentally subsidized loan for covering living costs has been about 1.4 per-
cent among students who pay tuition and about 3 percent among students who
study free of charge (MoES 2012; MoES data).
Direct Allocations of Public Funds to Cover Study Process
The amount of government funding to cover HEI study costs is calculated
in accordance to a nationally predetermined formula (Cabinet of Ministers Regu-
lations No. 994, 2006). The funding is only allocated to full-time study programs
that are — almost exclusively — offered at public HEIs (although there are some
exceptions which will be addressed later in this section). The amount of funding
is calculated annually by applying a per capita formula that takes into account
the costs of the study program by the field and level of studies. Specifically,
the key components in the overarching formula are: (1) the number of state-
funded study places determined annually by the Minister of Education and Scien-
ce by March 1; (2) basic costs of a study place; (3) student social security and
welfare costs; and (4) the coefficients by subject area.
The basic costs of a study place reflect the lowest costs of a Bachelor and pro-
fessional study program in the least expensive subject area in the respective year.
As illustrated in Figure 16, this basic cost is multiplied by the minimum coefficient
for the thematic area of studies and by the coefficient corresponding to the level of
studies (of Bachelor, professional, Masters, or Doctoral study level).
Cost coefficients determine the amount of allocation for each study area in rela-
tion to the basic costs of a study place.
The government regulations stipulate the maximum and minimum value of
the cost coefficients by study area. This distinction, which was introduced along-
side formula-based funding in 2002, is motivated by the need to accommodate
state budget constraints while projecting a future annual increase in state alloca-
tion to higher education. In 2002, an additional 10 percent (annually) to the mini-
mum coefficient was planned until the funding reached the maximum value of
subject area coefficients. Thus, the plan was to reach the maximum coefficient
value in state budget allocation by subject area in 2012. In reality, however,
the higher education sector experienced drastic cuts in public financing; particu-
larly during the economic recession.
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 123
Figure 17 Components
in the formula for state-budget
allocation to cover the study
process at a HEI
Source: Authors, based on data
provided by Cabinet of Minister
Regulations 994, 2006
As a result, the allocation of public funds dropped below even the minimum
coefficient value stipulated by the government. In 2013, it only constituted on
average about 80 percent of the minimum coefficient value. At the same time,
the delta between the stipulated and the actual amount of allocation differs be-
tween supervising ministries under which the HEIs operate35. Public funding per
study place to the HEIs of the Ministry of Education of Science was only 84 per-
cent of the minimum. It was 90 percent at the HEIs under the supervision of
the Ministry of Health and the Ministry of Culture.
Optimum value of Minimum value of Table 23 Public funding
the coefficient of the coefficient of coefficient values by subject
No. Study directions the study costs the study costs36 area
1 Legal sciences 1.1 1.0 Source: Cabinet of Ministers
Regulations No. 994, 2006
2 Humanities 1.4 1.0
3 Social and behavioral sciences 1.4 1.0
4 Information and communication sciences 1.4 1.0
5 Business and administration 1.4 1.0
6 Teacher education and education sciences
1.7 1.1
(except for the programs in row 21 of this table)
7 Private services 1.8 1.1
8 Transport services 1.8 1.1
9 Computer sciences 2.5 1.5
10 Mathematics and statistics 2.5 1.5
11 Construction 2.9 1.7
35Interview with MoES expert.
36Real allocation was on average 80 percent of the minimum in 2013 (however, there were differen-
ces accross subject areas and apparently also type of institution); interview with MoES expert.
124 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
Optimum value of Minimum value of
the coefficient of the coefficient of
No. Study directions the study costs the study costs36
12 Navigation 2.9 1.7
13 Engineering sciences 2.9 1.7
14 Agriculture, forestry and fishery 2.7 1.8
15 Manufacturing and processing 2.7 1.8
16 Organization and management of sport work 2.7 1.8
17 Natural sciences 3.2 1.9
18 Environmental protection 3.2 1.9
19 Architecture 3.5 3.1
20 Art (except for the programs in row 28 of this table) 3.5 3.1
21 Teacher education programs for the acquisition of
3.5 3.1
a qualification of a visual art or music teacher
22 Pharmacy 3.5 3.0
23 Health and social care 3.5 3.0
24 Veterinary sciences 5.0 4.0
25 Medical treatment 4.0 3.5
26 Civil defense 4.2 2.7
27 Music, choreography 4.5 3.9
28 Art programs – The Audio-visual Media Art and Design 4.5 3.9
29 Dental care 5.1 4.4
30 Military defense 6.0 6.0
While the number of publicly funded study places per program is revised every
year, the methodology of calculating the basic costs of a study place and the
values of coefficients of subject areas has remained largely fixed since 2002. How-
ever, the modes of teaching and learning have changed, along with the actual costs
of studies in various disciplines. In order to revise and update the methodology,
the Ministry of Education and Science has commissioned research to evaluate
the current methodology of calculating study costs and attributing coefficients to
various subject areas37.
37 One approach which might be considered further is the full economic costing model (FEC), which
was originally developed for research and which is calculated on a transparent basis using an exten-
sion of the TRAC methodology, whereby costs are normally divided into four main types: (i) directly
incurred costs, which are costs spent specifically to enable the research project to be carried out;
(ii) directly allocated costs, which are a share of the costs of a resource used by a project whereby
the same resource is also used by other activities; (iii) estates costs, associated with the use of
university buildings, such as rents, repairs, maintenance and so forth; and (iv) indirect costs, which
are miscellaneous costs that are otherwise not included as directly allocated costs (e.g. admini-
strative support, office consumables; usually expressed as GBP per academic staff FTE). For more
information, see
http://www.worcester.ac.uk/researchportal/documents/A_short_guide_to_Full_Economic_Costs.pdf
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 125
As already mentioned, nearly all public funds for higher education studies are
distributed to public HEIs. However, the regulations allow public funds to be
allocated to private higher education institutions (Cabinet of Ministers Regulations
No. 994, 2006). Ministries and other national public administration bodies are able
to sign agreements concerning a certain number of students to be educated at
private HEIs, in the following cases: (i) where private HEIs have study programs of
higher quality than public HEIs (though it is not completely clear how this higher
quality is demonstrated) (ii) when they offer a unique study program that is not
offered by public HEIs, or (iii) when public HEIs are unable to educate the number
of specialists required by the state in a given area. In 2014/15, under this agree-
ment, the Ministry of Education and Science allocated 25 state-funded study
places in hospitality services to the professional Bachelor degree program at
the “Turiba” School of Business Administration. Public funding was also awarded
for five Doctoral study places at the Riga International School of Economics and
Business Administration, with a view to supporting collaboration between HEIs
in carrying out joint study programs38. In years preceding the economic crises of
2009, there was an intention to extend public funding to private HEIs more fre-
quently39. However, the public budget decreased due to the recession, and this
subsequently did not happen40.
The Process of Deciding on the Number of State Funded Students
The number of study places at various HEIs and fields of studies is set on
an annual basis by the Minister of Education and Science. While the final decision
rests with the Minister, the prior process involves multiple stakeholders, including
the twelve Sector Committees of the Latvian Employers’ Confederation, other pro-
fessional organizations, ministries, and the Higher Education Council.
The distribution of budget places across study programs implemented by HEIs
is planned on the basis of HEIs performance indicators — the actual number
of state-financed students, graduates, and drop-outs. The planning takes into
account labor market forecasts by the Ministry of Economics as well as the
amount of the public budget funds available for the respective calendar year41.
While the MoES is able to determine how many specialists should be financed by
the state for HEIs that operate under its supervision (within the scope of the res-
pective budget allocation), it cannot make decisions with regards to HEIs that fall
under the supervision of other ministries. In these instances, MoES essentially
agrees to the recommendations of these ministries as to how many state budget
places should be allocated to these tertiary institutions in the respective year42.
This is due to the fact that the funding for these places comes from the budget of
these particular line ministries.
38 Interview with MoES expert.
39 Ibid.
40 There is another minor exception in relation to allocating public funds to full-time studies only.
In 2011/2012, there were 40 part-time students studying in the professional Bachelor’s degree study
program “Boarder guard” at the regional Rezekne HEI (MoES, 2012). These students were admitted
on the basis of a mutual agreement between the State Border Guard and the aforementioned public
HEI (Kalv â ne, 2011, 10 July).
41 Note difference between fiscal (calendar) year and academic year.
42 Interview with MoES expert.
126 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
Figure 18 Process of annual
planning in state-funded study
places at HEIs
Source: Authors, based on
information provided by MoES,
2013b
The annual agreement on the number of state-funded study places concerns
the new matriculation cohort, i.e., full-time students to be admitted for the first
year in their study program. When planning for state-funded study places
in 2014, the Ministers of Education and Science, Agriculture, and Health, as well
as representatives of eight major HEIs, agreed on the following list of guiding prin-
ciples:
•The first guiding principle is to better take the needs of the labor market into
account (MoES Protocol No. 1-27/289, Annex 1, 2013, December 20).
•The second is that the budget subsidy for the institution in 2014 must remain
the same as in 2013. However, the distribution of study places in study pro-
gram must be reduced by 20 percent across social sciences and education
(decrease of enrolment in 2014/15 academic year) and a respective increase of
the number of study places in STEM fields, especially at the Master and Doctoral
level.
•The third guiding principle is strategic specialization. HEIs and the Ministers of
Agriculture and Health have committed to revising the structure of study pro-
grams and to introducing a curriculum that: corresponds better to labor market
needs, promotes the specialization of the institution by defining its strategic
focus, reduces the fragmentation of study programs by joining similar programs
and supports the vertical development of programs (one program at various
study levels) rather than horizontal development (various program at the same
study level). It was envisaged that Daugavpils University, University of Liepaja,
Rezekne HEI, Ventspils University College, and Vidzeme University of Applied
Sciences would evolve as regional HEIs whose main purpose is to support
the development of their region.
•The fourth guiding principle refers to program sustainability, i.e., only those
in demand and well-governed would be financed from the state budget.
Programs that fail to maintain a sufficient number of students and that have
high dropout and low graduation rates should either be consolidated with other
similar programs within the institution or else closed. HEIs were encouraged
to consider the development of joint study programs, especially at the Doctoral
level. All these decisions regarding the curriculum and study programs should
nevertheless be made by the respective HEIs themselves.
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 127
The changes applied in the scope of the aforementioned four principles require
that HEIs consolidate their programs, and make strategic development decisions
in order to maintain current levels of state budget funding for study places.
Quality assurance in Latvia is regulated by the Law on Higher Education Institu-
tions, as well as Cabinet Regulations No. 668 “Regulations on Accreditation of
Higher Education Institutions, Colleges and Subject Area”. The current regulation,
adopted on September 25, 2012, embodies the reform of the system of accredita-
tion. Previously, the scope of accreditation was higher education institutions
and study programs. Study programs had to undergo an accreditation within
three years after receiving a license (permission to implement a study program).
With the new regulations, accreditation is granted to the study direction as
a whole and applies to all licensed study programs that belong to this area.
Study programs included in the study direction are described in detail in the
accreditation application submitted by the HEI. A study direction is accredited for
six years; in case of a conditional accreditation for two years. Accreditation may
be refused on the following grounds:
1. A substantiated joint report of the experts or individual opinion of an expert
evaluating the study direction is negative.
2. The study program or study programs corresponding to the relevant study
direction do not comply with the requirements of the Law and regulations.
3. The study and informative bases (including the library), material technical,
financial base and the qualifications of the academic staff do not comply with
the conditions for the implementation of the study program or study programs
corresponding to the relevant study direction.
4. The study programs for the acquisition of a master’s or doctoral degree do not
comply with the state of (scientific) advancement of research or similar.
5. The institution of higher education or college has not eliminated the deficien-
cies detected during the previous accreditation of the study direction.
The transition to the new system of accreditation of study direction was com-
pleted by August 31, 2013. According to the most recent data on accreditation
published by MoES on December 20, 2013, for higher education institutions
taken as a whole there are currently 217 study direction accredited for six years,
28 study direction accredited for two years, 2 study direction for which accre-
ditation was refused and three study direction where the accreditation is in pro-
gress.
The regulations foresee that accreditation is organized by the MoES or an institution
authorized by MoES in an open tender. Currently, accreditation is organized by the
Study Accreditation Committee chaired by MoES. In the long-run MoEs envisages
the establishment of a national body for external quality assurance to be included
in the European Quality Assurance Register for Higher Education.
While the previous discussion on external quality assurance has focused on
accreditation, it is, however, important to keep in mind that accreditation, by its
nature, only establishes if the quality of higher education is sufficient above
an established threshold; it does not provide further-reaching information on rele-
128 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
vance and attractiveness of programs. In order to gain a deeper understanding of
the potential impact of the current level of funding on quality of provision, more
research would be needed and possibly accompanying measures in terms of
external quality assurance (like institutional evaluations). There is, however, anec-
dotic evidence pointing at deeper quality issues; the topic of perceived insufficient
labor-market relevance was, for example, raised in discussions by employer
representatives.
Direct Allocations of Public Funds to Cover Scientific Activities at HEIs
From a national policy financial and governance perspective, higher education
and research in Latvia are viewed as two different activity streams. There are two
separate laws regulating the sector of higher education: the Law on Higher Edu-
cation Establishments (Saeima, 1995); and the Law on Scientific Activity (Saeima,
2005), pertaining to research and scientific activity. The latter mostly takes place
in research institutions distinct from HEIs. The Law on Scientific Activity stipulates
that it is the duty of HEIs to perform research activities.
There are two main sources of science funding in Latvia: the state budget and
European Structural Funds. In 2012, state science funding constituted almost
EUR 14.7 million, while EU contribution was 64.5 million euros (MoES, 2014).
Additional funding for research can be generated through competitively-selected
research and collaboration with enterprises. Funding from the state budget
is available only to institutions registered in the Registry of Scientific Institutions.
In 2013, all public HEIs (with the exception of the National Defense Academy)
were represented in the Registry of Scientific Institutions either themselves or by
some institution affiliated to some degree with the HEI.
State budget financing is intended to provide base funding for research activities
at public HEIs and research institutions, as well as to support basic and applied
research. Base funding for public scientific institutions is calculated on the bases
of formula which includes infrastructure maintenance costs, wages for scientific
personnel, and a coefficient for the development of scientific institution (Cabinet of
Ministers Regulations No. 1316, 2013). The coefficient for the development of the
scientific institution incorporates performance based criteria which is the amount
of research and development projects, the number of scientific publications
and patents, and the number of Masters and Doctoral thesis defended with the
guidance from the respective scientific institution. The infrastructure maintenance
costs and the coefficient for scientific development are both adjusted for the area
of studies with a coefficient 2 for natural sciences and 1.3 for social sciences
and humanities. Similarly like in the case of decreased funding for studies,
research institutions receive only 25 percent of the optimal annual base funding
for science.43
Public funding for research is also available on competitive bases from the State
Research Program, Commercially Oriented Research Program, and Fundamental
and Applied Research Program. Funding from these sources is available on com-
petitive bases to all institutions registered in the Registry of Scientific Institutions,
which also includes privately founded scientific institutions (Cabinet of Ministers
43 Interview with MoES expert.
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 129
Regulations No. 1316, 2013; No. 227, 2011). Yet, like in all other instances,
the amount of public funding available is determined by the general availability of
resources in public budget.
For the State Research Program, the Ministry of Education and Science invites
proposals from scientific institutes, groups of scientists, commercial enterprises,
non-governmental organizations as to what should be the subjects tackled in the
scope of the research program (Cabinet of Ministers Regulations No. 443, 2006).
These proposals are evaluated by a committee organized by MoES and represen-
ting various ministries, experts of Latvian Council of Sciences, and the National
Academy of Sciences against the criteria of national priorities in research, scienti-
fic and applied importance of the topic, and the novelty of the topic. Once the rele-
vant topic proposals for State Research Program are selected, a call for compe-
titive research plan submissions which would meet the goals of the research pro-
gram is organized. The lead researcher in this application should be a scientist
employed at registered scientific institution which can also be a HEI. There can be
several partners — public and private scientific institutions — engaged in the
implementation of the research and receiving public funding. It is also possible
for commercial enterprises registered as scientific institutions to take part in the
execution of these research projects and provide their co-funding.
Commercially Oriented Research Program is aimed to support research and busi-
ness collaboration. Project applicant should be a scientific institution. The project
should involve a commercial partner from the manufacturing sector who provides
co-funding for the project. The distribution of public funding in the scope of this
program is competitive, administered by the Ministry of Education and Science
engaging experts in the areas of research proposals. Funds received in the scope
of this program can only be used solely for the purposes designated in the alloca-
tion of research funding. In 2013, however, there was no public funding allocated
for Commercially Oriented Research Program (MoES, 2014a).
Fundamental and Applied Research Program is funded by the state budget
and administered by Latvian Council of Sciences. The purpose of Fundamental
and Applied Research Program is to support the creation of new knowledge
regardless of their relevance for the commercial use (Cabinet of Ministers Regula-
tions No. 227, 2011). In order to ensure that all fields of sciences have access
to this funding, Latvian Council of Sciences distributes the funding between
the areas of science based on the hitherto results and scientific potential. Evalua-
tion of projects submitted for each area of science is carried out by relevant
experts. All registered scientific institutions, public and private, are entitled to
apply for this funding. However, in the case of scientific institutions with some
ownership of commercial enterprises a clause applies that the respective com-
mercial institution holds no priority rights to the use of the research capacity and
results funded by this program.
In addition to three aforementioned competitive public grants where HEIs registe-
red as scientific institutions are eligible to apply and base funding for research
institutions, there is additional stipulation pertaining to allocating funding for
scientific activities at the institutions of higher education specifically (Cabinet of
Ministers Regulations No. 994, 2006). Regulations on the HEI funding provide
a formula for calculating funds for the scientific development of the HEI. This for-
mula differentiates funding allocation by the area of studies, except for colleges,
as mentioned in the regulation. When calculating funding for equipment essen-
130 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
tial for the scientific development of the institution, a higher coefficient of 2.0
is applied for natural sciences, engineering, technology, health, agriculture, forest
sciences, and veterinary sciences. This increased funding is applied in the case of
HEIs but not colleges. All other fields of scientific activity receive funding based on
their HEI profile, which includes the number of state funded students by the level
of studies and other indicators like the number of graduates and faculty holding
Doctoral degrees and professorship. Governmental regulations stipulate that
annual funding for equipment relevant to ensuring the scientific development of
a HEI should not be less than EUR 21,344 in the case of HEIs and EUR 7,115
in the case of colleges (Cabinet of Ministers Regulations No. 994, 2006). This
funding to HEIs and colleges is allocated as a lump sum. Within institutions,
these funds are allocated based on internal competition. It should be mentioned
that from 2009 to 2014, there were no funds allocated to HEIs in the scope of this
legislative framework due to severe public budget cuts.44 In the years prior to
budget crises the distribution of this funding to HEIs was stipulated in the agree-
ment protocol between MoES and HEI, similarly like it is done for study places.
In 2014, the funding in the amount of 55,028 Euros was reinstituted for scientific
activities in study programs of Latvian philology and Latvian history at universities
based on the vote in the national Parliament (Ministry of Finance, 2014). The
clause on funding scientific activities at HEI was used to distribute these funds to
University of Latvia, Daugavpils University and Liepaja University.45
All in all, public institutions of higher education which are registered as scientific
institutions receive base funding for science, can receive on competitive bases
funding from public research programs, if there are funds they may receive fund-
ing intended specifically for scientific activities at HEIs, and finally funding for
Doctoral study programs, calculated according to the general procedure of state
funding for study places is also considered as part of science funding at HEIs.
The decrease in the state allocation to higher education in the past years has
correlated with the decrease in the research expenditure of HEIs (MoES, 2013d).
From 2009 to 2013, EU structural funds became the main source of funding for
HEI scientific activities. While base funding for science from the public budget
might be considered insufficient, this issue seems unlikely to be addressed
as long as project-contingent science funding is the primary form of financial
support for research.
Research funding from structural funds is available for both developing scientific
infrastructure as well as increasing human resource capacity in research. One tool
for growing human resource capacity in research has been allocating scholar-
ships to Masters and Doctoral students from the European Social Fund (ESF).
Overall, 23 Masters degree scholarship projects have been supported to the
amount of EUR 11.7 million, while 28 Doctoral degree scholarship projects have
been supported to the amount of EUR 53 million (SEDA, 2014). ESF funding
is also used to support young researchers by paying their wages in projects that
have received funding on a competitive basis. EUR 75 million have been allocated
for this purpose (ibid.).
44 Interview with MoES expert.
45 Ibid.
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 131
The infrastructure for ESF-research funding totals EUR 80 million (MoES/SEDA
data). This is also distributed to institutions registered in the scientific registry,
on a competitive basis. According to information provided by SEDA, about 90 per-
cent of science funding from EU structural funds is received by the University of
Latvia and its affiliated scientific institutions.
Indirect Public Subsidies to Higher Education
Indirect public subsidies to higher education are channeled via public support to
the student loans system. Since 2001, government-subsidized student loans
have been available to all residents of Latvia pursuing higher education who can
meet loan co-signatory requirements (Cabinet of Ministers Regulations No. 220,
2001). In order to obtain a state-subsidized loan, the borrower needs to provide
a primary guarantor in the form of one loan co-signatory with income deemed
sufficient by the issuing bank46. As a guarantee for the loan, the student can also
offer real estate or securities, provided that the bank acknowledges and accepts
these.
The government guarantees 90 percent of the student loan amount to all student
borrowers. For orphans and children with no parent guardians, however, the go-
vernment guarantees their loans 100 percent. Student loans are intended to cover
tuition fees and support the costs of student living.
The loan is principally provided by commercial banks that are selected through
an annual tender procedure based on the most attractive interest rate offered.
The governmental subsidy to the student loan is reflected in the subsidized
interest rate, the grace period after completion of studies, debt forgiveness under
certain conditions stipulated by the government, and the secondary loan guaran-
tor provision offered by the government.
The borrowing student is required to pay interest on the loan to the amount of five
percent, even if the actual interest rate charged by the commercial bank is higher.
This is the case regarding the loan issued to cover the student’s daily living
expenses. The government covers the difference between the interest rate paid
by the student and the one charged by the bank. The governmental subsidy
accommodated in the interest rate is even higher on those loans covering tuition.
Students do not accrue an interest rate on these types of loans while they are
enrolled in their study program. The government covers these expenses entirely
until the student graduates and must start repaying the loan. The government
then continues to subsidize the difference in the interest rate between the annual
5 percent paid by the student and the total annual rate charged by the bank.
Once students graduate, there is a grace period of one year during which stu-
dents need not repay their loan. The expenses of the grace period related to with-
holding the loan payments are also covered by the government vis-a ` -vis the com-
mercial banks that are the principal lenders. The government-subsidized student
loan is a mortgage type of loan under which students need to repay 1/10 of
the amount per year so that the total repayment is completed within 10 years.
46A natural person of full-age with the capacity to act, who has a regular income, which is not less
then the minimum monthly salary specified by the State.
132 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
If a student borrower drops out of the study program for which the loan was issu-
ed, the loan repayment begins three months after ex-matriculation.
Moreover, there are certain conditions under which the amount owed by the stu-
dent can be reduced, such as birth of a child, work in a profession or field as spe-
cified by the government, disability, or death. In these cases, the government
steps in and repays the loan to the commercial bank for the respective forgiven
loan proportion.
Prior to this student loan scheme, the government had a policy of granting
study and student loans from the state budget (Cabinet of Ministers Regulations
No. 251, 1997; No. 86, 1999). These were loans that were generally available
and did not require co-signatories. Although these loans are no longer available,
there are still some outstanding debts today. However, they are in the process of
collection.
The overall budget of the indirect subsidy to higher education via the government-
supported student loans scheme comprised LVL 2.7 million (EUR 3.8 million)
in 2012 (Studiju un zin âtnes administrâcija, 2012).
1.F Resource diversification in higher education in Latvia
Tertiary education institutions in Latvia which offer Bachelors and graduate degree
studies are expected to deliver higher education as well as engage in research
(Saeima, 1995). Public funding to higher education is split into a subsidy for
studies and a subsidy for research. As described in the preceding section, public
funding for studies to public HEIs is distributed on the bases of the number of stu-
dents. Science funding, on the other hand, generally is awarded on the bases of
research results and in public grant competitions.
Overall, there are three main sources of revenue for covering costs of studies
and scientific activities at HEIs: tuition, public funding, and EU structural funds.
The proportion of these sources differs by public and private institutions. Private
institutions primarily depend on tuition revenue. In 2012, private sector of higher
education drew 78 percent of its total revenue from tuition fees (MoES, 2014).
The remaining revenue in private sector of higher education came from public
sources, EU structural funds, and income generated from institutional services.
Public sector of higher education, on contrary, generated only 16 percent of its
revenue from tuition fees. The most prominent sources of revenue in public edu-
cation sector were state funding and EU structural funds.
By the revenue distribution as displayed in the table below, the largest share of
higher education funds, 88 percent, was concentrated in the public sector of
higher education. This corresponds to the fact that public sector absorbs the lar-
gest share of students in the country. Private sector of higher education received
12 percent of the total higher education budget.
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 133
Table 24 HE funding in Latvia, 2012
1 Total Revenue of HEIs and colleges EUR 311.2 million; 1.4 percent of GDP
1.1 Public universities and colleges EUR 237.3 million; 88% total HE revenue
1.2 Private universities and colleges EUR 38 million; 12% of total HE revenue
2 State budget funding EUR 110.6 million; 0.5% GDP)
2.2 Subsidy from the general revenue for universities EUR 95.9 million; 31% of total HE revenue
and colleges, including 15 percent co-financing
for EU structural funds
2.3 State budget funding for science, including EUR 14.7 million; 5% of total HE revenue
15 percent co-financing for EU structural funds
3 Private funds EUR 72.8 million; 0.3% GDP
3.1 Revenue from tuition fees in state (public) EUR 43.4 million; 14% of total HE revenue
universities and colleges
3.2 Revenue from tuition fees in private universities EUR 29.4 million; 9% total HE revenue
and colleges
4 Other funds EUR 127.8 million; 0.6% GDP
4.1 International funding for science and studies, EUR 64.5 million; 21% total HE revenue
including 85 percent co-financing from
EU structural funding
4.2 Revenue from scientific work not financed by EUR 12.5 million; 4% total HE revenue
the state budget or international funding
4.3 Other revenue of universities and colleges EUR 50.8 million; 16% of total HE revenue
Source: MoES, 2014
The greatest part of public higher education funding, which was 31 percent of
total higher education revenue in 2012, was allocated towards study process
in higher education. State funding for science comprised only five percent on the
total higher education budget in 2012 (MoES, 2014). This difference between pub-
lic investment in studies and science was mitigated by contributions from EU
structural funds and other international sources, the third largest contributing
source to higher education budget in Latvia in 2012. International funding for stu-
dies and science, including EU structural funds, comprised 21 percent of the total
higher education budget.
It should be acknowledged that 15 percent of total higher education revenue
in 2012 was generated by institutions of higher education via sources other than
described above. These alternative revenue sources include income from educa-
tional services provided by HEIs, revenue from renting facilities, and donations.
While the presented general data on revenue in higher education sector informs
about the general trends, the availability of more detailed data on the HEI revenue
streams both in private and public sector is limited. Tertiary institutions are not
required to publicly account for their balance sheets. The data on funding mix on
the institutional level is more available for public institutions of higher education.
134 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
However, even in instances when consolidated budget reports of public HEIs
are examined, there are concerns on the accuracy of data reported due to under-
reported transfers between institutions of higher education, for instance (Civitta,
2014).
Nevertheless, information that is available on public HEI budgets informs several
observations on the diversification of income at public institutions of higher educa-
tion. The aggregate data on the institutional revenue sources in the public sector
of higher education reveals that the amount of income from the various income
streams differs from one institution of higher education to the next. For some pub-
lic HEIs in 2012, about 80 percent of their revenue came from general governmen-
tal subsidy aimed to cover the costs of educating state funded students (MoES,
2014). In other instances, this proportion was about 20 percent and down to
as little as two percent.
Figure 19 Revenues of public
institutions of higher education
in 2012
Source: MoES, 2014
Depending on the institution, there were various combinations of revenue pro-
portions for covering the study process. In all instances, tuition fee paid by full
time and part time students presented a source of income. A source of revenue
across all public institutions for financing study process was also international
funding, including grants from the EU structural funds and international student
mobility programs like ERASMUS. Several institutions reported revenue generated
from educational services and intended to cover the costs of study process.
The same variation in institutional revenue in 2012 is observed also in regards
to revenue generated for research at public institutions of higher education
(MoES, 2014). Institutions of higher education can receive public funding for
research projects if they are registered as scientific institutes, which nearly all of
them are. As described earlier, public funding to research has declined since 2009
and it has correlated with the decline in HEIs research spending. Still, funding for
science for the most part does form a significant share in the institutional revenue
streams made available through the state funds and EU structural funding.
At the same time, data on public HEIs revenue streams reveal differences
in the ability of institutions to tap into these funds. In 2012, six out of 16 public
HEIs reported revenue for research in the amount of 15 to 48 percent of their total
revenue (MoES, 2014). For eight institutions this revenue contributed 0.5 to
15 percent of the total budget. In two cases there was no income from science
funding reporter in 2012.
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 135
Table 25 Revenues of public institutions of higher education in 2012
Co-funding
State for International Other
Total funding EU structural Tuition funding funding Science Other
HEI funding for studies funds revenue for studies for studies funding revenues
EUR (thousands)
LU 81,432 14,600 92 14,298 8,157 992 18,159 25,226
RTU 58,665 18,675 1,476 5,987 9,994 0 18,088 5,921
LLU 28,376 8,924 832 2,888 5,235 0 8,028 3,301
DU 10,778 3,985 61 919 674 0 1,558 3,641
RSU 37,806 20,499 9 8,534 1,130 936 3,230 3,476
LiepU 4,431 2,096 0 744 199 0 928 464
LKuA 3,660 3,021 16 472 85 71 10 0
LMâA 4,037 3,293 37 97 213 380 28 26
LMûA 3,278 2,425 40 202 518 40 1 92
LSPA 2,661 1,443 46 788 330 0 38 61
LJA 2,493 635 17 956 390 0 4 508
RPIVA 4,024 1,197 7 2,265 215 134 127 87
RA 5,855 2,067 149 538 1,349 916 773 212
VeA 4,680 1,133 63 215 356 131 2,225 620
ViA 2,962 933 11 679 731 0 74 545
BA 3,364 90 0 2,429 359 40 0 447
Source: MoES, 2014
The ability of HEIs to attract funding for science from public and the EU structural
funds depends on their position among all scientific institutions competing for
research grants, which also include independent research bodies. In 2013, there
were 88 institutions registered as scientific institutes; 46 of the publicly founded
and 42 privately founded scientific institutes (Izgl î t î bas kvalitâtes valsts dienests,
2013). Among these institutions, 10 were public institutions of higher education
and four were units of HEIs. At the same time many other research institutions,
although legally independent bodies have historic ties and collaborate on various
levels with HEIs. Thus, even if in research competition a public HEI is not the main
applicant, there are partnerships formed which enable access to research funding
for various institutions, including public HEIs.
The authors argue that the ability of public HEIs to attract science funding also
depends on their capacity in research. Most of the public funding for science is com-
petitive. The element of competition in providing base funding for HEIs is involved
in the assessment of their achieved research results. Access to other national grants
for science is explicitly competitive. In order to access these revenue diversification
opportunities, HEIs need to be able to achieve scientific accomplishments.
136 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
The national share of science funding revenue at the institutions of higher educa-
tion is smaller when compared to the revenue generated from the EU structural
funds for science and human capital in science. However, public budget for
science is also enclosed in 15 percent co-funding for EU structural funds to HEIs
receiving these funds. The remaining 85 percent are funded by the EU within
the scope of structural funds projects. Overall, EU grants are the third most signifi-
cant source of funding for higher education and science in Latvia.
Table 26 EU structural funds Allocation European Social Fund European Regional Development Fund
for higher education
Higher Education LVL 51 million LVL 102 million
and science, 2007–2013
(EUR 73 million) (EUR 146 million)
Source: LIVA, 2010
Science LVL 40 million LVL 186 million
(EUR 57 million) (EUR 266 million)
Access to EU structural funds is done on a selective and competitive basis.
The procedure for nationally distributing EU structural funds involves two types of
tenders. One is an open call tender where any higher education institution can
apply and submit its project. Project selection is done by assessing the relevance
of the applicant to the minimum requirements set for participants in the tender,
as well as by assessing the quality of the project. The second type of EU structu-
ral fund tenders is a restricted call tender, where only HEIs pre-selected by
the Ministry of Education and Science are eligible to submit their projects. Once
the eligible HEIs have turned in their project proposals, the recipients of funding
are determined in competition between the projects. More than 75 percent of
the EU structural funds for education and science are distributed in restricted call
tenders (SEDA, n.d.).
Currently, EU funds provide a main leverage for retaining researchers in the Latvian
higher education sector, namely by financing their research (SEDA, n.d.). Access
to international funding for studies coming from European sources is important
income for HEIs intended for improving the content of higher education curricula
and developing graduate study programs (SEDA, n.d.). The increase in the number
of Doctoral students as of 2008 is a direct result of the EU funds supporting Doc-
toral study programs, which allocated scholarships to PhD candidates. In 2008,
2,025 or 2 percent of all students were pursuing Doctoral level studies both at
public and private HEIs (MoES data). In 2012, this proportion had grown to 2,519
or 3 percent of all students (MoES, 2012).
Next to the three main income sources for higher education institutions is a cate-
gory of “Other revenue” reported by public institutions of higher education.
In 2012, other revenues contributed 17 percent of total public HEIs budget, colle-
ges excluded (MoES, 2014). An inquiry into the details of this income category
shows various sources of income. The example of the University of Latvia, which
reported about 30 percent of its budget as other revenue in 2012, shows signifi-
cant share of this income from rent of facilities, services provided by university
(University of Latvia, 2012). Daugavpils University, which also has about one third
of its budget from other revenues in 2012, reports the greatest share coming from
an international infrastructure project not related to studies or research, followed
by revenues from rent and services, some other international grants, and dona-
tions to the institution (Daugavpils University, 2014). A different case from two
aforementioned is Ventspils University College which enjoys strong financial sup-
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 137
port of the local municipality (Sustainable Strategy of the City of Ventspils until
2030, 2013). In 2012, 13 percent of Ventspils University College budget was
contributed by the local municipality on the bases of the mutual collaboration
agreement (MoES, 2014).
Vidzeme University of Applied Sciences, a regional HEI, also receives municipal
support. In 2014, Valmiera municipality allocated EUR 22,500 for the HEI’s re-
search grants program (Valmiera municipality, 2014). The purpose of this program
is to support studies which engage young researchers, focus on issues relevant for
Vidzeme region, and produce applicable results. Municipality of Valmiera finances
this program since 2011. Prior to that equivalent funding was allocated to finance
research of academic staff at Vidzeme University of Applied Sciences. In addition
the research funding, Valmiera municipality supports the organization of an interna-
tional summer school at Vidzeme University of Aplied Sciences. There is also a joint
library for the city and HEI, funded by Valmiera municipality.
To summarize:
Public higher education sector has access to several sources of revenue both for
covering study process as well as research activities. For study process, most
revenue in the public sector is received from public budget and EU structural
funds. Public HEIs also attempt to generate their own revenue from rent, services
and other grants not related to studies and research. However, there are varia-
tions by the amount of each of these revenue sources among institutions of public
higher education. While access to public funding for study process is not compe-
titive, the accessibility of public and international research funding is linked to
the competitiveness of HEIs as research centers. Achievement record in studies
and science of public HEIs is also important when applying for EU structural
funds. Thus, ability of public HEIs to diversify the revenue is related to its position
in higher education and research sector overall.
1.G Student financial assistance
Free Study Places and Governmental Allowance to Students at Public HEIs
Student financial aid in Latvia is provided in the form of both direct and indirect
public subsidies, and private resources. These include loans and scholarships,
as well as income tax rebates for educational expenditures.
In addition to being a mechanism for allocating basic funding for higher education
institutions, government-funded study places for a portion of students at public
institutions of higher education might also be considered a form of student finan-
cial assistance. In 2012, 37 percent of all higher education students in Latvia stu-
died free of charge. Access to publicly-funded study places varies from program
to program, based on MoES distribution of budget places to institutions and study
programs. Thus, chances of being admitted to study free of charge for students
depend both on the study program and the particular institution, since some
institutions and areas of study receive more support than others.
138 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
As discussed above, admitting students to government-funded study slots
is based on academic merit. Applicants with the best grades are admitted to study
free of charge, in accordance with the principle of free-of-charge budget places,
while others have to pay tuition fees. “Academic merit”, however, is not uniformly
understood across study programs: in programs with a large pool of academically
outstanding applicants and fewer government-funded study places, the grade
threshold for free study places can sometimes be very high. In study programs
with fewer applicants and a larger number of government-funded places, appli-
cants with mediocre academic results stand a greater chance studying free of
charge. In order to ensure that only the highest-performing students in the pro-
gram enjoy free studies, higher education institutions have — on their own initia-
tive — introduced a so-called student ‘rotation’ scheme, based on the results of
exams usually taken twice a year. According to this policy, students who pay
tuition can transfer to governmentally-sponsored study places, providing they out-
perform (i.e. in these exams) students who were initially admitted to these free
study places. With a few exceptions, only full-time students are admitted to study
free of charge at public higher education institutions (Cabinet of Ministers Regula-
tions No. 994, 2006).
Most students on budget places are enrolled in academic and professional
Bachelor degree programs. In 2012, this proportion was 85 percent of all govern-
ment-sponsored full time students (MoES, 2012). Students who are admitted
to free study places also qualify for government-funded monthly stipends, whose
amount depends on the particular level of studies. For Bachelor and Masters
students, the government monthly stipend is EUR 99.60 (Cabinet of Ministers
Regulations Nr. 740, 2004). For Doctoral degree students it is EUR 113.83 per
month for their coursework and 85.37 Euros per month for their Doctoral research.
A portion of the stipends for Doctoral research are conditional grants that might,
under certain conditions (i.e. if Doctoral candidates fail to complete their disserta-
tion within five years), become repayable loans. Conditional stipends for Doctoral
research are generally not available. The list of subject areas where these
stipends are available is approved annually by the Minister of Education and
Science.
The stipends described above are financed from an institutional budget line of
the government’s subsidy, calculated by multiplying the number of full-time
equivalent study places by the equivalent of a full-time student on a per year basis
(on Bachelor, Masters, or Doctoral level of studies). A small amount is also alloca-
ted to generate funds for covering stipends to students on maternity leave (Cabi-
net of Ministers Regulations No. 740, 2004).
The size of the government subsidy does not always match the number of stu-
dents studying in free budget places. Funding allocated towards the provision of
stipends is typically insufficient to successfully accommodate all students in go-
vernment-funded study slots, i.e. depending on the institution; there might be
more budget-places than stipends for students which would normally be expected
to match in their number the number of budget places provided. Only about
15 percent of all students studying in state budget places at public HEIs receive
state scholarships (MoES, 2014).
Based on government regulations, government-funded monthly stipends are
awarded to the highest-achieving students in the program. Criteria such as need,
disability and other socioeconomic factors are only taken into consideration
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 139
in cases where when two candidates have the same academic standing. Socio-
economic factors are the primary criterion for single payment stipends for which
students facing some extraordinary personal circumstances apply. For these
stipends, the institution of higher education can spend no more than 5 percent of
its annual governmentally-funded stipends’ budget line.
A separate budget line of government stipends funded by the European Social
Fund (ESF) is available to Doctoral students in the scope of their Doctoral studies.
However, in cases where the student receives the ESF stipend, the national
monthly stipend is then revoked. Doctoral stipends paid under the framework of
ESF funding are nevertheless more generous, since they include funds for acti-
vities such as academic conferences, and are competitively awarded to higher
education institutions on the basis of developing their Doctoral study programs.
A proportion of annual expenditure for all public higher education is allocated by
the government for the purpose of covering student scholarships (Cabinet of Mini-
sters Regulations No. 740, 2004). Additional scholarships by HEIs can be provi-
ded from a special fund of private donations. In these instances, distribution of
these funds is regulated by institutional policy.
Figure 20 Financial aid to
students, as percent of total
public expenditure on higher
education (ISCED 5-6),
2001–10
Source: Authors’ calculations, based
on Eurostat database
As shown in Figure 20, the level of financial aid to students as a percentage of
total public expenditure of higher education in Latvia has decreased significantly
between the years 2001–10 (12.8 percentage points)47. In 2001, the share of
financial aid of higher education expenditure in Latvia was among the highest
in Europe, exceeding the EU-27 average by 11.8 percentage points whereas
in 2010, Latvia fell 6.2 percentage points below the EU-27 average. In 2010,
the expenditure share of student financial aid in Latvia was slightly below (1.2 per-
centage points) the level of aid in the other two Baltic countries.
47 Financial aid to students as currently defined in the UOE data collection on education statistics
is referring only to direct public assistance to pupils or students in the form of scholarships, public
loans and family allowances contingent on student status. This is not a full measure of the level of
assistance students may receive as for instance, students may also get financial support like loans
from private banks, other services (i.e., student welfare services such as for meals, transportation,
health care or dormitories) or tax reductions. The financial aid to pupils/students varies as the educa-
tion systems are different across countries (Eurostat).
140 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
In 2007, prior to the economic and financial crisis, the percentage of the higher
education budget spent on student aid reached its lowest point of 5.1 percent,
which was the fifth lowest among all EU-27 countries in that year. The relative
share of public student aid financing in Latvia fell dramatically from 24.8 percent
in 2001 to 5.1 percent in 2007 due to a reform in the student loan system. Until
the year 2000, loans were granted from the State budget. However, from 2001
onwards, loans were granted by private banks appointed by the state, thereby
dramatically reducing the share of student aid in total public expenditure on
higher education. The transition was gradual — although the number of state-
granted loans decreased immediately after 2001, the state continued to grant
loans until almost 2007.
Government-subsidized Student Loans
As discussed extensively in the section on Indirect Public Subsidies to Higher Edu-
cation, government-subsidized student loans are available to all Latvian residents
who pursue higher education and are able to meet co-signatory loan require-
ments (Cabinet of Ministers Regulations No. 220, 2001). There are two types of
loans in this program. One is the so-called study loan meant to cover tuition fees.
This loan is available to full-time and part-time students. The loan for covering
tuition fees starts accumulating interest rate within just one year after the student
has completed the studies and has to start repaying the loan. The maximum
annual interest rate that student needs to pay for is 5 percent. If the total interest
rate is more than that, the government compensates the difference to the com-
mercial bank offering the loan.
The second type of loan is that intended to cover student living expenses. Only
full-time students are able to qualify for this loan, whose maximum is EUR 170 per
month. This loan also carries the maximum annual interest rate of 5 percent for
students. The difference, however, is that this interest rate becomes effective from
the issuance date of the loan, and students must cover these costs. The repay-
ment of the principal loan amount, however, is postponed until one year following
the completion of studies.
Both loans are also available for students seeking to study abroad. The maximum
amount that students can borrow to finance their studies abroad for several
consecutive programs is EUR 28,458 (Cabinet of Ministers Regulations No. 220,
2001).
The government-guaranteed student loan is a mortgage-type loan with fixed
monthly repayments over a maximum repayment term of 10 years. For students
who successfully complete their studies, loan repayment begins one year follow-
ing graduation, at a steady interest rate of 5 percent. For students who drop out,
repayment of the interest rate on loans begins immediately after ex-matriculation,
at a rate usually greater than 5 percent. Repayment of the principal loan for these
students begins three months after ex-matriculation. There are, however, certain
conditions under which the amount owed by the student can be reduced.
For every child born or adopted, the student debt holder has 30 percent written
off. If both parents have student debt, this provision only applies to one of them.
The student loan debt is fully forgiven if the borrower becomes disabled or dies.
Similarly, student debt is fully or partially written off if the graduate becomes a mili-
tary officer and is employed by the military service. In addition, one tenth or one
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 141
fifth (each year) of the student debt is written off in instances where the graduate
is employed by public sector (gradual loan forgiveness). The list of positions that
qualify for this waiver is annually approved by the government.
Prior to the current student loan scheme, the government had a policy whereby
study and student loans were granted from the state budget (Cabinet of Ministers
Regulations No. 251, 1997; No. 86, 1999). These were widely available and did
not require co-signatories. Although these loans are no longer provided, repay-
ments are still actively being collected.
Private Student Financial Support Programs
There are two main types of private student financial support programs: the first
is student lending schemes implemented by commercial banks for commercial
purposes, and the second involves philanthropists and businesses engaging
in philanthropy.
In the case of private loans, the largest commercial banks in Latvia offer some sort
of student loan scheme. These are essentially commercial loans targeting stu-
dents and offering funding to cover their higher education costs.
Philanthropic support to students is also made available, in the form of scholar-
ships provided by foundations to higher education institutions. For instances,
the “University of Latvia Foundation” manages both monetary donations and
income from handling in-kind donations, such as real estate bestowed to
the university and pays stipends to students (Latvijas Universitâtes Fonds, 2014).
In addition, there are foundations such as “Vitolu fonds”, which offer direct scho-
larships to students. In terms of the selection criteria, scholarship recipients are
usually chosen on account of both need and merit; however, there are sometimes
also particular constraints with respect to the subject area.
Student financial support initiatives are, further, offered by municipalities, where
additional funding is leveraged via local businesses, philanthropists, and the muni-
cipal budget. In these instances, grants typically tend to be offered on the assump-
tion that recipients will return to the municipality following the completion of their
studies, and thus contribute to the local community/economy.
142 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
Appendix 2
List of Documents Reviewed — Development of
Discussion on HE Funding Reform
Below is a short overview of the main documents discussing and referring to the pros
and cons of the existing HE funding model, proposals for reforms, and target indi-
cators.
Guidelines for the Development of Higher Education and Science Technologies 2002–2010,
Ministry of Education and Science, 2001
Targets:
•State budget funding to HE: 1.4 percent of GDP; state budget funding to science
and research: 1 percent of GDP (from that 0.4 percent for science universities).
•Attract private funding to HE: 1–1.4 percent of GDP; private funding for research
1–1.3 percent of GDP.
•Funding for state-funded study places should cover 20 percent of the respective
population aged 18–23.
•Provide additional state budget funding for internationalization; support for stu-
dent exchange programs (Erasmus, Socrates, Nordbalt, etc.).
•Develop scholarship funds at HEIs from their own resources.
•Integrate HE, science, and modern technology.
•Increase state funding for science at universities for the development of docto-
ral studies, support science disciplines, scientific research base, and infrastructure.
•Attract international funding for the development of research and technology.
National Concept of the Development of Higher Education and Higher Education Institutions
until 2010, Higher Education Council, 2001
(approved by the Cabinet of Ministers on July 16, 2001)
Targets:
•State budget funding to HE has to be gradually increased (by 2006, plus LVL
3 million a year; by 2011, plus LVL 1.3 million a year). At the same time HEIs
should bear responsibility for the effective use of public resources in the form of
performance contracts between HEIs and MoES regarding the specific number
of specialists to be prepared.
•In the following 10 years, to increase the state funding to reach the optimum
coefficients for studies in accordance with the existing normative basis.
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•Revise the remuneration system of academic staff by harmonizing the lowest
rates of salary for the different groups of academic personnel.
Guidelines for the Development of Education 2007–2013, Ministry of Education and Science, 2006
(approved by the Cabinet of Ministers on September 27, 2006)
Evaluation: In 2004/2005 the number of students per 1,000 members of the popu-
lation is 556, which in comparison with the average number in EU of 371 is high.
However, the number of students is not the indicator of quality. It can be explained
by the low prestige of vocational education and limited possibilities in the labor mar-
ket. Moreover, the number of students in STEM is insufficient, only 5.2 percent
of the total number of students and 12.5 percent of state-funded students. Number
of budget study places is not sufficient and does not promote accessibility.
Targets:
•Increase the amount of student loans (to reach LVL 120 a month) and increase
the number of study loans, which are covered by the state budget.
•Increase the number of state funded scholarships by 5 percent a year. Attract
private funding for the formation of scholarship funds.
•Increase the number of budget study places in STEM to reach at least 51 per-
cent of all state-funded study places.
•Attract EU funds for the preparation of the highest level specialists (Masters,
Doctors).
•Increase the coefficients of study costs by 1/10 a year to reach 83 percent of
the optimal value in 2007 and 95 percent in 2010.
•Increase funding to HE to reach 0.8 percent of GDP in 2007, 1.1 percent in 2008,
1.4 percent in 2009, and 1.5 percent in 2010.
•At least 40 percent of state budget funding for science concentrated in universi-
ties for research.
Is anything wrong with higher education in Latvia?, 2009, paper by V.Dombrovskis,
Stockholm School of Economics
Evaluation: Existing system is geared to funding study places, which are a form
of industrial policy in HE with government subsidizing certain professions. Scien-
ce funding is largely independent of any performance indicators and is allocated
to scientific institutions based on tradition. Present HE system is not as effective
as the Soviet education in promoting innovativeness.
Proposals for reform:
•Research budget should be allocated on the basis of success: publications
in internationally peer-reviewed journals and success in attracting European
research grants.
144 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
•Allocation of subsidies for budget places should depend on the program full
time faculty’s success in publishing in internationally recognized peer-reviewed
journals. That is, a university with a more publishing full-time faculty in a relevant
program of study would be entitled to a greater subsidy as compared to a uni-
versity with a less publishing faculty. This would push universities to change
their internal motivation systems to stimulate their faculty to produce research
that would comply with the world standards.
•The reform would not increase the total amount of financing for HE but would
change the criteria by which universities receive public subsidies.
•Government should offer additional financing contingent on introducing credible
MA programs in English, and possibly provide matching grants linked to uni-
versities’ success in attracting foreign students.
•Government may provide targeted grants for training PhD students abroad and
for attracting visiting faculty from top schools in the world.
Information Note on the Necessary Structural Reforms in HE and Science to Enhance
the International Competitiveness of Latvia, Ministry of Economics, 2010.
(Information note was submitted to the Cabinet of Ministers to present the results of the working
group on structural reforms in HE initiated by Prime Ministers upon the request of HE sector).
Evaluation: In 2009 Latvia has low state budget funding for HE (less than 1 per-
cent of GDP). Both public and private funding for HE has considerably decreased.
Proposals for structural reforms in regard of HE and science funding:
•Increase state budget funding to HE to reach 1.2 percent of GDP in 2015;
for science, 1.5 percent of GDP in 2015. Increase to be achieved gradually,
around 0.3–0.4 percent of GDP per year for HE and around 0.4–0.5 percent of
GDP per year for science.
•Improve the system of allocating state budget funds; introduce a transparent
performance-based funding principle (“money follows quality”). Decrease
the weight and impact of “input” indicators on the amount of allocated budget
funding.
•Introduce performance-based funding in science, and link funding with the re-
sults of scientific activity — publications and patents — and their application to
national economy.
•Diversify HE resources; allow attracting additional funding from private sector
(industry, entrepreneurship) and other sources. Make the HE funding system
more transparent; clearly differentiate public and private finance to HE.
•State funding for graduate studies (MA, PhD) to be concentrated in the HEIs
with the quantitative and qualitative indicators to operate at the highest level
studies and research.
•MoES to evaluate the actual costs of a study place and plan adequate funding
for it.
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•Optimize study programs, especially those funded by the state, to reduce frag-
mentation and doubling and to facilitate the development of joint programs.
•MoES in cooperation with MoF to work out a performance-based HE and scien-
ce funding model which takes into account the results of HEIs and scientific
institutions in the previous three years, as well as sets the expected results
(indicators) of the funding to be allocated.
Financing Higher Education: A Model for Reform, May, 2011, by V.Dombrovskis, Strategic
Analysis Commission
Evaluation: The cornerstone of the HE financing in Latvia is the system of budget
places, whereby the state provides predetermined per student subsidy in certain
education programs. The state also decides on major parameters of this system,
such as the size of the subsidy, the distribution of budget places by study pro-
grams, as well as among universities.
Arguments against:
1. The tax financed system distorts the incentives of both students and universi-
ties, thereby producing economic inefficiencies.
2. The system is intrinsically regressive with regard to income distributions, as it
entails redistribution from the poor to the affluent.
3. Given competing demands for public financing, the present system is unlikely
to procure sufficient resources for HE.
A fully tuition based system of financing, in which the students directly incur
the costs of their education, is the opposite of tax financed system of HE. It is not
associated with the problems discussed above, but it has its own issue.
As compared with tax financed systems, tuition based systems put the student
in the driver’s seat. Advantages: students have substantial incentives to invest
in higher education. Tuition based systems are open ended in terms of finan-
146 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
cing. Drawbacks: low paying capacity of students; as a result, only those from
wealthy families can afford HE. Pure tuition based systems might be inefficient
and socially unfair.
Proposed solution: Income contingent loans. Basic idea: students do not pay,
but graduates do.
•Abandon the system of budget places and the central planning that it entails.
Introduce tuition fees for higher education with substantial autonomy for the uni-
versities to formulate study programs and set the fees.
•Introduce state provided loans for the students with interest rates tied to the
government cost of borrowing.
•Charge the State Revenue Service with collection of these loans from graduates,
alongside the income tax.
•Protect graduates with income contingent repayments by providing built-in
insurance against inability to repay and excessive volatility. This would facilitate
competition between universities and provide information to help students make
more informed choices about their human capital investment.
Action Plan for the Government 2011 (Prime minister Valdis Dombrovskis)
(Parliamentary elections in 2010, Parliament was dissolved next year May 28, 2011)
•Provide sufficient funding to HE taking into account performance and quality
indicators, develop funding coefficients for regions.
•Introduce performance based HE funding to ensure the consolidation and effec-
tive use of HE and science resources.
•Funding to be granted on the basis of a long-term national development pers-
pective.
The Proposal for Performance Based Funding of HE and Science, Ministry of Education
and Science, 2011
(remains as a project version, further activities suspended by the incoming Minister of Education
and Science Roberts Kilis)
Proposal for performance-based funding:
After analysis of the higher education and science financing model that exists
in Latvia, it may be concluded that the higher education and science financing
model in Latvia already comprises all three types of performance based higher
education and science financing: (i) formula, (ii) target contract, and (iii) financing
to be obtained according to tender procedure.
A partially formula-based financial reference amount has been introduced in the
higher education of Latvia since 2002, and it is supplemented by a performance-
based (number of prepared specialists) contract among the institutions of higher
education and ministries.
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The formula is based on the clear and easily comprehensible criteria suggested
by the World Bank experts. A formula financial reference amount has been also
introduced in science from 2005, where the variable part depends on particular
scientific results (number of publications, number of patents, etc.). Innovative
financing or financing to be allocated according to tender procedure has also
been introduced (financing of science according to tender procedure, ESF and
ERDF financing for studies, scientific activity and innovations and for improvement
of infrastructure).
Therefore, it may be concluded that in order to comply with the task entrusted by
the Cabinet, it is necessary to put more emphasis in the financing of the HE and
science on the results by introducing additional performance indicators in accor-
dance with the state policy for the area of higher education.
Action Plan for the Government 2012 (Prime Minister Valdis Dombrovskis)
A new HE funding model from 2014 to enhance accessibility, fairness, and inter-
national competitiveness of HE based on a thorough analysis and evaluation by
international experts. Aim: by the end of 2014 research on the funding model
carried out, normative basis worked out, and the new model implemented.
Action Plan for the Government 2014 (Prime Minister Laimdota Straujuma)
Strategic specialization of HE, optimization of HE network, balanced development
in regions. Enhancing the engagement of HEIs in the economic development
in regions. Proposals for a new HE funding model to be prepared to enhance
national development, accessibility of HE in regions, labor market connect, inter-
national competitiveness. For the budget of 2015 evaluation of the actual costs of
study place.
Action Plan for the Development of Higher Education and Science 2013–2014
(approved by the Cabinet of Ministers)
Target: To prepare for implementation a new model for higher education finan-
cing ensuring quality higher education for everybody.
•Research carried out in cooperation with the World Bank regarding the current
financial model for higher education in Latvia, as well as the potential alternative
financing models and their legal, economic, financial, social and other aspects
(risk assessment) (01.10.2014).
•Based on the results of the performed research, prepared proposals for
establishment of optimal model for financing of higher education, assessed
risks for implementation thereof, performed detailed assessment of initial impact
and summarized opinion of the public and social partners on that model
(01.11.2014).
•Prepared normative basis for gradual introduction of the financing model
(01.11.2014).
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Guidelines for the Development of Education 2014–2020 (project)
(approved by the Cabinet of Ministers on December 16, 2013, parliamentary endorsement needed)
New funding model of HE as central to reforms in HE to enhance international
competitiveness and quality of studies. Aspects to take into consideration in the
process of preparation of the new funding model: accessibility and fairness; inter-
national competitiveness; legal, economic, financial, and social risks; possible
scenarios of implementing the new model. Aim: by 2020 the new funding model
is fully functioning and its impact on the strategic goals can be evaluated.
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 149
Appendix 3
Note on Availability of Performance Data
Submission and processing of the data reflecting the activity of higher education
institutions (both university type and non-university type institutions — colleges)
in Latvia is governed by the Law on Higher Education Institutions, Official Sta-
tistics Law, Regulations of the Cabinet of Ministers No. 922 “Procedures for
the Approval of the State Statistics Reports and Forms”, Regulations of the Cabi-
net of Ministers No. 348 “Procedures for the Submission of Information of Activity
of Higher Education Institutions to the Ministry of Education and Science”,
as well as the related Regulations of the Cabinet of Ministers No. 994 “Procedures
for the Financing of Institutions of Higher Education and Colleges from the Funds
of the State Budget”. The main players in the process of gathering and analyzing
activity and performance in higher education48 are HEIs, Ministry of Education
and Science, Central Statistical Bureau. To various extents the data are submitted
to the Ministry of Education and Science (in some cases through other ministries)
and Central Statistical Bureau, as well as published in the institution’s annual
report and on the institution’s website.
Official Statistics Law defines the role of Central Statistical Bureau as the main
co-coordinator of the flow of statistical information at the national level, as well as
the mutual harmonisation of statistical indicators to be included in State registers
and other information systems. This includes gathering the data of activity and
performance of higher education institutions, both state funded and private.
Official Statistics Law states that the provision of the data required by the Central
Statistical Bureau is obligatory. In light of the stipulations of the Statistics Law
the Regulations of the Cabinet of Ministers No. 922 “Procedures for the Approval
of the State Statistics Reports and Forms” specify the parameters (templates)
to be used for the submission of data. Specifically, the Regulations No. 922
include a special form for HEIs to submit information on their activity at the begin-
ning of each academic year — by October 15.
Law on Higher Education Institutions (henceforth Law on HEIs) defines the gene-
ral principle that HEIs monitor their performance by gathering and analyzing
relevant data. Section 5 of the Law on HEIs lists the tasks of HEIs including
the obligation to ensure that “information regarding student results, graduate
employment, the satisfaction of students with the study program, the work effec-
tiveness of academic staff, the study funds available and the disbursements
thereof, essential indicators of the activities of an institution of higher education
is compiled and analyzed”. Section 75 of Law on HEIs elaborates on the data
to be published in the institution’s yearly report (year-book) and submitted to
the Ministry of Education and Science as follows:
(1) Each year, for the promotion of co-operation among institutions of higher
education and colleges, State authorities and local government institutions
and society, an institution of higher education and college shall prepare a report
of the activities thereof in the reporting year (a year-book) which shall be pub-
48
“Performance data” are here less strictly defined and include both input and output indicator of
HEIs.
150 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
lished as a separate issue and kept on the Internet home page of the institution of
higher education and college.
(2) In accordance with the procedures and the time period prescribed by
the Cabinet, an institution of higher education and college shall submit informa-
tion regarding the activities thereof to the Ministry of Education and Science,
and this information shall include data about:
1) The structure of the institution of higher education and college;
2) The number and composition of students and other staff of the institution of
higher education and college;
3) Options for study and the number and composition of enrolled students;
4) The offered study courses, study modules and study programs, as well as
information regarding the subject areas;
5) The allocation and utilization of State budget funds;
6) Economic activity, own income and utilization thereof;
7) International relations;
8) Information regarding the subsequent course of work of graduates in the next
three years after completion of the relevant study program of the institution of
higher education or college.
On the basis of the above stipulations in the Law on HEIs (and the Law and regu-
lations governing statistics), the Cabinet of Ministers Regulations No. 348 “Proce-
dures for the Submission of Information of Activity of Higher Education Institutions
to the Ministry of Education and Science” (henceforth Regulations No. 348) detail
the procedure and timeline for the submission of data to the Ministry. Annexes
to the Regulations No. 348 specify the parameters according to which the above
information should be structured. Moreover, the Regulations include reference to
the parameters of information required by the Central Statistical Bureau.
Regulations No. 348 provide that HEIs provide the following information to the Mi-
nistry of Education and Science:
(1) By September 5 of the current year: information on the structure of higher
education institution or college (structural scheme of the institution); number
and composition of enrolled students; number and characteristics of graduates
(students who have obtained the academic, professional, scientific degree and
professional qualification); and information on study opportunities.
Data on the newly enrolled students are provided per study level and study pro-
gram: title and level of study program; number of applicants per one state-funded
study place; and number of newly enrolled students, including those enrolled as
state-funded and those to pay tuition fee (Appendix 2, Table 1). Data on the gra-
duates are also provided per study level and study program: title and level of
study program; and number of students who have obtained a degree or qualifica-
tion, including those whose studies were state-funded students and those who
paid tuition fee (Appendix 2, Table 2). Information on study opportunities entails
information regarding the tuition fee per study level and program in full-time and
part-time studies (Appendix Table 3).
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 151
Appendix 2, Table 1 MoES parameters for the information on the number and
composition of newly enrolled students in higher education institution/college in the
respective academic year
Applicants Number of Including
Level and title of per state-funded enrolled
study program study place students State-funded Paying
Appendix 2, Table 2 MoES parameters for the information on the students who
have obtained a degree or qualification in higher education institution/college
in the respective academic year
Including
Level and title of Number of persons who have
study program obtained a degree or qualification State-funded Paying
Appendix 2, Table 3 MoES parameters for the information on the tuition fee for study
program in higher education institution/college in the respective academic year
Fee for part-time studies
Level and title of Fee for full-time
study program studies Attendance required49 Attendance not required
(2) By October 15 of the current year: information on the number and composition
of students (currently studying) and staff, the courses and study programs offe-
red, as well as information on business operations (in accordance with the form
specified by Central Statistical Bureau), international relations.
This section of information is provided in parallel to the Central Statistical Bureau
on the basis of the parameters specified by Central Statistical Bureau regarding
the activity of HEIs — detailed information on the students and staff, study pro-
grams, business operations (CSB form to be added). Along with that the Regula-
tions No. 348 specify the information to be provided on international relations
(Appendix 2, Tables 4, 5 and 6).
Appendix 2, Table 4 MoES parameters for the information on the students of higher
education institution/college studying abroad in the respective academic year
Higher education
Country institution/college Number of students
Appendix 2, Table 5 MoES parameters for the information on the international con-
tracts and participation in international projects and programs
Higher education
Country institution/college Number of contracts, projects
49 In Latvia part-time studies are further differentiated according to attendance requirements.
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Appendix 2, Table 6 MoES parameters for the information on the international
exchange of academic staff (work, internship and other cooperation abroad)
Higher education Field of science Number of
Country institution/college (study program) persons
1) By 1 November of the current year: admission requirements.
2) By 1 April of the current year: distribution and use of state funds for the previous
year’s budget, revenues and expenditure of the institution.
The latter section of information has to be provided according to the parameters
specified by the Ministry (Appendix Tables 7 and 8).
Appendix 2, Table 7 MoES parameters for the revenue of higher education institu-
tion/college
No. Type of revenue Amount of revenue
1. Subsidy from the general state revenue
incl. co-funding for the implementation of European Union structural
funds projects
2. Revenue from tuition fee
3. Subsidy (grants) for scientific projects
4. Rest of budget funding for scientific projects
(for instance, state programs, state commissioned research)
5. Revenue from the performance of scientific work not financed by
the state budget
6. International funding (funds, programs), incl. international funding
for research projects
7. Revenue from facilities rental
8. Other revenue
Appendix 2, Table 8 MoES parameters for the expenditure of higher education
institution/college
Amount of expenditure
No. Type of expenditure (percent)
1. Remuneration total
incl. salary for academic and administrative staff
2. Social security costs for the employees
3. Business trips
4. Services
5. Materials, energy resources, heating, light, water, inventory, etc.
6. Books and magazines
7. Grants
8. Transport compensations
9. Capital expenditure, including movable property
10. Other expenditure
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Performance indicators of budget study places
Reporting on the use of budget funding is also described in other regulations.
Regulations of the Cabinet of Ministers No. 994. “Procedures for the Financing of
Institutions of Higher Education and Colleges from the Funds of the State Budget”
stipulate that the Ministry of Education and Science and other ministries, which
have institutions of higher education and colleges under their authority, enter into
contracts with the State institutions of higher education and State colleges regar-
ding the preparation of the definite number of specialists and the provision of
development of scientific work. The Performance Contract defines the mutual
liabilities of the institution and the Ministry in the use of the state budget funds for
the preparation of specialists, the control of finance, reporting and exchange of
information. The annexed Agreement Protocol which is updated yearly details
the amount of state funds granted to the institution and its composition: total
number of study places, total amount of funding granted for the relevant year,
costs of study place, and number of specialists to be prepared. Institutions having
received state budget places have to report at the beginning of each calendar
year — by 1 February — on such things as fulfillment of budget places (actual
number of budget students as compared to the planned), number of graduates,
and number of students actually studying. In case of underperformance (not
enough budget students and graduates), HEIs have to provide explanation.
Thus, the data of higher education institutions are gathered annually by the Ministry
of Education and Science, as well as the Central Statistical Bureau, and are gover-
ned by several regulations. Some data are submitted in parallel to both institutions.
The system appears to be opaque and causes duplication of data collection.
A discussion to introduce a more effective exchange of statistical information
is in progress towards a unified register of HEIs subject areas where the perfor-
mance data are linked to the study program and consequently — to quality.
The changes in the system would require considerable amendments in the current
Regulations No. 348, as well as the Law on HEIs concerning the exchange of sta-
tistical information, possibly consolidation of the existing normative basis. At pre-
sent amendments are in progress to revise the positions of revenue and expenditu-
re to ensure their consistency with the Cabinet of Ministers Regulations of Decem-
ber 25, 2005 No.1031 “On the Classification of Budget Expenditure in accordance
with the Economic Categories” and Regulations No. 1032 “On the Classification of
Budget Revenue”. The planned amendments also include more detailed parame-
ters on graduates to be provided by institutions on a regular basis.
Analysis of performance data
Central Statistical Bureau provides general statistics on higher education such as
number of students, graduates, academic staff, and funding to higher education;
however, the central statistics do not reflect the situation in specific institutions.
The data received at the Ministry of Education and Science included in the Annual
Survey on Higher Education Institutions reflect the situation in each institution
in the respective year. The data are partially included in the internal database of
the MoES to monitor the use of the budget funding, the dynamics of students’
numbers per program, and the actual numbers of graduates as opposed to
the planned numbers (fulfillment of the requirements in the Performance contract
and Agreement Protocols).
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Graduate Tracking
Although the Law on HEIs explicitly states the obligation of HEIs to monitor the
progress of graduates in the labor market, an appropriate monitoring methodolo-
gy has not yet been developed. Apart from the data on persons having graduated
(persons who obtained a degree or qualification), information on graduates is cur-
rently limited to voluntarily feedback provided as a response to graduate surveys,
interviews, or other outreach organized by HEIs. A systemic and unified approach
to graduate tracking is yet to be developed. It is envisaged to develop cooperation
with the State Revenue Service to analyze graduates’ success in the labor market
on the basis of their income indicators (tax paid). A pilot project between the State
Revenue Service and Riga Technical University has been conducted to gather
data on graduates’ average income per subject areas.
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 155
Appendix 4
Stakeholder Consultations
Workshop – December 2, 2013
Institution, organization Representative(s) Position
Ministry of Education Iveta Graudina Councilor to the Minister
and Science
Liga Lejina Director of the Department of Political Initiatives
and Development
Inese Sture Deputy Director of the Department of Higher
Education, Science and Innovations
Marina Meksa Senior Expert of the Department of Higher
Education, Science and Innovations
Anatolijs Melnis Senior Expert of the Department of Higher
Education, Science and Innovations
Inta Svirksta Expert of the Department of Structural Funds
and International Financial Instruments
Laura Treimane Officer of Higher Education/Local Consultant
State Education Development Dita Traidas Director
Agency
Stakeholder Roundtable – December 3, 2013
Institution, organization Representative(s) Position
Higher Education Council Andris Teikmanis Associate Professor
Latvia Students’ Union Inguna Zarina Member
Asnate Ka oka Member
Latvia Confederation of Anita Lîce Expert
Employers
Latvia Chamber of Commerce Karîna Zarina Director of Political Department
and Industry
Ministry of Economics Vita Skuja Official/Department of Economic Development
and Labour Market Forecasts
Riga Stradins University Toms Baumanis Prorector of Development
un rektora
J ânis Bern âts Legal Advisor
Business Higher Education Aldis Baumanis Lecturer
Institution, “Turîba”
156 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
Institution, organization Representative(s) Position
Latvia Academy of Arts Andris Teikmanis Associate Professor
Ventspils University College Ligita Blumberga –
Riga Graduate School of Law Kitija Freija Director
University of Latvia Gundars Bçrzi òš Chancellor
Riga Academy of Pedagogy Tija Zirina Associate professor, Manager of the Department
and Education Management of the Organization of Studies
Vidzeme University of Agnese Lapetrova Rector’s Assistant – Research Coordinator
Applied Sciences
Stockholm School of Rita Kaša Pro-Rector
Economics in Riga B.Sc. Thesis Faculty Advisor
Daugavpils University Participated.
Liepaja University
Riga Technical University
Ventspils University of
Applied Science
Latvia University of Agriculture
Stakeholder Interviews – February 5–7, 2014
Institution, organization Representative(s) Position
Ministry of Culture Roventa Putnina Officer at Budget Department
Barba Krisjane Head of Budget Department
Latvia Academy of Arts Sandra Plota Director
Gita Senka Deputy Director of International Cooperation
and Development
Latvia Academy of Culture Zane Silina Vice Rector
Latvia Academy of Music Normunds Viksne Vice Rector of Academic Affairs
Irena Baltabola Director of Study Programs
Vita Daudisa Head of Finance Department
Dace Markus Rector
Riga Academy of Pedagogy
and Education Management
Daina Voita Vice Rector of Science
Latvia Academy of Sports Svetlana Panova Chief Accountant
Education
Juris Grants Vice Rector of Science
Janis Zidens Rector
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 157
Institution, organization Representative(s) Position
Latvia Maritime Academy Andrejs Zvaigzne Vice Rector
Janis Brunavs Professor
Janis Berzins Rector
BA Business School of Dr. Andris Sarnovics Rector
Business and Finance
Liga Peiseniece Vice Rector for Academic Affairs
Ministry of Defense Ilona Drege Under State Secretary of Administrative
and Legal Affairs
Inese Kaive Deputy Director of Section of Military Education
and Science of Department of Human Resources
National Academy of Defense Georges Kerlins Vice Rector
Daugavpils University Several participants Students, PhD students
and PhD students
from Institute of
Systematic Biology
Inese Kokina Vice Rector for Research
Irena Kaminska Vice Rector for Studies
Rectors’ Conference50 Janis Bernats Legal Expert
Agnese Rusakova Expert
Higher Education Council Several –
representatives
from the Higher
Education Council
Ministry of Interior Alda Strode Financial Specialist
Laris Tumanana Director of Department of Financial Management
Agnese Laure Office at Department of Financial Management,
Section of Financial Policy and Methodology
Gints Rozenbils Officer at Department of Human Resources
Management
Ministry of Agriculture Ilze Slokenberga Official of Department of International Affairs
and Strategic Analysis
Ministry of Environmental Edgars Paulovics Officer at Zemgale Planning Region Development
Protection and Regional Department (counterpart of Latvia University of
Development Agriculture)
50 Separate meeting with Andrejs Rauhvargers, Secretary General of Rectors Conference on February 18,
2014.
158 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
Institution, organization Representative(s) Position
Latvia University of Janis Sprukts Chancellor
Agriculture
Daira Treigute Head of Financing Department
Dita Stefenhagena Rector’s Assistant
State Police Natalija Dorozko Head of Financial Department
Gunta Gregersone Head of HR Department, Section of Professional
Competence Building
State Police College Maris Riekstins Deputy Director
State Border Guard Aivars Uzulnîks Deputy Director
Velta Grecka Head of Finance Department
Sandra Keisa Senior Specialist of Human Resources
Department
State Border Guarding Iveta Plasa Head of Department of Finance and Planning
College
Daiga Kupc âne State Border Guard
Fire Safety and Civil Vilis Students Deputy Director
Protection College
Ministry of Health Inese Andersone Head of Department of Coordination of Financial
Analysis and Investment
Biruta Kleina Deputy Director of Health Care Department
Ministry of Welfare Danute Jasjko Director of Department of Social Services
Aldis Dudins Senior Expert of Department of Social Services
Riga Stradins University Toms Baumanis Vice Rector of Development
Janis Bernats Rector’s Legal Advisor
Juris Lacis Vice Rector of Administration
Red Cross Medical College Gastons Neimanis Director
(of Riga Stradins University)
Inara Urpena Deputy Director in Academic Affairs
and Research
Social Integration State Jana Pulkstene Deputy Director in Professional Rehabilitation
Agency
Inese Urpena Administrator of College Study Programs
Business Higher Education Aldis Baumanis Associate Professor
Institution “Turîba”
Riga International School of Irina Sennikova Rector
Economics and Business
Administration Ilmars Kreituss Vice Rector of Academic Affairs
Tatjana Vasiljeva Vice Rector of Science
Ieva Brence Head of Department of Economics and Finance
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 159
Institution, organization Representative(s) Position
Transport Irina Yatskiv Acting Rector
and Communications
Institute Igors Kabaskins President
Igors Graurs Vice Rector of Academic Affairs
Ministry of Economics Vita Skuja Officer of the Department of Economic
Development and Labor Market Forecasts
Ludis Neiders Head of Department of Structural Policy of National
Economy, Economic Coordination Section
Ruta Rimsa Officer at Department of Structural Policy of
National Economy, Economic Coordination Section
Ministry of Environmental Veronika Jurca Senior Expert of the Department of Regional
Protection Development Planning
Cross-Sectoral Coordination Elina Petrovska Consultant
Center
Latvia Confederation of Inga Sina National Coordinator in Professional Education
Employers and Employment
Latvia Chamber of Commerce Aldis Baumanis Associate Professor
and Industry
Latvia Students’ Union Inguna Zarina Member
Liva Vikmane Member
Vidzeme Planning Region Kristaps Rocans Project Manager
Ministry of Finance Ilonda Stepanova Director of Budget Department
Liga Sulca Head of Division
Ministry of Education Inese Sture Deputy Director of the Department of Higher
and Science Education, Science and Innovation
Gunta Ar âja Deputy State Secretary – Director of
the Department of Structural Funds
and International Financial Instruments
Marina Meksa Senior Expert, Department of Higher Education,
Science and Innovation
Anatolijs Melnis Senior Expert, Department of Higher Education,
Science and Innovation
Janis Paiders Officer, Department of Higher Education, Science
and Innovation
Reinis Lasmanis Officer, Department of Higher Education, Science
and Innovation
Kristîne Keièa Officer, Department of Higher Education, Science
and Innovation
Karîna Aleksandra Officer, Department of Higher Education, Science
and Innovation
Evita Sarma –
160 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
Institution, organization Representative(s) Position
University of Latvia J ânis Stonis Administrative Director
Gundars Bçrzi òš Chancellor (supervises Department of
Development and Planning, and Department of
Finance and Accounting)
Ventspils University College Gita Revalde Associate Professor and Rector
Vidzeme University College Gatis Krumins Rector
Iveta Putnina –
Liepaja University J ânis Rimš âns Rector
Riga Technical University Ingars Eriòš Chancellor, Associate Professor
Prof. Uldis Sukovskis Vice-Rector for Academic Affairs
T âlis Juhna Zin ât òu prorektors
Prof. Ugis Bratuskins Dean of the Faculty of Architecture and Urban
Planning
Prof. Juris Smirnovs Dean of the Faculty of Building and Civil
Engineering
State Education Development Dita Traidas Director
Agency
Elita Zondaka Head of Department of Structural Funds
Management and Monitoring
Ansis Pekss Head of Science Project Monitoring Unit,
Department of Structural Funds Management
and Monitoring
Ingus Zitmanis Head of European Social Fund Project Monitoring
Unit, Department of Structural Fund Management
and Monitoring
Atvars Sauss Head of Infrastructure Project Monitoring Unit,
ERDF Infrastructure Project Control Department
Agnese Aivare Head of the ERDF Infrastructure Project Control
Department
REPORT 1: Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses | 161
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Report 2
ASSESSMENT OF
CURRENT
FUNDING MODEL’S
‘STRATEGIC FIT’
WITH HIGHER
EDUCATION POLICY
OBJECTIVES
18 April 2014
Contents
168 Abbreviations
169 Executive Summary
172 Introduction
174 1 Strategic Priorities of Higher Education in Latvia
174 1.1 Strategic papers for the Latvian higher education sector
175 1.2 Clustering the strategic objectives into Thematic Goals
181 2 Assessment of the Fit between Funding and Thematic Goals
182 2.1 Increase the quality of education and its link with the national economy
185 2.2 Increase the quality and (international) competitiveness of research
187 2.3 Increase sector efficiency
189 2.4 Enhance technology, innovation, creativity, and entrepreneurship
190 2.5 Renew and develop the human resources of higher education institutions
191 2.6 Stimulate participation in and access to higher education
193 2.7 Stimulate internationalization in higher education
194 2.8 Enhance the funding base of higher education
195 2.9 Establish a new and transparent approach to quality assurance
196 2.10 Overview on strategic fit by Thematic Goals
198 3 Potential Further Alignment of Funding and Policy Objectives
199 3.1 Funding opportunities that may enhance quality of teaching
203 3.2 Funding opportunities that may enhance quality of research
206 3.3 Funding opportunities that may enhance sector efficiency
209 3.4 Funding opportunities that may enhance technology, innovation, creativity,
and entrepreneurship
210 3.5 Funding opportunities that may enhance professional capacity of academics
211 3.6 Funding opportunities that may enhance access and participation
213 3.7 Funding opportunities that may enhance internationalization
214 3.8 Other opportunities to stimulate teaching and research
215 Appendices
215 Appendix 1 Description of National and Sectoral Policy Planning Documents
220 Appendix 2 Stated Policy Objectives and Targets in Higher Education, Science
and Innovations
220 A. National Development Plan of Latvia for 2014–2020
222 B. Guidelines for the Development of Science, Technology and Innovation 2014–2020
223 C. Guidelines for the Development of Education 2014–2020 (project)
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Abbreviations
EC European Credit(s)
EU European Union
ESF European Social Fund
EUA European University Association
HE Higher Education
HEI Higher Education Institution
MoES Ministry of Education and Science
MoE Ministry of Economics
RAS Reimbursable Advisory Services
RTA Reimbursable Technical Assistance
R&D Research and Development
SEDA State Education Development Agency
STEM Science, Technology, Engineering and Mathematics
REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 169
Executive Summary
Policy Objectives
This report is the second in a series of three papers prepared by the World
Bank’s Latvia Higher Education Team as part of its Reimbursable Advisory
Services on Higher Education Financing in Latvia. The aim of this paper
is to identify the main policy objectives for Latvia’s higher education system
and then assess how the current funding model fits or aligns with those objec-
tives. The assessment is based on a review of key strategic documents for
Latvia’s national and sectoral development, international practices for higher
education financing, and feedback from select stakeholders in Latvian higher
education.
Based on the team’s expertise and experience51 advising different higher
education systems on this issue, the report assumes the alignment of strate-
gic goals and funding mechanisms is a crucial success factor to promote na-
tional strategies. Though other policy instruments provide considerable support,
the national funding system can create incentives to steer the sector in a desired
direction.
For the purposes of this assessment, the strategic objectives for higher edu-
cation identified in the key policy planning documents were clustered into
the following nine thematic goals:
1. Increase the quality of education and link with the national economy
2. Increase the quality and (international) competitiveness of research
3. Increase sector efficiency
4. Enhance technology, innovation, creativity, and entrepreneurship
5. Renew and develop the human resources of higher education institutions
6. Stimulate participation in and access to higher education
7. Stimulate internationalization in higher education
8. Enhance funding base of higher education
9. Establish a new and transparent approach to quality assurance
Consistent with the Bank’s first report, this paper also explores the current
funding model for Latvian higher education through four components (instru-
ments of state funding, diversification of financial resources, financial auto-
nomy, and student funding) to determine how each aligns with the thematic
goal. The following table summarizes the overall assessments regarding the stra-
tegic fit of the four components of the funding system with each of the nine
51 The Bank’s Latvia Higher Education Financing team consists of World Bank staff as well as interna-
tional and local experts bringing together expertise from a range of countries (Finland, Germany,
the Netherlands, Latvia, the wider European area, and the United States) and contexts.
170 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
Thematic Goals. The scores vary from a strong positive strategic fit (indicated with
“++”) to a strong negative fit (indicated with “- -”). A neutral relationship is indica-
ted with “0”.
State Resource Financial Student
Thematic goals Funding Diversification Autonomy Funding
1. Quality of education -- + + -
2. Quality of research -- + + +
3. Sector efficiency -- - + +
4. Technology, innovation,
- -- 0 0
creativity and entrepreneurship
5. Human resource development - + + 0
6. Participation and access -- ++ 0 --
7. Internationalization - 0 0 -
8. Funding base -- - 0 +
9. Transparent quality assurance + 0 0 0
As the table demonstrates, the overall funding model, particularly the basic
funding for teaching and research, does not align well with the Thematic
Goals for Latvian higher education. In general, this does not mean the policy
objectives cannot be met, since other policy instruments can also be effective.
However, the structural underfunding of the system together with the current
model’s emphasis on inputs (i.e., enrollment), and its lack of a performance orien-
tation actually appear to work against the spirit of quality education and research.
Increases in state investment in higher education, in accordance with current
legislation, could go hand-in-hand with the introduction of more performance-
driven and innovation-oriented funding instruments that provide incentives for
the system to move in the desired direction of enhanced teaching and research
quality.
Though the strong reliance on tuition fees and on EU structural funds should,
in theory, steer higher education towards greater relevance to societal
and economic needs, the incentives are not strong enough. Both tuition fees
and EU funds are currently relied upon to maintain the functioning of the system
and support the status quo, so they are unable to work effectively as instruments
that guide towards greater quality, creativity, innovation, and entrepreneurship,
especially in light of current economic and quality assurance realities.
While financial autonomy is high in Latvia, some institutions have not utilized
their full potential in this respect. Certain institutions are being creative in deve-
loping alternative revenue sources, but the resultant funds are necessary to offset
the low level of state investment in the system, so there is not much ability to rein-
vest in new opportunities, partnerships, or innovation. Additionally, some other
institutions do not appear to be fully aware of their autonomy. The system would
benefit from financing instruments that allowed it to incentivize, for example, part-
nerships with the private sector for revenue-generating research or training
collaborations.
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Finally, Latvia’s current approach to student funding appears to have a slight
misalignment with the Thematic Goals, particularly as it relates to internatio-
nalization and expanding access. Latvia would be well advised to reconsider
how student financing could better align in a more supportive way with key policy
objectives.
With these Thematic Goals identified, the report also provides alternative
ways to align the funding model and examples of how other countries utilize
their funding instruments to support comparable policy objectives. These
alternative approaches introduce a variety of alternatives the World Bank team
will consider as it prepares recommendations for a reformed approach to finan-
cing higher education in Latvia. The recommendations will be the foci of the third
and final report expected to be delivered in the fall of 2014.
This report is organized into three chapters with multiple appendices. Chap-
ter 1 outlines the main policy documents reviewed as part of this process and illu-
strates how the policy objectives for Latvian higher education were clustered into
the nine Thematic Goals. Chapter 2 contains the assessment of whether or not
the current funding mechanisms for Latvian higher education are aligned with
the clustered policy objectives for the higher education system. Finally, Chapter 3
provides alternative approaches for how the funding mechanisms could better
align with the policy objectives or themes, including some references to how other
countries have utilized components of their funding model to support similar poli-
cy objectives.
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Introduction
The report at hand is the second in a series of three papers prepared by
the World Bank’s Latvia Higher Education Team52 as part of its Reimbursable
Advisory Services on Higher Education Financing in Latvia. The primary objec-
tive of this paper is to assess to what degree the current higher education funding
model aligns with or supports the strategic objectives of Latvia’s higher education
system. Alignment is considered a highly desirable feature of higher education
and research funding systems, since all levers (i.e., financial incentives, policy
directives, etc.) are working to help the system realize its goals.
This second report builds on several foundational elements included in the first
report, Higher Education Financing in Latvia: Analysis of Strengths and Weak-
nesses, 2014. The first report, inter alia, articulated the strengths and weaknesses of
Latvia’s current approach to funding higher education in light of recent European
trends and according to criteria for “good funding models” as agreed to with Latvia’s
Ministry of Education and Science (MoES). This second report builds on the prior
analysis by identifying the main policy objectives, with a focus on those that are mid-
and long-term, for Latvian higher education and then assessing how the current
funding model fits those objectives.
The findings and observations of this assessment result from (a) a review of
guidelines, priorities and goals contained within key strategic documents related
to Latvia’s national development or its education sector, specifically seeking
topics related to higher education; (b) the World Bank team’s international
experience assessing or reforming systems of higher education financing; and
(c) feedback from select stakeholders (e.g., rectors, academic staff, students, etc.)
in Latvian higher education.53
This report is organized into three chapters with additional support in the
Appendices. Chapter 1 provides a brief overview of the main policy documents
reviewed and, for the sake of this assessment only, clusters the policy objectives
for Latvian higher education referenced within those documents. A more extensive
summary of the documents incorporated into this analysis and their specific
higher education goals, guidelines, and objectives are included in the Appen-
52 Members of the World Bank’s Latvia Higher Education Team are Dr. Nina Arnhold, Senior Edu-
cation Specialist and Task Team Leader, World Bank; Adjunct Professor Jussi Kivistö, University of
Tampere, Finland; Professor Hans Vossensteyn, Director of the Center for Higher Education Policy
(CHEPS), the Netherlands; Jason Weaver, Senior Education Specialist, World Bank; and Professor
Frank Ziegele, Director of the Centre for Higher Education (CHE), Germany.
53 On 12 March, the World Bank and MoES hosted a workshop at the European Commission’s office
in Riga for stakeholders in the higher education system. As part of the workshop, participants were
divided into small groups to discuss how the current funding model aligns with different policy objec-
tives and to brainstorm alternative ways in which better alignment could be achieved.
REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 173
dices. Chapter 2 then contains the assessment of whether or not the current
funding mechanisms for Latvian higher education are aligned with the objectives
of the higher education system. As was done in the prior report, the mechanisms
of funding for higher education in Latvia are explored according to the following
four elements: state funding for teaching and research, diversification of finan-
cial resources, financial autonomy, and student funding. The chapter includes
an assessment of how these different elements of the funding model align with
each of the nine thematic goals identified in Chapter 1. Finally, Chapter 3 provides
alternative approaches or suggestions for how the funding mechanisms could
better align with the policy objectives or themes, including some reference to how
other countries have utilized components of their funding model to support similar
policy objectives.
Based on the team’s expertise and experience advising different higher edu-
cation systems on this issue, the report assumes the alignment of strategic
goals and funding mechanisms is a crucial success factor to promote natio-
nal strategies. With a well-aligned funding model, policy objectives are more
likely to become reality; whereas without reference to strategic goals, a funding
system lacks orientation. However, it must also be stressed that funding is not
the only instrument that determines the outcome of strategies. Funding can create
incentives to steer the sector in a desired direction, but other policy instruments
and elements must also provide support.
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1 Strategic Priorities of
Higher Education in Latvia
1.1 Strategic papers for the Latvian higher
education sector
Although Latvia’s higher education sector is not currently governed by a compre-
hensive strategic plan, several programs, guidelines, and plans offer a vision for
the sector and medium- and long-term goals or objectives. The documents listed
below, which account for both national and sectoral development strategies, were
reviewed either for specific higher education strategic objectives or for context
in interpreting the identified objectives.
• Growth Model for Latvia: the Man in the First Place (adopted by the Parlia-
ment of Latvia on October 26, 2005)
• Sustainable Development Strategy of Latvia until 2030 (adopted by the Parlia-
ment on June 10, 2010)
• National Reform Programme of Latvia for the Implementation of Europe
2020 Strategy (endorsed by the Cabinet of Ministers on April 26, 2011)
• National Development Plan of Latvia for 2014–2020 (adopted by the Parlia-
ment on December 20, 2012)
• Latvia Convergence Programme 2013 to 2016 (endorsed by the Cabinet of
Ministers on April 29, 2013)
• Information Note on the Development of the Smart Specialization Strategy
(endorsed by the Cabinet of Ministers on December 17, 2013)
• Partnership Agreement for the 2014–2020 EU Funds Programming Period
(submitted to the European Commission on January 15, 2014)
• Operational Programme “Growth and Employment” for the 2014–2020
EU Funds Programming Period (submitted to the European Commission on
March 4, 2014)
• Declaration of the Intended Activities of the Cabinet of Ministers headed by
Laimdota Straujuma (endorsed by the Parliament on January 22, 2014)
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• Guidelines for Development of Science, Technology and Innovation 2014–2020
(endorsed by the Cabinet of Ministers on December 28, 2013)
• Guidelines for the Development of Education 2014–2020 (project) (endorsed
by the Cabinet of Ministers on January 7, 2014)
• Action Plan for the Development of Higher Education and Science for
the Time Period from November 1, 2013 until December 31, 2014 (adopted
by the Cabinet of Ministers on November 22, 2013)
• The Concept of the Development of Higher Education and Higher Education
Institutions for 2013 to 2020 (established in accordance with the Higher Educa-
tion Law)
• Law on Higher Education Institutions (in force since December 1, 1995)
For more information on these documents, please refer to the Appendices of this
report.
1.2 Clustering the strategic objectives
into Thematic Goals
For the purposes of this document, the strategic goals for higher education that
were identified in the aforementioned documents were clustered into nine Thema-
tic Goals. Importantly, this clustering of policy objectives is wholly the work
of the World Bank’s team and done to facilitate a more succinct assessment of
the degree to which the funding model aligns with Latvia’s broader strategic
objectives for higher education. At the level of the Thematic Goals, occasional
comparisons can subsequently be drawn to how other countries utilize their fund-
ing model in support of similar objectives.
In the following tables, each of the nine Thematic Goals is presented along
with examples of the specific strategic objectives and their source document.
The objectives clustered under Thematic Goals include aspirational targets, new
initiatives, and areas of focus. Since the strategic objectives were largely identified
from a review of key documents, it should be noted that this list is not intended
to reflect any weighting or prioritization. Also, virtually all of these could have
a relation to funding, but sometimes non-financial incentives and instruments may
be just as or even more effective.
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1. Increase the quality of education and its link with the national economy
• Transform the education system and improve its content to focus on
employability (competencies, entrepreneurship, and creativity)
• Increase role and availability of (good) internships to facilitate the transition
to labor market and reduce unemployment (18 months after BA, MA, or PhD
Example Objectives graduation reduce unemployment from 7.5% to 5.2% in 2020)
for this Thematic Goal • Develop a register of graduates – a system for monitoring and assessing
the graduates’ paths in the labor market
• Stimulate excellence through sufficient “critical mass” or economies of scale
to ensure intellectual collaboration and spillovers, resource consolidation,
and efficiency
National Development Plan 2014–2020
Information Note on the Development of the Smart Specialization Strategy
Guidelines for the Development of Education 2014–2020
Source Documents
Guidelines for the Development of Science, Technology and Innovation
2014–2020
Action Plan for the Development of Higher Education and Science 2013–2014
2. Increase the quality and (international) competitiveness of research
• Improve quality of research, especially in areas of Smart Specialization,
and strengthen its collaboration with business to generate new, innovative,
and competitive products and services
• Promote the development of a system of joint research-based
and industry-oriented doctoral studies
Example Objectives • Increase the number of doctoral students, encourage their involvement
for this Thematic Goal in research projects
• Establish joint doctoral study centres at universities and scientific institutions
to focus on topical socioeconomic issues
• Improve international competitiveness and participation in European Research
Programmes and Infrastructures
• Invest in modern research infrastructure
National Reform Programme of Latvia for the Implementation of Europe 2020
Strategy
National Development Plan 2014–2020
Source Documents Operational Programme “Growth and Employment” for the 2014–2020 EU Funds
Programming Period
Guidelines for the Development of Science, Technology, and Innovation 2014–2020
Action Plan for the Development of Higher Education and Science 2013–2014
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3. Increase sector efficiency
• Strengthen the integration of higher education with science, research,
and industry to help promote knowledge transfer
• Encourage strategic specialization of HEIs through differentiation of
institutional profiles
Example Objectives
• Improve education infrastructure through consolidation of study programmes,
for this Thematic Goal
reduce programme fragmentation and duplication, especially through regional
collaboration
• Stimulate institutional research excellence by resource efficiency
and concentration to form critical masses
National Reform Programme of Latvia for the Implementation of Europe 2020
Strategy
Information Note on the Development of the Smart Specialization Strategy
Operational Programme “Growth and Employment” for the 2014–2020 EU Funds
Programming Period
Declaration of the Intended Activities of the Cabinet of Ministers Headed by
Source Documents Laimdota Straujuma
Guidelines for the Development of Science, Technology, and Innovation
2014–2020
Action Plan for the Development of Higher Education and Science 2013–2014
Concept of the Development of Higher Education and Higher Education
Institutions for 2013–2020
4. Enhance technology, innovation, creativity, and entrepreneurship
• Strengthen position of STEM to reduce the disproportion of labour market
(increase the proportion of state-funded places from 44% to 55%
and proportion of graduates in STEM areas from 19% to 27% in 2020)
• Increase proportion of college students in the system (from 18% to 24%
in 2020)
Example Objectives
• Modernize infrastructure in the higher education institutions implementing
for this Thematic Goal
study programs in STEM areas, especially at college and doctoral level
• Increase funding for science and innovation, including co-funding by private
business
• Stimulate market-oriented (societal relevant) research, enhance
commercialization of research results
National Development Plan 2014–2020
Guidelines for the Development of Education 2014–2020
Information Note on the Development of the Smart Specialization Strategy
Operational Programme “Growth and Employment” for the 2014–2020 EU Funds
Source Documents Programming Period
Guidelines for the Development of Science, Technology and Innovation
2014–2020
Concept of the Development of Higher Education and Higher Education Institutions
for 2013–2020
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5. Renew and develop the human resources of higher education institutions
• Increase proportion of academic (university) staff with a doctorate from 54%
to 65% in 2020
• Increase number and proportion of foreign staff (from 0.5% to 7% in 2020)
• Attract younger staff (proportion of 30–49 year olds from 45% to 55%
Example Objectives
in 2020)
for this Thematic Goal
• Increase basic salary levels of academics, create transparent remuneration
structures, and introduce performance incentives (bonuses and rewards)
• Renew the principle of joint pedagogic and research work to facilitate
the engagement of academic staff in research and vice versa
National Development Plan 2014–2020
Partnership Agreement for the 2014–2020 EU Funds Programming Period
Guidelines for the Development of Education 2014–2020
Source Documents
Guidelines for the Development of Science, Technology, and Innovation
2014–2020
Action Plan for the Development of Higher Education and Science 2013–2014
6. Stimulate participation in and access to higher education
• Attract more students from lower socioeconomic backgrounds by developing
a support system, including increasing scholarships and grants
• Provide more need-based student financial support as opposed to purely
Example Objectives merit-based (e.g., introduce 3000 scholarships for students from lower
for this Thematic Goal socioeconomic backgrounds)
• Stimulate access of mature students, lifelong learning function
• Increase proportion of 25–34 year olds holding a HE degree in the labor force
from 37% to 40% in 2020
National Reform Programme for the Implementation of Europe 2020 Strategy
Information Note on the Development of the Smart Specialization Strategy
Operational Programme “Growth and Employment” for the 2014–2020 EU Funds
Programming Period
Source Documents Declaration of the Intended Activities of the Cabinet of Ministers Headed by
Laimdota Straujuma
Guidelines for the Development of Education 2014–2020
Guidelines for the Development of Science, Technology, and Innovation
2014–2020
REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 179
7. Stimulate internationalization in higher education
• Increase proportion of credit mobility students coming to Latvia
for a temporary study visit abroad to obtain some courses in the framework of
their studies in the home-country (from 0.8% to 20% in 2020)
• Increase proportion of degree mobility students coming to Latvia to obtain
a full degree program (from 2.9% to 8% in 2020)
• Increase number of graduates that have studied a period abroad (from 13.7%
Example Objectives to 20%) in 2020
for this Thematic Goal • Increase number of internationally accredited study programs (from 0 to 20
in 2020)
• Attract more foreign staff
• Offer more quality study programs taught in official European Union languages
(60 in 2020)
• Promote international accreditation of study programmes (20 internationally
accredited study programmes in 2020)
National Development Plan 2014–2020
Operational Programme “Growth and Employment” for the 2014–2020 EU Funds
Programming Period
Partnership Agreement for the 2014–2020 EU Funds Programming Period
Source Documents Declaration of the Intended Activities of the Cabinet of Ministers Headed by
Laimdota Straujuma
Guidelines for the Development of Education 2014–2020
Guidelines for the Development of Science, Technology, and Innovation
2014–2020
8. Enhance funding base of higher education
• Increase higher education expenditure as proportion of GDP in accordance
with the Law on Higher Education Institutions – annual increase of funding
for state higher education institutions by a minimum of 0.25% of GDP
Example Objectives to reach at least 2%.
for this Thematic Goal
• Revise the calculation of the costs of education (per study place, per subject
area)
• Implement performance oriented funding
Guidelines for the Development of Education 2014–2020
Action Plan for the Development of Higher Education and Science 2013–2014
Source Documents Law on Higher Education Institutions
Concept of the Development of Higher Education and Higher Education Institutions
for 2013–2020
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9. Establish a new and transparent approach to quality assurance
• Set up a database of accredited higher education study directions, programs,
and institutions for external and internal assessment of quality
• Set up a database of higher education study quality assessment experts
• Ensure the availability of quality assessment and accreditation results to
foster informed decisions as to the choice of the study programs
Example Objectives
and institutions
for this Thematic Goal
• Establish and maintain a national agency for higher education quality
assessment
• Establish Study Boards to ensure objective evaluation of the institutional
and study quality, oversee the allocation and effectiveness of study places,
and enhance strategic partnership with entrepreneurs
Operational Programme “Growth and Employment” for the 2014–2020 EU Funds
Programming Period
Guidelines for the Development of Education 2014–2020
Source Documents
Action Plan for the Development of Higher Education and Science 2013–2014
Concept of the Development of Higher Education and Higher Education Institutions
for 2013–2020
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2 Assessment of the Fit between
Funding and Thematic Goals
Consistent with the organizing structure of the first report, each of the Thematic
Goals will be assessed against four elements of Latvia’s current funding model for
higher education:
• State funding for teaching and research (allocation of state budget via study pla-
ces and public research funding)
• Diversification of financial sources for higher education institutions (EU funds,
tuition fees, market revenues, external research income, transfer activities, etc.)
• Financial autonomy of higher education institutions (lump-sum versus line-item
allocations, freedom to spend money flexibly and build financial reserves, finan-
cial regulations, discretion to set salaries, etc.)
• Student funding and support (the individual financial situation of the student,
loans, scholarships, etc.)
The tables that follow are organized according to the Thematic Goals. The four ele-
ments of Latvia’s funding model are then assessed to determine the degree to which
the funding model aligns with the Thematic Goals. The question to be answered is:
How do these four instrumental elements align with this specific Thematic Goal of
Latvian higher education? For example, for the Thematic Goal ‘Increase the quality
of education and link with the labor market’, the tables provide an assessment of
the degree to which Latvia’s current instruments of state funding for teaching and
research align with and support this objective. The same is analyzed for the diversifi-
cation of financial sources, financial autonomy, and student funding.
Sections 2.1 through 2.9 present a table for each of the Thematic Goals to assess
the extent to which it is promoted by all components of the funding system.
In section 2.10, a summary of the alignment will be shown the other way round:
for each funding component, a short summary of the alignment with the overall
with the different goals is provided.
The assessment draws primarily from the description of Latvia’s current funding
model as described in Appendix 1 of the first report, the Strengths and Weakness
of the existing model provided in Chapter 4 of the first report, and feedback from
representative higher education stakeholders who participated in a related exer-
cise facilitated by the World Bank team during its March 12 workshop at the
European Commission’s office in Riga.
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For each of the four dimensions, an ‘overall alignment’ is provided based on
the authors’ opinion for the reasons outlined beneath it. For the purposes of this
report, a subjective weighting scheme was developed, so both the ‘overall
alignment’ and the individual assessments reflect the authors’ opinion on how
the funding model does or does not provide incentives to achieve the Thematic
Goals. The relative “alignment scores” of the current funding mechanisms with the
Thematic Goals are assessed on a five-point scale: “strongly aligned”, “aligned”,
“neutral”, “misaligned”, and “strongly misaligned”. The “strongly” categories
mean that (almost) all the arguments point in the same direction or that there are
extremely strong issues. “Aligned” or “misaligned” suggests that there are argu-
ments in both directions but one direction is regarded as stronger. “Neutral”
suggests that either the alignment and misalignment are somehow balanced,
or there are no effects at all. The plusses and minuses will also be used for each
of the assessment statements in order to indicate the impression for each obser-
vation on the relative alignment between the funding instruments and Thematic
Goals.
Strongly Strongly
Misaligned Misaligned Neutral Aligned Aligned
-- - 0 + ++
Alignment between goals and funding systems is an important success factor of
funding. Therefore, where misalignment is identified, the funding system, in gene-
ral, should be reconsidered to improve alignment. However, there are areas where
it is difficult to reach alignment and other instruments (e.g., new policies) may be
sufficient. At the end of the assessment for each Thematic Goal, a brief summary
is provided to suggest ways in which changing the funding components could
increase alignment is provided.
2.1 Increase the quality of education and its link
with the national economy
Dimension 1: State Funding for Teaching and Research
Overall
Alignment STRONGLY MISALIGNED
Assessment • The current amount allocated per study places is significantly less than the cost of the
education, which negatively affects the quality of education. (- -)
• The study place system is input-oriented, so it does not incentivize the performance of
HEIs. The use of output-oriented indicators, such as the number of graduates,
in the current performance contracts does not produce sufficient incentives,
because they are not stated explicitly and are not perceived to have considerable
financial impacts. (- -)
• Since new study places are a zero-sum game for the universities, the system lacks
performance-based financial incentives to further stimulate the achievement of
excellence. (- -)
• A positive performance incentive is set on the side of the students who, because of
the merit-based (rotation) system at some institutions, have a strong incentive to perform
well. (+)
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• The negotiation and planning of study places allow the MoES to consider ways to align
with the labor market. Through stakeholder consultations, the MoES obtains a reasonable
projection of labor market needs, so the number of places allocated is based on informed
decisions. This helps to realign the distribution of study places by discipline with national
labor market needs. Admittedly, future labor market projections are difficult, so there
are limits to the amount of ‘labor force planning’ possible in the current system. (+)
• Since adjustments in the allocation of study places are centrally planned, there is
no real incentive for the universities to develop bottom-up initiatives to change program
structures or develop innovative programs; in other words, there is little to
no demand-orientation as part of the study place model. This is different, of course,
for fee-paying students. (-)
• Although a funding model is not meant to promote the development of a register of
graduates, such a register can help inform the funding model. The development of
a register of graduates is often a precondition to creating financial incentives towards
labor-market orientation and employability. With a register of graduates, tracer studies
are possible and are important instruments in assessing employability and informing
student choice (by asking, for instance, how long it takes graduates to secure their first
job or the unemployment rate as of a certain number of months after graduation).
This allows the construction of labor market-oriented indicators to be used in financial
incentive models. (- -)
• The study-places model can also adjust to differences in “regional labor markets”. (+)
Dimension 2: Diversification of Financial Resources
Overall
Alignment ALIGNED
Assessment • Willingness to pay tuition fees by a high number of students leads to substantial revenues
that support teaching quality. (++)
• One can expect that students paying full fees will be more conscious about choosing
studies with better labor market prospects. (+)
• The existence of a considerable private higher education sector could, in principle, lead to
professionally-oriented programs and stimulate diversity of study options. In many
countries, private providers particularly offer relatively low-cost programs, so the quality
assurance mechanisms must function well. (+)
• Relying on two major sources of income (tuition fees and EU funds) instead of further
diversifying, creates quality concerns, poses financial risks, and endangers long-term
developments (particularly due the current demographic decline). (-)
Dimension 3: Financial Autonomy
Overall
Alignment ALIGNED
Assessment • Financial autonomy is a basic condition for quality of education, allowing the development of
specific profiles, flexible realization of innovations, and reaction to market demands. (++)
• Financial autonomy also allows institutions to better respond to changes in the labor
market. (+)
• The positive effect would become even stronger if all actors were aware of the autonomy
they have. (+)
184 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
Dimension 4: Student Funding
Overall
Alignment MISALIGNED
Assessment • Because many students have to pay substantial tuition fees, there will be a (strong) voice
demanding value for money which is likely to have a positive impact on quality. (+)
• The limited number of scholarships available and the strict conditions for taking up loans
(the guarantor condition) prevent many students from borrowing. Instead, they work
to cover the cost of fees and living expenses and so reduce the time spent on study,
which negatively affects quality. (-)
• The competitive merit-based nature of the available scholarships stimulates study
success and quality. However, since so few scholarships are available, the quality
incentive will only affect the best 20% of students on state-funded places
(maximum 10% of all students). (-)
• Overall underfunding, which harms quality, also applies to fee-based places because some
institutions/programs charge tuition fees at the level of state subsidies or lower. (- -)
• The ongoing decline in the college-aged demographic decreases the tuition revenue base
of HEIs, which may reduce the viability and quality of programs and institutions. (-)
• Because a full complement of need-based student support is not offered, some
well-qualified students from lower socioeconomic backgrounds may not enter higher
education. (-)
• Limited information about study choices may prevent students from entering higher
education or lead to wrong study choices and drop out as a result. (- -)
• Having student loans and graduate debt may make prospective students more conscious
about their study choices, study success, and future labor market prospects. (+)
From the analysis above, the following elements can be regarded as very impor-
tant for the alignment of funding instruments with the goal of increasing educatio-
nal quality and its relevance to the national economy:
•Implementing the intended increase in public funding for higher education appears
to be a crucial prerequisite to enhance higher education quality.
•Introducing performance-orientation in the funding instruments can also sub-
stantially enhance quality.
•Creating financial space to invest in innovative initiatives can further enhance
quality.
•The diversification of resources should be expanded to also further diversify the
quality “demands”.
•Financial autonomy is strong, but some institutions could be made more aware
of and active with their autonomy.
•To increase alignment, student loans could include some more performance
orientation; for example, instead of the current “grantor requirement” and bonu-
ses on child birth and public jobs, one could think of remitting part of the debt
in case of completion of studies within the nominal duration, or in case of being
among the top-10% graduates, or cancelling the interest in such cases.
REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 185
2.2 Increase the quality and (international)
competitiveness of research
Dimension 1: State Funding for Teaching and Research
Overall
Alignment STRONGLY MISALIGNED
Assessment • Quality of research benefits from an integrated funding system of university
and non-university research, leading in general to competition within the whole research
sector (which is not very intensive due to incremental allocation of funds). On the other
hand, collaboration between universities and research-performing institutions is not
incentivized. (- -)
• While the recent research evaluation has identified units with international competitive
potential, per-capita funding is spread out in an ‘egalitarian’ manner across research units.
Funding is, thus, not used strategically to support promising research initiatives. (- -)
• As is the case of the study place model, performance indicators are used “implicitly”
for research and without substantial effects on distribution of funds. Again, basic funding
and performance oriented components are implemented in a mixed way, supporting
stability at the expense of performance orientation. (-)
• Supporting research with EU funds can have a positive impact, as the funds have helped
support young researchers, increase the number of doctoral students, and modernize
infrastructure. They are, however, the only source at the moment actively promoting
international competitiveness and research excellence. As a non-permanent funding
source, they can only be planned to have short- to mid-term impacts. There is also
no coherent coordination between state and EU funding, leading to what is likely
a suboptimal use of research infrastructure. (0)
• The current allocation criteria for research funds from the EU structural funds are not
fully transparent and lead to a relatively equal distribution of funds. This leads to
suboptimal competition and performance orientation. (-)
• Instruments to fund important elements of research strategies, such as funding of post
doc positions, are missing. The problem of underfunding also negatively impacts research
in quantity and quality (more than in the case of teaching it is also a matter if there is any
chance to conduct research activities, since at some universities almost no research
is done). (- -)
• A research strategy also needs ideas about specific research priority areas,
identified in a joint process with bottom-up and top-down inputs by the government
and the universities. In the strategic documents reviewed, such a research strategy
cannot be identified (if there is no strategic research portfolio then there can be
no strategic fit with funding). (- -)
Dimension 2: Diversification of Financial Resources
Overall
Alignment ALIGNED
Assessment • EU structural funds were most relevant to sustaining and developing research quality
during the last years. In general, diversification of research funds is an important
precondition for competitiveness in research. (++)
• It appears, however, that EU structural funds have, in a way, replaced part of the basic
state funding for research. (-)
• Relying on two major sources of income (including EU structural funds related to
research) instead of further diversifying (e.g., from industry or EU research funds such as
Framework Programs, ERC, etc.), creates quality concerns, poses financial risks,
and endangers long-term developments. (-)
186 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
Dimension 3: Financial Autonomy
Overall
Alignment ALIGNED
Assessment • Financial autonomy is a basic pre-condition for quality of research, allowing the development
of specific profiles, flexible realization of innovations, and reaction to market demands. (++)
• Financial autonomy can also stimulate institutions to collaborate with other research
partners, to create critical mass, and to attract funds from private sources like industry.
This opportunity, however, appears under-leveraged thus far. (+)
• Again, the positive effect would become even stronger if all actors were aware of
the autonomy they have. (-)
Dimension 4: Student Funding
Overall
Alignment ALIGNED
Assessment • Student financing for bachelor and master students has little to do with research. (0)
• The support available to PhD students, particularly through the EU structural funds
programs PhD students are offered tuition-free student places and scholarships for living
expenses. As such, these scholarships provide a substantial contribution to attracting
young talented academics into academia which supports the longer term research base
and research quality as well. (++)
• The substantial number of fee paying students may in some cases lead to
cross-subsidies from teaching resources to research and thus support research quality.
Due to the structural underfunding and often not fully cost-covering tuition fees,
this “research quality impact” will be very limited. (0)
From the analysis above, the following elements can be regarded as very impor-
tant for the alignment of funding instruments with the goal of enhancing research
quality:
•For research, the intended increase in public funding for higher education also
appears to be crucial.
•Integrating explicit performance-orientation in the funding instruments can also
substantially enhance research quality.
•The diversification of resources should be expanded and stimulated beyond
the EU structural funds components, particularly to integrate with industry.
•Financial autonomy is very good but could be used more proactively.
REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 187
2.3 Increase sector efficiency
Dimension 1: State Funding for Teaching and Research
Overall
Alignment STRONGLY MISALIGNED
Assessment • The study place model and research funding do not contain clear and transparent
incentives for differentiation of institutional profiles. (- -)
• The allocation of study places is partially fragmented and in some cases appears to run
counter to the wish for consolidation of programs/institutions. (-)
• There is no mechanism to analyze and carefully promote desirable forms of sector
consolidation for study programs, taking into account the trade-off between efficiency
(e.g., economies of scale) through centralization and access and competition through
decentralization. While a reduction in the number of programs is no goal in itself,
the analysis of the trade-off is not sufficiently promoted in the current system. (- -)
• State research funding does not promote 1) collaboration between research
organizations or with external partners (e.g., industry), 2) realization of critical mass,
or 3) research excellence. (- -)
• The totally divided funding streams for teaching and research impede an integration of
the university’s core missions of teaching and research. (- -)
Dimension 2: Diversification of Financial Resources
Overall
Alignment MISALIGNED
Assessment • There are some logical links between the consolidation issue and diversification.
First, diversification in terms of tuition fee revenues may lead to more competition rather
than to a reduction of programs, especially in the context of private-public competition.
Sufficient numbers of full-tuition paying students will enable to maintain a situation of
program duplication. (-)
• Second, diversification of research income in a more local context could lead to
a situation of fragmented research instead of critical mass. However, diversification
through attracting EU funds requires international competitiveness and critical mass
in the respective research topic which could only come from (inter-)national
collaborations. (-)
• The fact that research funds are broadly allocated across institutions (vs. pooled
according to performance criteria) together with the fact that institutions have
substantial tuition revenues, enables them to sustain quite a number of small study
programs and research groups. (-)
Dimension 3: Financial Autonomy
Overall
Alignment ALIGNED
Assessment • Financial autonomy is a basic precondition for strategic specialization of HEIs and thus,
for the creation of scale efficiencies and the construction of critical mass; autonomy
alone, however, will not be sufficient in achieving these aspects without adequate
incentives). (++)
• However, financial autonomy may also maintain a situation of a suboptimal
and fragmented research system. (-)
188 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
Dimension 4: Student Funding
Overall
Alignment ALIGNED
Assessment • The potential for enrolling students on a full-fee paying basis and supporting them
with student loans allows institutions to enroll more students than on the basis of
state-subsidized places only. This situation affords them the opportunity to optimize
the size and capacity of their study programs. (++)
• On the one hand, a reliance on fee-paying students can stimulate institutions to offer
interesting (niche) programs that distinguish them from their competitors, which further
supports the benefit of program diversity. However, the absence of a significant financial
support system for low-income students may lead fee-paying students to prefer
(and thus institutions to offer) low-cost programs, which could lead to an unproductive
fragmentation of similar programs. (+)
• Having a substantial number of full-fee paying students induces a market mechanism
in the HE system whereby students “vote with their feet”. In the longer run, this can create
more efficiency in the system. While in principle this is a good element, it occasionally
requires interventions to correct undesired market outcomes (e.g., students preferring
low-quality programs or programs with fewer requirements due to ease of studies
or lower costs). (+)
• Because students want to study more efficiently to keep costs down, they will stimulate
an internal dynamic that also creates more efficient study processes within the study
programs and institutions. (+)
From the analysis above, the following elements can be regarded as very impor-
tant for the alignment of funding instruments with the goal of increasing sector
efficiency:
•To increase sector efficiency, incentives should be considered that base consoli-
dation decisions on an analysis of trade-offs between critical masses and compe-
tition (instead of fragmentation or not sufficiently analyzed reductions of pro-
grams).
•The integration of teaching and research funding criteria is a promising approach
to better integrate planning for the core missions of the university.
•Tuition fees provide institutions some extra financial space, but one has to be
careful the competition for fee-paying students does not to lead to a fragmented
market.
•Financial autonomy is important to initiate external collaborations or to consoli-
date activities as well.
REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 189
2.4 Enhance technology, innovation, creativity,
and entrepreneurship
Dimension 1: State Funding for Teaching and Research
Overall
Alignment MISALIGNED
Assessment • The study place model in general is a good approach to increase STEM study places,
as the Ministry could just decide to focus study places on desired fields. It also allows
steering towards an increase in the proportion of college students by providing relatively
more free places there. However, there is concern among stakeholders regarding
the preparedness of prospective STEM students and drop-out tendencies in STEM studies
in general. (0)
• There is no funding mechanism to support creative and innovative curriculum of new
study programs. (-)
• There are no targeted incentives and funding systems to promote innovation
and market-oriented research. (-)
Dimension 2: Diversification of Financial Resources
Overall
Alignment STRONGLY MISALIGNED
Assessment • The higher education market may not be able to provide sufficient STEM study places
or students adequately prepared to fill all vacant places. Public intervention is required. (- -)
• There are no “innovation funds” granted to invest in promising innovative study programs
or research priorities. (- -)
• Income from private sources, such as industry or local communities, is underdeveloped,
leading to a situation where the potential to promote market-oriented research
and academic entrepreneurship may not be sufficiently utilized. (-)
Dimension 3: Financial Autonomy
Overall
Alignment NEUTRAL
Assessment • Financial autonomy could lead to situations where specific governmental targets are not
sufficiently taken into account. For instance, the intended increase of STEM studies
and the relative shift to the college sector could not be guaranteed by just granting
financial autonomy; interventions for very specific decisions by setting frameworks
could be necessary. (-)
• On the other hand, creativity and market orientation are promoted by financial autonomy.
Interventions need to ensure that the advantages of autonomy are preserved. (+)
Dimension 4: Student Funding
Overall
Alignment NEUTRAL
Assessment • The ability to enroll students on a full fee-paying basis beyond the limited number of
state-funded study places allows more students to enter higher education. In other
words, a larger portion of the population is educated without state support, which,
in theory, allows more resources to be available for innovative programs. In reality,
however, the fee-paying model is mostly used to fill the teaching capacity in regular
programs, so this rather indirect effect on innovation is not exploited. (0)
• The fact that fees differ according to the costs of study leads to higher fees for STEM
which would allow a stronger position for STEM. However, the fact that relatively few
fee-paying students are in STEM programs, this potential impact is very small. (0)
190 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
From the analysis above, the following elements can be regarded as very impor-
tant for the alignment of funding instruments with the goal to enhance technology,
creativity, innovation, and entrepreneurship:
•The ability to allocate state-subsidized study places to various disciplines is a strong
instrument to secure participation in STEM.
•More should be done to attract and retain sufficient numbers of well-qualified
students to fill these places.
•To stimulate innovation, creativity, and entrepreneurship, public-private partner-
ships could be better stimulated, perhaps through something like innovation
funds, but while still maintaining a high level of financial autonomy for institutions.
•The fee-paying mechanism appears to have limited impact on innovation, though
one could study what happens in private higher education in this respect.
2.5 Renew and develop the human resources of
higher education institutions
Dimension 1: State Funding for Teaching and Research
Overall
Alignment MISALIGNED
Assessment • There are no funding incentives to attract staff with doctorates or foreign staff
or incentives to train staff to obtain their doctorate degrees. (- -)
• The current remuneration system with strong variation between institutions
and individual academics is not transparent. There is a general perception that many
academics are underpaid which runs counter to the idea of the thematic objective. (- -)
• The recent initiatives to attract young talented academic staff with EU structural funds
are good, and similar initiatives should examine the high dropout rates among young PhD
candidates. (+)
Dimension 2: Diversification of Financial Resources
Overall
Alignment ALIGNED
Assessment • EU structural funds are used to enhance professional capacity, especially to attract
younger staff. They make a substantial contribution to increasing the number of PhDs
in Latvia, especially by offering scholarships. (++)
• EU structural funds are not used to attract foreign academic staff. (0)
Dimension 3: Financial Autonomy
Overall
Alignment ALIGNED
Assessment • Financial autonomy does not always align with such policy goals as the desired
proportion of staff with a PhD or foreign academic credentials. In this case, policy
objectives and regulations exist that relate to institutional autonomy (e.g., required
percentages of staff with PhD as clear policy target) without presenting conflict.
Also, the minimum compensation for academic staff is regulated; the ability to meet this
objective is likely more a matter of funding level and not of autonomy. (+)
REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 191
Dimension 4: Student Funding
Overall
Alignment NEUTRAL
Assessment • Student financing has no immediate impact on the professional capacity of teachers
and researchers. (0)
• However, by increasing the funding base through full-fee paying students, institutions
may, in theory, have better opportunities to attract additional (young or international)
academics or to increase wages (which is again a rather weak and indirect aspect).(0)
From the analysis above, the following elements can be regarded as very impor-
tant for the alignment of funding instruments with the goal to develop the human
resources of higher education institutions:
•There could be more policy attention paid to attracting staff with doctorates
or foreign staff utilizing state funding.
•Utilization of the EU structural funds to attract and retain young talented researchers
is a very good initiative in this respect.
•Institutional autonomy could help here, but one has to realize that the academic
labour market should be transparent to be attractive to young scholars.
2.6 Stimulate participation in and access to higher
education
Dimension 1: State Funding for Teaching and Research
Overall
Alignment STRONGLY MISALIGNED
Assessment • Experiences from European countries show that the provision of free study places
to students on merit-based criteria implies the risk that primarily students from higher
socioeconomic backgrounds benefit, whereas many students from lower socioeconomic
backgrounds have to pay high tuition fees. This results from the tendency of students
from higher socioeconomic backgrounds to achieve better marks at school.54 (- -)
• Leaving out part-time students in the study place model discriminates against
and impedes access of mature students and low-income students who have to work
to pay for the costs. (- -)
• The rotation system may lead to higher dropout rates among students from
disadvantaged backgrounds who fail to stay on previously earned state-subsidized study
places (as they have to work and can spend less time on their studies). (- -)
54 Vossensteyn, J.J. (2009), Challenges in student financing: State financial support to students
— a worldwide perspective, in: Higher Education in Europe, Vol. 34, No. 2, pp. 183–199.
192 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
Dimension 2: Diversification of Financial Resources
Overall
Alignment STRONGLY ALIGNED
Assessment • The substantial number of full fee-paying students in public HEIs and the substantial
private higher education sector increases choice for students and provides access
opportunities beyond the scope of public budgets. (++)
Dimension 3: Financial Autonomy
Overall
Alignment ALIGNED
Assessment • There is little to no systematic influence of autonomy on this goal area, except that HEIs
themselves select students for scholarships and student loans. (+)
• The decentral system of allocating scholarships makes it less transparent to prospective
students whether or not they are eligible. This may hinder some students from entering
higher education. (-)
• HEIs can decide freely on tuition fees. Though some institutions have kept their fees low
to ensure access, autonomy in deciding on fees has ensured greater access for many
students who are not entitled to state-subsidized study places. (+)
Dimension 4: Student Funding
Overall
Alignment STRONGLY MISALIGNED
Assessment • The widespread use of tuition fees in a country with wide income disparities may have
a negative impact on access. The dual track system with merit based selection of students
for state-funded study places is likely to subsidize students from better socioeconomic
backgrounds. Therefore, students from lower socioeconomic backgrounds are more likely
to pay full tuition fees (see above). The perceived unfairness of this system is likely to
negatively impact access and participation in higher education. (- -)
• The limited availability of scholarships does not have a positive impact on access.
In particular, the merit-based allocation makes scholarships most likely to benefit
high-achieving upper-middle students who would most likely attend higher education
without student support. However, the scholarships will hardly benefit those who most
need them: students from lower socioeconomic backgrounds. This stimulates
a perception of unfairness and thus negatively impacts access. (- -)
• Debt aversion and the guarantor restriction make student loans less available to students
from lower socioeconomic backgrounds and have a negative impact on access. (- -)
• Altogether, the limited availability of scholarships and student loans for students
who need them most from a financial perspective may leave quite some talent under
leveraged. (-)
From the analysis above, the following elements can be regarded as very impor-
tant for the alignment of funding instruments with the goal to stimulate participa-
tion in and access to higher education:
•The strong risk that the study place model supports students from already
advantaged backgrounds should be mitigated.
•However, the dual track system provides higher education opportunities for stu-
dents who are less academically prepared students.
•Student financial support programs should be available to students in need,
either as a way to complement or replace the funding available to the most aca-
demically prepared talented students.
REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 193
2.7 Stimulate internationalization in higher
education
Dimension 1: State Funding for Teaching and Research
Overall
Alignment MISALIGNED
Assessment • There are no incentives for internationalization, though it is also not hampered by
the system). (-)
Dimension 2: Diversification of Financial Resources
Overall
Alignment NEUTRAL
Assessment • In general, diversification offers the potential to increase income from abroad
and therefore contribute to internationalization. Because there are no requirements
with regard to internationalization connected to the application for or use of EU
structural funds, this potential appears under-utilized. (-)
• Latvian higher education does not strongly use its position as a low-tuition country
for non-EU students compared to many Western European countries (e.g., with Sweden
and Finland also recently introducing fees for non-EU students). (0)
Dimension 3: Financial Autonomy
Overall
Alignment NEUTRAL
Assessment • There is little to no systematic influence of autonomy on this goal area, although institutions
can take up their own initiatives to become a stronger international player. (0)
Dimension 4: Student Funding
Overall
Alignment MISALIGNED
Assessment • The wide reliance on tuition fees in Latvian higher education may stimulate some
students to go abroad and study in countries without tuition fees. This may stimulate
internationalization in terms of outbound student mobility. However, other costs related
to international mobility are very likely to compensate for the differences in tuition costs.
The perception of quality is an even more plausible reason to go abroad rather than
differences in tuition fee levels. (-)
• The reliance on tuition fees in Latvian higher education may prevent some foreign
students to study in Latvia, particularly those from countries with tuition free higher
education. For non-EU students, however, the Latvian fees are low compared to studying
in, for example, the UK, the Netherlands, and some Scandinavian countries. (-)
• The fact that higher education institutions administer the scholarships and loans means
that Latvian students who want to study abroad cannot use Latvian student support
for degree mobility. (- -)
• However, Latvian students who spend only a period abroad for studies in the framework
of their own program (credit mobility), can use their scholarships and loans to study
abroad and may also apply for Erasmus grants. This has a positive impact on
internationalization. (++)
194 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
From the analysis above, the following elements can be regarded as very impor-
tant for the alignment of funding instruments with the goal to stimulate internatio-
nalization in higher education:
•Though it is difficult to stimulate internationalization through basic funding,
it could be incentivized in the form of innovation funds or in formula funding.
•The relatively low tuition fees in Latvia could be used to attract foreign students
who now may have to pay higher tuition fees in other European countries.
•Student grants and loans allow short term study abroad but do not further stimu-
late internationalization.
2.8 Enhance the funding base of higher education
Dimension 1: State Funding for Teaching and Research
Overall
Alignment STRONGLY MISALIGNED
Assessment • As this objective is directly related to intended changes in the funding system, the assessment
has to be negative – teaching and research are underfunded, cost calculations are outdated,
and performance oriented funding is not (or only implicitly) implemented. (- -)
• The promised public funding increase, even stipulated by law, has not been implemented
in 2013–2014. (- -)
Dimension 2: Diversification of Financial Resources
Overall
Alignment MISALIGNED
Assessment • Revenues from tuition fees and EU structural funds substantially help to keep higher
education and research investments at least at a minimum level. (+)
• However, basic state funding should not be replaced by these types of revenue as this
would endanger the objectives of a solid long term funding basis. (- -)
• Income from private sources such as industry or community services appears to be
underdeveloped. (-)
Dimension 3: Financial Autonomy
Overall
Alignment NEUTRAL
Assessment • The goals mentioned here are not related to autonomy, though HEIs are allowed to attract
various funding sources and spend the revenues according to their own discretion. (0)
Dimension 4: Student Funding
Overall
Alignment ALIGNED
Assessment • The strong reliance on full-fee paying students has substantially increased the funding
basis for HEIs as well as overall investment in higher education compared to a situation
in which HE would only be available to students on state-funded places. (++)
• The strong reliance on tuition fees together with the practice to charge tuition paying
students the same amount as the state subsidy may stimulate HEIs to push collectively
for more realistic funding levels to be paid by both the government and students. (+)
REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 195
From the analysis, above the following elements can be regarded as very impor-
tant for the alignment of funding instruments with the goal to enhance the funding
base of higher education:
•It is very desirable to have the Latvian government really achieve its ambitions
and prove itself to be a reliable partner that makes the promised higher educa-
tion and research investments.
•Linking the promised investments to requirements that institutions invest in inno-
vation and collaboration with science, society, and industry may further enhance
the funding base of higher education. This new, targeted financing strategy may
be something in which the government is interested in investing.
•The tuition revenues are currently a good source of supplemental income, but
the declining demographic projections for Latvia call for new strategies to main-
tain high-levels of (paid) participation as a key revenue source.
2.9 Establish a new and transparent approach to
quality assurance
Dimension 1: State Funding for Teaching and Research
Overall
Alignment ALIGNED
Assessment • There is no direct relationship between funding and quality assurance in the system.
However, study programs and institutions need to be accredited in order to be eligible
for state-funded study places and for awarding official degrees. This guarantees
a minimum quality standard for state-funded study places and a push to have
a well-functioning quality assurance system. (+)
Dimension 2: Diversification of Financial Resources
Overall
Alignment NEUTRAL
Assessment • There is no direct relationship to quality assurance mechanisms. Indirectly one can
expect that tuition paying students will require a well-functioning quality assurance
system to guarantee they get “value for money”. Such pressure does not appear at
present (yet). (0)
Dimension 3: Financial Autonomy
Overall
Alignment NEUTRAL
Assessment • There is little to no systematic influence of autonomy on this goal area. (0)
Dimension 4: Student Funding
Overall
Alignment NEUTRAL
Assessment • Student financing has no linkage to the quality assurance system, except through
the effects mentioned above. (0)
196 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
From the analysis, above the following elements can be regarded as very impor-
tant for the alignment of funding instruments with the goal to establish a new and
transparent approach to quality assurance:
•Financial instruments are yet relatively unrelated to quality assurance (and there
is not much to do about this). However, to stimulate more competition, one
could consider that a more transparent quality assurance system can substan-
tially contribute to where fee-paying students would like to study.
2.10 Overview on strategic fit by Thematic Goals
The following table summarizes the overall assessments regarding the strategic
fit of the four elements of the funding system with the nine Thematic Goals.
The scores vary from a strong positive strategic fit (indicated with “++”) to a strong
negative fit (indicated with “- -”). A neutral relationship is indicated with “0”.
State Resource Financial Student
Thematic goals Funding Diversification Autonomy Funding
1. Quality of education -- + + -
2. Quality of research -- + + +
3. Sector efficiency -- - + +
4. Technology, innovation,
- -- 0 0
creativity and entrepreneurship
5. Human resource development - + + 0
6. Participation and access -- ++ 0 --
7. Internationalization - 0 0 -
8. Funding base -- - 0 +
9. Transparent quality assurance + 0 0 0
As the table demonstrates, the overall funding model, particularly the basic
funding for teaching and research, does not align well with the Thematic Goals for
Latvian higher education. In general, this does not mean the policy objectives
cannot be met, since other policy instruments can also be effective. However,
the structural underfunding of the system together with the current model’s
emphasis on inputs (i.e., enrollment), and its lack of a performance orientation
actually appear to work against the spirit of quality education and research.
Increases in state investment in higher education, in accordance with current
legislation, could go hand-in-hand with the introduction of more performance-
driven and innovation-oriented funding instruments that provide incentives for
the system to move in the desired direction of enhanced teaching and research
quality.
Though the strong reliance on tuition fees on EU structural funds should, in theo-
ry, steer higher education towards greater relevance to societal and economic
needs, the incentives are not strong enough. Both tuition fees and EU funds are
REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 197
currently relied upon to maintain the functioning of the system and support
the status, so they are unable to work effectively as instruments that guide
towards greater quality, creativity, innovation, and entrepreneurship, especially
in light of current economic and quality assurance realities.
While financial autonomy is high in Latvia, some institutions have not utilized their
full potential in this respect. Though some institutions are being creative in deve-
loping alternative revenue sources, the resultant funds are necessary to offset
the low level of state investment in the system, so there is not much ability to
reinvest in new opportunities, partnerships, or innovation. Other institutions do not
appear to be fully aware of their autonomy. The system and its institutions would
benefit from financing instruments that allowed it to either reward or invest in part-
nerships with the private sector, as an example, for revenue-generating research
or training collaborations.
Finally, Latvia’s current approach to student funding appears to have a slight
misalignment with the Thematic Goals, particularly as it relates to internationaliza-
tion and expanding access. Latvia would be well advised to reconsider how
student financing could better align in a more supportive way with the policy
objectives.
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3 Potential Further Alignment of
Funding and Policy Objectives
In Chapter 2, it became clear that — despite some of the strengths of the current
system — there are many areas where the strategic fit is not given, or even where
there could be negative impact on strategic goals. The focus now is what can be
done to improve “strategic fit”, and this surfaces two underlying questions:
1. Which are the target areas where funding models could help the most or the
least? Not all of the targets mentioned in the policy planning papers can
or should be equally addressed by funding instruments.
The objective of the development of quality assurance and accreditation cannot
be easily promoted by funding instruments. The basic link in the study place mo-
del is already there. Further links, such as the integration of evaluation outcomes
in performance-oriented funding, are not recommended. Program evaluations are
an instrument of internal learning and self-steering and should remain a separate
complementary element to funding mechanisms. However, one could include
some quality related issues in performance agreements with higher education
institutions (e.g., the implementation of course evaluation or the implementation of
“teacher qualifications” for academic teaching staff). Also, research evaluations
can be linked to funding models with targeted funding having the potential to pro-
mote high quality research; this is addressed in the research quality goal area.
The other objective that plays a special role is “to stimulate the funding base of
higher education”. The goals mentioned there do not imply an output, outcome,
or a specific reform that is influenced by funding, but they do imply targets for
the funding models themselves. The very direct consequence from this goal area
is to increase the funding level, revise the cost calculation for study place prices,
and introduce performance-oriented funding instruments.
Therefore, the following analysis focuses on the other seven objectives discussed
above. They could be addressed by funding arrangements in multiple ways.
2. Which are the funding instruments (based on European experiences) from
which we could expect positive contributions to the strategic objective?
This chapter explores a number of different funding practices utilized in various
European countries. In sum, these alternatives present a menu of funding approaches
Latvia could consider to support its own higher education system and policy objec-
tives. At this stage in the project, the alternative models presented are only intended
to stimulate thinking and debate about possible funding options for Latvia.
REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 199
The approaches presented have been selected because they have proven or are
regarded to be positive or successful in advancing certain objectives within their
respective higher education systems, even though international analyses that try
to link system or institutional performances to funding reforms, often cannot find
direct effects, neither positive nor negative. This often is the case because system
performance generally is related to a multitude of factors, developments, and poli-
cies that can be measured in different ways (e.g., quality, completion, research
outputs, etc.).55
In the third report of this project, the World Bank’s project team will further ela-
borate on some of the mechanisms that appear to be attractive alternatives for
Latvian higher education. To be clear, this paper does not argue at this stage
which instruments should be adopted by Latvian higher education.56 It also does
not suggest that all instruments should be implemented at once as this may lead
to too radical changes (or some instruments could have a quite similar function).
The paper addresses a number of alternative funding possibilities per strategic
objective and proposes opportunities for state funding for teaching and research,
resource diversification, autonomy, and student financing under each heading.
When presenting alternative financing instruments, the paper primarily looks at
the conceptual opportunities but also indicates some examples from international
practice (in text boxes) regarded as good practice.
3.1 Funding opportunities that may enhance quality
of teaching
The current funding mechanism in Latvian higher education for teaching is predo-
minantly input- or process- oriented, namely based on the number of allocated
state funded study places with different prices attached per discipline.
State funding
• Funding formula with competitive and performance oriented elements
One alternative would be based on a funding formula for teaching that includes
one or multiple competitive elements as drivers. This would possibly make
the funding per institution more dynamic than the current fixed number of
student places against a particular price that is annually negotiated between
the Ministry and the individual HEIs. Under a funding formula, the amount of
funding per institution depends on the relative share of the total number of
students or new entrants they absorb, usually with different weights attached
for various disciplines. One could also integrate performances or outputs of
HEIs (and/or programs) in the formula, such as the number successfully
completed study credits or bachelor’s and master’s degrees. Focusing on
55 Jongbloed, B., H. De Boer, J. Enders and J. File (eds.) (2010), Progress in higher education reform
in Europe, Funding Reform, Volume 1: Executive summary and Main report, Report for the European
Commission, Enschede: CHEPS, IoE, Technopolis.
56 The World Bank team will provide recommendations for reforming Latvia’s funding model for higher
education in its final report, which is scheduled for delivery in the fall of 2014.
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outputs provides incentives to care about the reduction of drop-outs. Examples
of this type of funding can be found all over Europe.
The Netherlands: Performance based funding
Since January 1, 2011, the funding model for teaching in universities and universities of applied sciences is similar and comprises two parts: one
part related to the number of students and degrees conferred and one called “education provision”.
• Number of students and degrees conferred: This part of the funding, which defines 65% of the teaching budget, is the product of a weighted
student price and weighted number of enrolments (within the nominal duration of a program) and diplomas. The weighted student price
is determined as the total budget divided by the total number of weighted enrolments and diplomas. The weights are 1, 1.5, and 3 for low,
high, and top studies — humanities & social sciences, science & engineering, and medicine respectively. These weights are the same for
bachelor and master students.
• Education provision: This part is further divided into two sections. First, the government provides a basic budget to each university, which
in total makes up about 7% of all teaching funds available. This is based on the quality of teaching, for specific programs or facilities. Second,
the remaining funds are distributed among higher education institutions according to institution-specific percentages.
Previously, the Dutch funding model also included the number of new entrants recruited by institutions. This could add another incentive
component: whereas output indicators incentivize efficient studies, this indicator makes institutions compete for attracting first-year students
to increase market shares.
• Capacity funding
In this option, the funding of teaching is (also) based on an agreed number of
students, graduates, or successfully completed study credits rather than study
places. This would stimulate institutions to focus on study success rather than
on the teaching process. This is partially done in Latvia, however, there could
also be a performance dimension in such a model, which could also potentially
reward or sanction the fact that the agreements are (not) fulfilled. This brings
more uncertainty and performance incentives for the institutions. Such a model
is partially applied in Sweden.
Sweden: Capacity funding
Direct government funding, in terms of operational grants for education, takes the form of state block grants. The allocations are based on
per capita amounts per student (full-time equivalents or FTE) and the performances achieved by students. These amounts per student and
per study result in different tariffs for different disciplines/study fields. The study performances are calculated in terms of annual performance
equivalents for the students in terms of the numbers of credits obtained (1 FTE student = 60 EC).
Every year the Parliament decides on the budget ceiling of each HEI, of which 30% is allocated based on performance. The HEI reports at
the beginning of the fiscal year (January or February) how many FTE students and FTE study achievements they realized by December 31 of
the previous fiscal year. In addition, the HEI’s monitor their student numbers and study achievements throughout the year, and based on the moni-
toring results, they report an intermediary estimate of their total budget required (shortages versus surpluses) three times per year. They also
forecast this for the coming few years to enable longer term planning of the budgetary requirements for the coming 3 years.
Funding amounts per FTE student and per FTE study result vary between different educational disciplines/areas. There are 15 funding levels,
of which some comprise two or more subject areas. The humanities and social sciences have the lowest revenue levels, while the fine arts has
the highest (media studies has a weight a 14 times that of humanities).
The centrally determined funding cap per higher education institution is an absolute limit and therefore the Swedish funding mechanism can be
regarded as capacity funding. Within the framework of the funding process, each HE institution engages annually in a dialogue with the Ministry of
Education and Research. In this dialogue, each HEI agrees with the ministry on its targets or aims in terms of realized student numbers and study
achievements that will be rewarded. There is a maximum budget which constitutes the highest aggregate compensation of FTE students and
annual performance equivalents permitted for the fiscal year.
REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 201
When the budget is allocated to the HEI, then the HEI itself decides on the distribution of funds among faculties and other units. Universities
and university colleges receive provisional funds at the beginning of each budget year and the final amount is determined at the end of the year
taking into account student numbers and accomplishments presented in the annual report for the previous budget year.
If an institution does not reach its funding ceiling because of fewer enrolled students and/or their performance outcomes not achieving agreed
targets, it does not receive the full funding. If an institution enrols a greater number of students than indicated as the agreed ceiling amount,
no additional compensation is paid. Thus fluctuations in the number of students directly affect the funding of the institution, even in the same year.
Practice shows that each institution has to deal with some fluctuations and they cannot exactly predict the total volume of students and study
results. Annual budgetary changes are normal. In order to mitigate these effects, institutions are allowed to carry over 10% of the ceiling amount
to the following years, in case they then attain less or more than the ceiling amount. That means that institutions that do not meet the budgetary
ceiling can use their previous surpluses to cover the deficit. The same is valid if a HEI has had students enrolled which sums up to less than the
ceiling amount. In future years the HEI might then use previous deficits in years when it exceeds the ceiling amount. In 2010, 8 higher education
institutions (out of 35) had to return some of their budget to the ministry (exceeding 10% of their ceiling amounts respectively and reflecting
in total 0.25% of the total ceiling amount for all HEIs).
Capacity funding is quite similar to “voucher models”, where all eligible
students (e.g., all with a higher education entrance qualification or above
threshold scores in a central entrance exam) will receive a number of
“credits” or “vouchers” which they can trade in for specified units of education
(a course, a module, a year or a full program) at any accredited higher educa-
tion institution or program. As soon as they run out of vouchers, they will have
to pay full-cost covering tuition fees. If institutions do not deliver “value for
money”, students will move to other programs or HEIs. The added value of
the voucher system is related to the transparency and cost-awareness on the
student side. This type of model is applied in Australia, through the learning
entitlements system. Of course, a voucher system can vary on many dimen-
sions, including who is eligible, the number of subsidized educational units,
the period in which they can be used, and the potential requirement of top-up
fees from students. An overview of a voucher system is provided later under
the policy objective for sector efficiency.
Resource diversification
There are not many direct links between resource diversification and quality of
teaching (or offering other types of programs, like short cycle programs) except
for introducing general tuition fees.
• General tuition fees
An option is to charge tuition fees to all students. This would complement
the current funding base of HEIs with an additional income. This can be used
to invest in various ways that enhance the quality of teaching, including up-
grade teaching infrastructure, professionalization of staff, better reward staff
to attract better academics, attract more teaching staff, and provide academics
with more research time. General tuition fees usually do not imply full-cost
tuition as in the dual track model, but lead to certain percentages of public-
private cost-sharing. Students’ contributions should not lead to diminished
public investments. In various German Länder, general tuition fees were imple-
mented in the period between 2007 and 2013, connected with a guarantee that
public funding will not be reduced, and helped to improve teaching infrastruc-
tures considerably. However, increasing a system’s reliance on tuition and fees
often carries with it political challenges and implementation risks.
202 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
Financial autonomy
Quality of teaching can be stimulated through output/performance funding, quality
assurance and, potentially, performance agreements, but not by limiting autono-
my. Spending autonomy stimulates institutions to use resources where they are
most needed and effective at a given moment in time. So there are no relevant
options to change the state of autonomy.
Student funding
Student financing can be related to the quality of teaching. There are a couple of
options.
• General tuition fees
A first option is to charge tuition fees to all students (see above).
• Link scholarships to study progress and achievements
Current scholarships in Latvia are already strongly merit based. Students who
do not perform at the highest level will not be awarded any further scholar-
ships. If the Latvian government decides to also introduce need-based scholar-
ships for students from lower socioeconomic backgrounds, one could imagine
linking such scholarships to study success (e.g., transferring grants into loans
if particular performance requirements are not met). Such systems are used
in Norway and the Netherlands.
The Netherlands: Performance-related grants
Every student enrolled in an accredited full-time study program in higher education who satisfies the applicable conditions is entitled to financial
assistance. Under the current system, financial assistance includes a basic grant, a means-tested supplementary grant (for the 30% most needy
students based on parental income), a tuition fee loan, and a voluntary loan.
The basic grant and supplementary grant are initially paid out in the form of a loan. If the student graduates within ten years, the loan is converted
into a non-repayable grant. Therefore these grant parts are called a performance-related grant. Students receive performance-related grants
for the nominal duration of their study program and may take up a loan until 36 months after the nominal duration of their program.
• Link student loans to performance
Instead of linking eligibility for student loans to family wealth, such as through
the grantor requirement, student loans could be made available for students
which demonstrate sufficient academic results. Also, instead of waiving student
debt in case of becoming a parent or a securing a “useful job”, debt could
be waived (in full or part) for students who are among the best performing
graduates or who graduate within a nominal duration of studies. This practice
is, for example, being applied in the German BAFöG loans and the Estonian
student loans.
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3.2 Funding opportunities that may enhance quality
of research
The current funding mechanism in Latvian higher education for research is to
a large extent based on historic allocations and input oriented. The study places
funding model is also assumed to support research, though to a rather limited
extent. Research funding and the study place system are separated instruments.
In addition to that, the national Science Council allocates some funds.
State funding
• Funding formula with competitive and performance oriented elements
In this option, the funding model is based on a funding formula for research
that includes one or more competitive elements. This would make the funding
per institution a bit more dynamic than the current history-based model.
In addition, the model can be altered to be more input based or more per-
formance oriented. In an input oriented funding formula, one could include
the number of FTE researchers, whereas an output oriented model distribute
funds based on the relative share of the total number of PhD degrees conferred
or other research outputs (e.g., refereed journal articles, books, grants won
in competitions such as from Research Councils and EU funds like ERC grants,
Horizon 2020 grants, Erasmus+ grants, etc.). Of course different weights can
be attached to inputs and outputs attached for various disciplines.
The advantages of using a funding formula for research is that it makes the re-
search funding more transparent by demonstrating how universities can earn
money. It can also bring more dynamics and such is an incentive for orienta-
tion towards high quality research. However, this approach may provide less
stability for the institutions and potentially for individual research units within
them. Such systems are used for example in Norway and the Netherlands.
As this rationale of a funding formula is the same as in the case of teaching
quality, it becomes clear that a funding formula could integrate state funding
with teaching and research criteria within one system. Such an integration,
especially in funding formula systems, is a widely used approach and usually
is seen as a contribution to flexibility and quality. The Finnish system is a good
example for an integrated approach. It also allows explicit weights between
teaching and research incentives as an effect of strategic goals.
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Finland: University funding
From 2013 onwards Finnish universities are funded including several performance criteria for teaching and research. This is expressed in the picture
below.
• Program funding for research
In this option one could think of a funding model that provides funds for parti-
cular national research priority lines on the basis of competition.
• Research excellence programs
Many European countries set up financial programs to promote research
excellence during the last years. The main idea always is to focus investments
in research. To build research excellence on an internationally competitive
level funding could not be spread over the whole sector but clusters have to be
found which have the potential to compete and get extra funding for this. Such
programs, again to be sorted into the third pillar of state funding, usually are
related to (international) peer review-based evaluation processes. They differ
REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 205
in terms of funding volumes, duration and specific targets. Usually one of the
major criteria to succeed is collaboration with academic and private sector
partners and critical mass, so such programs could directly contribute to sec-
tor efficiency.
Germany, Denmark, France: Excellence initiatives
German set up a huge research program during the last years, the “excellence initiative”. It funds research excellence in the forms of graduate
schools, research cluster and institutional plans to promote excellence. Especially the research cluster part strongly promotes collaboration
between universities, but also between universities and the non-university research sector. The clusters are selected in highly competitive
international peer reviews. A problem is the unclear perspective how long the funding would last: There are two five-year periods of funding,
and institutions hope that it will be continued, but it is not sure. In a similar program Denmark treated this issue differently: it was clear from
the beginning that funding will be limited to several years and will then be stopped. Part of the selection process and of the interaction university-
ministry was a business plan how to ensure financial sustainability after the state funding period. In France the program to create research
excellence was closely connected to build the “poles”, which are regional research clusters of institutions within a specific region.
• Research assessment exercise
In this option, research funds are linked to the outcomes of the national research
evaluation exercise. In such a system, research organizations within or out-
side universities can be awarded research funding if their research quality is
perceived to be above a certain level. The research evaluation could include
various quality indicators, like relative amount of research output, perceived
quality (by peers), societal relevance and impact, success in attracting third
party funding and/or from international resources or from acknowledged
research councils. One example is the English Research Assessment Exercise
and the 2014 Research Excellence Framework (http://www.ref.ac.uk/).
Resource diversification
• Stimulate university-industry collaboration
In this option, one could think of a central research fund to which research
organizations can apply for funding if they propose scientific research in which
private companies or non-profit organizations (including governmental orga-
nization) are also willing to invest (e.g., cost sharing 25% or 50% of the total
research costs).
• Premiums for attracting EU-funds, matching funds
In this option, a central research fund provides research organizations with
a premium if they successfully attract funds from industry support or some
other no EU funds source. This could be in the form of a small proportion of
the volume of the total sum awarded by the external sponsor, or one could
provide a fixed amount per FTE-research time funded through the project
(e.g., a top-up of €2,500 or €5,000 per annum).
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Autonomy
Quality of research can be stimulated by providing sufficient levels of autonomy
to research organizations and units in order to use resources where and the way
they are most needed and effective at a given moment in time.
Student financing
There are relatively no links between research funding and student financing,
except that HEIs could use revenues from tuition fees, for example, to also sup-
port their research infrastructure and research activities.
3.3 Funding opportunities that may enhance sector
efficiency
State funding for teaching and research
• Target agreements
Target agreements are an adequate instrument to link the objective of stra-
tegic specialization with performance-oriented funding. If ministries negotiate
and sign target agreements with HEIs, the agreement could be similar to the
following: The ministry commits funding and expects in return that the universi-
ty and the ministry agree on the objectives that have highest priority according
to the university profile. These targets are measured and controlled by perfor-
mance indicators. The difference compared with a funding formula is that
the indicators are measured ex ante and could be set individually for each HEI,
according to the specific profile. Target agreements usually are multi-period
arrangements, after their expiration the attainment of the targets is measured
and rewarded or sanctioned. Target agreements could include objectives for
all kinds of HEI’s missions. Hence they could create a funding component
which integrates state funding for teaching and research. They are applicable
in the first pillar of a funding model (justifying a basic funding component)
or especially in the third pillar to pre-fund profile-oriented developments.57
An important implication of target agreements could be the promotion of
horizontal diversity. The sector’s culture tends to see a vertical reputational
difference between “research excellent” universities and universities with other
priorities in missions, for example in the regional context or interaction with
industry. Target agreements of the described kind send the message that
an excellent higher education sector needs research excellence as well as
other profiles, so there is a horizontal differentiation of profiles with equal
importance for society.
57 For practical purposes, this report adopts the categorization of Ziegele (2013) who has identified
three typical pillars of funding models: (i) basic funding; (ii) performance funding; and (iii) innova-
tion-/profile- oriented funding. Regardless of the diversity throughout higher education systems and
funding models in Europe, these three pillars can, to a certain extent, be identified in most systems.
REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 207
Target agreements are mentioned here, as they are an instrument closely related
to institutional profiling. But it has to be stressed that target agreements could
be used quite flexibly for all kinds of objectives, also teaching and research
quality, internationalization, innovation, international research collaboration, etc.
The principle of providing ex ante funding of future performance within the
third pillar of public funding could be very flexibly applied for different purposes.
It always creates a balance to the ex post mechanisms of formula funding.
Examples of a relationship between target agreements and public funding of
universities can be found in:
•Hong Kong (where 10% of funding allocated through the Performance and
Role-related Funding Scheme),
•The Netherlands (where 7% of teaching funds is based on quality-oriented
performance agreements on developments in completion rates, didactical
qualifications of teachers, student satisfaction, etc.),
•Australia (where universities and the ministry agree in the Mission Based
Compacts what contribution HEIs will make towards national priorities, like
equity targets, quality targets, student satisfaction, etc.),
•New Zealand with three-year profile funding and
•Germany with the target agreements applied in many German states (see box
below).
In such agreements, agreements can be made on various issues, including
performance levels or performance development (to adjust for different starting
positions and conditions of different HEIs).
Germany: Target agreements in North Rhine-Westphalia
Like in a couple of other German states, North Rhine-Westphalia has introduced target agreements in the third pillar of the state funding model.
The ministry, the universities, and the universities of applied sciences negotiate on 3-year-agreements. The ministry makes clear which targets should
appear in the agreements from their perspective, but the HEIs could prioritize and add specific targets, taking into account their intended profile.
There have to be measurable indicators. The agreements are linked to funding from an innovation pool. The ministry uses a template for target
agreements, indicating chapters and aspects that have to be included in a standardized way, but the format leaves substantial leeway for the HEIs
to develop their own texts. The specific goals and performance indicators are suggested by the HEI first and then negotiated with the ministry.
• Sector consolidation programs
Governments could promote sector consolidation by financial incentives. Competi-
tive funding could be provided which is given to HEIs that have plans to merge,
to build joint units or to collaborate to increase sector efficiency. The idea would be
a bottom-up development of models for collaboration and consolidation, stimulated
by financial incentives. The assumed advantage of this strategy — compared to
a consolidation planned and organized by the ministry — is the creation of owner-
ship: HEIs realize their own plans and are not forced by external decisions.
One could also expect that such decentralized decisions about consolidation are
triggered by a careful analysis of potential efficiency gains, avoiding consolidation
for consolidations’ sake.
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Denmark: Comprehensive sector consolidation
The Danish government had the clear idea that the Danish higher education and research sector (universities and non-university research
institutions) was too fragmented, and they wanted it to be reorganized by forming critical mass and merging institutions. The political message
was very clear, but the government did not regulate which institutions should merge. A financial pool to support merger processes was provided,
the institutions came up with plans and the ministry approved. So it was a mixture of clear political will and autonomy/ownership of HEIs
in terms of operationalization and realization, supported by financial incentives. The outcome is a major restructuring of the sector by mergers,
plus substantial internal restructuring of the newly built units (for instance the University of Aarhus which is well-known in Europe for the com-
prehensive change process induced by the mergers).
Resource diversification
Financial diversification can, in some instances, lead institutions to pursue unique
specializations or profiles that align with new or expanded funding opportunities.
The development of a regional profile could, for example, be related to regional
income sources.
Autonomy
• Planned sector reorganization
Strategic specialization could of course also be done with a centrally planned
process, reducing autonomy. Strategic specialization of HEIs could be orga-
nized by defining a typology of HEIs, mergers could be imposed by the go-
vernment, and the reduction of study program duplication could be realized
using the study place system in this way, again balancing it with the sustain-
ability of competition and the need to serve the regions with study options.
Experiences have shown that consolidation efforts could work as a one-time
focused intervention (as long as it is a participative process taking the HEIs on
board). A ministry could make decisions to reorganize the sector at a certain
point in time, outside of state funding systems, and then get back to financial
and decision-making autonomy of the HEIs. The risk is that this will be seen
as externally imposed and motivation to work within the new structures will be
low for some time (because of a lack of “ownership” of the reforms within
the HEIs). Quite problematic is the permanent use of funding systems to conti-
nuously influence sector structures, because this would reduce autonomy
through permanent micro-steering and create dangers for the positive effects
of autonomy.
Germany: Consolidation process in Lower-Saxony
The German state of Lower Saxony runs a three-pillar state funding model, with stable basic funding connected to target agreements, a funding
formula and various specialized pools in the third pillar. Financial autonomy is high. Nevertheless some years ago the ministry started a one-time
process with the objective to reduce duplications and increase efficiency. The ministry collected comprehensive quantitative and qualitative data
(the latter especially from a state-wide process of research evaluation). Based on the data there were intensive talks and negotiations with
all HEIs, the institutions could make proposals. In the end the ministry decided on an overall plan to consolidate, which was still tough for some
institutions, but had a basic acceptance because of the participative process and because it was clear that this was just a one-time restructuring
and not a permanent restriction of autonomy.
REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 209
Student financing
There is no real potential to promote sector consolidation and efficient reorgani-
zation by student funding instruments. It should rather be taken into account that
the reduction of duplications in study programs could lead to reduced competi-
tion, also reducing the efficiency incentives from a competitive, fee-based system.
All instruments used in the context of state funding should avoid the creation of
monopolies and the effect that instead of creating competitive units the competi-
tion is being destroyed.
3.4 Funding opportunities that may enhance
technology, innovation, creativity,
and entrepreneurship
State funding
• Innovation fund: third pillar funding
In a balanced funding model, next to stable basic funding and competition,
performance and quality oriented funding systems also require space for inno-
vation and creativity. New initiatives that are perceived as a value added to
the teaching or research system and that are regarded financially viable from
a mid- to long-term perspective, often require seed money. An innovation fund
can provide the financial space for such initiatives, of course on the basis of
sound project and business plans and in competition with other creative and
innovative ideas.
• Targeted STEM funding
In order to support STEM, a technology and innovation fund could be esta-
blished that particularly supports a selective number of innovative projects
in science and engineering disciplines. In the same direction, the model could
offer similar funding for teaching and research programs in disciplines or subject
areas that are not very popular but anyhow regarded as a national (cultural, eco-
nomic, etc.) priority.
Resource diversification
• Program funding for research or special funds but in collaboration with
private sponsors
The options under state funding can also be extended with elements that
reward only projects that also involve societal partners, being for profit or non-
profit organizations.
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• Knowledge and innovation vouchers
This option concerns a program that stimulates industry or SME’s to get
engaged with knowledge institutions, like higher education and research
organizations. This can be stimulated with vouchers that allow them to “buy”
a limited amount of knowledge or advice in the hope that — or under the con-
dition that — they will invest to a larger extent themselves in such knowledge
collaboration. One example is mentioned in the following text box.
The Netherlands: Knowledge vouchers
Dutch higher education institutions have a legal obligation to be engaged regionally, particularly when it comes to producing graduates for the
labour market and to develop innovative collaborations with industry. One policy initiative is to stimulate regional collaboration between public
authorities, business and higher education through concentrating resources on excellent research that can be applied and commercialised
in innovative areas. Since 1997, Knowledge Vouchers are available to Small and Medium Sized companies (SMEs) in order to purchase free advice
or services from large knowledge intensive organisations like companies, research or teaching institutions, including universities and UAS.
Knowledge Vouchers are paid by public authorities (ministries, provinces or regions) or through the EU Interreg III program
(http://www.kennisvoucher.nl/?p=&t=en).
Autonomy
In order to take innovative initiatives, like setting up new study programs or re-
search lines (in STEM domains), institutions at least need the autonomy to alloca-
te funds to such projects or initiatives and to take it from other areas. In addition,
keeping regulations at as low as possible is also important to create space for
an innovative atmosphere — whether it is in STEM or any other discipline.
Student financing
There are no links between student financing and innovation, except that HEIs
could use revenues from tuition fees to also support their innovative initiatives
— e.g., to establish new study programs — or to (cross-) subsidize the more
expensive investments required for activities in the STEM domains, entrepreneu-
rial activities, and the like. But one should acknowledge that currently the Latvian
fee-income is at maximum similar to public funding of teaching and thus cannot
bring in substantial investment funds, particularly now demographic decline
pushes down expected tuition revenues.
3.5 Funding opportunities that may enhance
professional capacity of academics
Enhancing the professional capacity of Latvian HE is regarded as increasing
the number of academic staff with a doctorate and the proportion of foreign staff,
attracting younger staff, and improving salary conditions.
REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 211
State funding
State funding can contribute to the above mentioned objectives by either creating
new funds that are dedicated to such issues or through an increase in basic funds
under the condition of meeting particular targets.
Resource diversification
In the area of resource diversification, involving industry in (jointly) funding PhD
positions could be a valuable instrument.
Autonomy
Also in this area, a high degree of autonomy can help achieve the envisaged
objectives. However, the funds need to be made available for this specific
purpose. With full spending autonomy and conflicting demands, the HEIs may not
immediately spend their money for this purpose.
Student financing
Student financing is not related to the professional capacity and development of
academic staff, except for the fact that additional revenues from tuition fees can
be used to improve salary conditions, to attract foreign staff, to attract new young
staff members and to create additional PhD positions.
3.6 Funding opportunities that may enhance access
and participation
State funding
• Funding formula based on new entrants
In this option one could think of a funding formula that is particularly focused
on attracting large numbers of new entrants. This will stimulate HEIs to recruit
new students and thus also to better target previously underserved groups,
such as students from disadvantaged backgrounds, etc. However, beyond
attracting them, there may not be enough incentives to really educate and help
them towards graduation after a few years.
212 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
Resource diversification
• Establish a fund for widening participation
Similar to the UK, one can imagine either the government or institutions
to set aside a particular proportion of funding or tuition revenues to be used
for attracting students from underprivileged groups through scholarships,
loans and tuition waivers. Many British universities have their own widening
participation offices that provide support to various disadvantaged students
who would like to enter the institutions.
Autonomy
No link with access, except for setting selection criteria and using tuition revenues
to provide financial support to underprivileged students.
Student financing
• Provide need-based scholarships
A first instrument to support access and participation, particularly from lower
socioeconomic backgrounds is to offer means-tested need-based scholarships
to students from lower income families. There are many examples in Europe
and beyond with such scholarship programs; e.g., the German Bundesaus-
bildungsförderungsgesetz (BaFöG), the English National Scholarships Pro-
gramme, the Dutch Supplementary grants, the Australian Commonwealth
Grants Scheme and the New Zealand Student Allowance Scheme. Such need-
based grants can also be performance related as has been done in the Nether-
lands and Norway. In both countries, student financial support is paid out
as a loan, but can be (partially) converted into a grant afterwards if certain
conditions are met, such as getting a degree within a limited period of time
(like in the Netherlands), or if the student passed all exams and her/his gra-
duate income is below a certain threshold (Norway).
• Provide need-based student loans
A second instrument to support access and participation, particularly from
lower socioeconomic backgrounds is to offer means-tested need-based loans
to students from lower income families. An additional characteristic could be
to make debt repayment also dependent on graduate income. This would
mean that only graduates earning an above social-minimum salary would
repay their debt (i.e., a form of income-contingent loans).
REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 213
3.7 Funding opportunities that may enhance
internationalization
State funding
It is not common practice to put internationalization indicators into a funding
formula. This would burden a funding formula too much with “temporary” issues
and make funding formulas too complex. In general, it is better to have them rela-
tively simple. This implies that internationalization is one of the topics that can be
better addressed with temporary stimulation funds of in performance/target
agreements.
• Internationalization fund
In case of an internationalization fund, one can think of “temporary” stimulation
subsidies that encourage HEIs to implement internationalization strategies.
These could be used, for example to develop an internationalization strategy,
establish an international office and/or a welcoming center for foreign staff
and students; establish additional student residencies, provide scholarships
enabling students to study abroad; provide subsidies/scholarships for incom-
ing teachers, researchers and students, subsidize international sabbaticals for
own academic staff, etc. Such a fund could be related to target agreements.
Resource diversification
One can think of a limited stimulation fund, maybe linked to the one above,
for academic staff to subsidize travel and accommodation in case one collabora-
tes with foreign partner academics to jointly apply for international funding such
as EU grants.
Autonomy
Like before, sufficient levels of autonomy that HEIs can develop their own interna-
tionalization strategies and activities.
Student financing
• Portability of scholarships and loans for study abroad
To stimulate internationalization one can make loans and scholarships portable
for study abroad. This can apply to credit mobility or degree mobility. In Latvia,
stimulating outgoing degree mobility might not be considered desirable and it
may be complex to organize because the HEIs administer and allocate the
current scholarships for students. However, international student mobility often
requires some degree of reciprocity between participating institutions, because
one-way mobility streams often lead to a gradual disappearance of student
exchange practices. However, the situation is different concerning administra-
214 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
tion of loans. With regards to loans, one only has to arrange that debt will be
repaid in case mobile students stay abroad for a professional career.
• Targeted scholarships for incoming students
A second option can be scholarships that can cover part of the tuition fees and
living costs of incoming students; e.g., master students in particular areas with
labor market shortages in Latvia.
3.8 Other opportunities to stimulate teaching
and research
As discussed before, not all ambitions can be stimulated with money alone. This
could make the funding process too complex and difficult to understand. There-
fore, many countries often choose to include only a few core parameters in the
funding for teaching and research to stimulate HEIs to concentrate predominantly
on those areas; e.g., graduates, PhDs, and successful students.
Other instruments to make HEIs more responsive to the needs of society include
the following items:
•System wide strategies based on mutual agreements about the direction a sys-
tem should go with regard to specific policy areas, such as staff development,
research priority areas, internationalization, public-private partnerships, etc.
•Underpinning such strategic priorities, specific targeted funds — as discussed
above — can be a powerful instrument to make HEIs and other stakeholders
move in the desired direction.
•Another strong and more frequently used instrument concerns performance
or target agreements in which ministries and individual HEIs agree on a number
of issues that are considered of strategic importance to the system and the insti-
tutions. It is presented as a funding option above, but it could also remain
unrelated to funds and work as an instrument within the strategic process.
•Implement a tough but fair quality assurance system for teaching and research.
There usually are separate quality assurance systems for teaching and research.
In conclusion, this paper is not intended to argue which alternative financing
instruments should be adopted by Latvian higher education to align with the natio-
nal strategic objectives for higher education. Instead, the paper has identified
those important policy directions for Latvian higher education and assessed how
aligned the current funding model is with those objectives. In the final section of
this report, alternative funding instrument were described and references to other
countries with respected approaches were provided for consideration. In the third
report of this project, which is tentatively scheduled for delivery in the fall of 2014,
the World Bank’s project team will recommend what, from the World Bank team’s
perspective appears to be attractive alternatives for Latvian higher education.
REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 215
Appendices
Appendix 1
Description of National and Sectoral Policy
Planning Documents
The policies for higher education along with science and innovations are formula-
ted in a number of official documents, as well as project documents that form the
strategic framework for its development. Higher education funding reform should
pursue the goals, objectives and targets defined in these documents. The docu-
ments listed below, which account for both national and sectoral development
strategies, were reviewed either for specific higher education strategic objectives
or for context in interpreting those identified objectives.
Growth Model for Latvia: the Man in the First Place
(adopted by the Parliament of Latvia on October 26, 2005)
The long-term conceptual document Growth Model for Latvia establishes the ge-
neral principles for Latvia’s development in the following 20–30 years with
an emphasis on knowledge and wisdom transformed into skills as a resource for
economic growth. The driving force of growth is educated society. Accumulation,
transfer and application of knowledge are the process at the basis of social and
economic development and the warrant of labor force quality, use of the capital
and development of technology.
Sustainable Development Strategy of Latvia until 2030
(adopted by the Parliament on June 10, 2010)
The long-term national development planning document Latvia 2030 recognizes
the need for a paradigm change in education. Life-long education oriented to-
wards creativity that responds to global competition and demographic challenges
is one of the pre-requisites for changing the economic model. The areas for long-
term policy include increasing accessibility of education and introducing changes
in the organization of the educational process, efficient use of financial and hu-
man resources in education, a closer link of the education system with the econo-
mic and public processes, as well as a link between the formal education and
further education for adults.
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National Reform Programme of Latvia for the Implementation of Europe 2020 Strategy
(endorsed by the Cabinet of Ministers on April 26, 2011)
The National Reform Programme is a part of economic policy coordination and
surveillance at the European Union level in the framework of the European Seme-
ster. It defines the objectives and measures for national development in the con-
text of Europe 2020 Strategy including modernization of higher education by
improving the study and research efficiency, quality and international competitive-
ness, as well as by ensuring conformity of the obtained qualification and skills to
the labor market requirements, modernization of the material-technical base of
higher education institutions and raising the efficiency of resources use, ensuring
equity of higher education.
National Development Plan of Latvia for 2014–2020
(adopted by the Parliament on December 20, 2012)
National Development Plan 2014–2020 (NDP2020) is the national medium-term
planning document that sets the vision of Latvia in 2020 “Economic Breakthrough
— for the Greater Well-being of Latvia” and defines the priorities for the growth of
national economy, human security, and regional development. NDP2020 lays
emphasis on advanced research, innovation and higher education to be achieved
by establishing a culture of innovation supported by a specially tailored and effec-
tive system of innovation. This system integrates legislative, educational, scienti-
fic, research-related and financial conditions for a successful commercialization of
research results and a continuous collaboration between science and industry
sectors, and one that secures an increase in private investment in science and
research funding.
Latvia Convergence Programme 2013 to 2016
(endorsed by the Cabinet of Ministers on April 29, 2013)
In order to achieve the overall objectives of the government budget, while ensuring
the conditions for economic growth in the medium term, the Latvian government
defines its objectives to continue the implementation of structural reforms, including
those in education and science. The document emphasizes the need to ensure the
accessibility of basic and secondary education, structural changes in vocational
education, higher education modernization and increasing the number of gradua-
tes, attracting foreign students and consolidating public research institutions.
Information Note on the Development of the Smart Specialization Strategy
(endorsed by the Cabinet of Ministers on December 17, 2013)
A conceptually new and complex strategy is being developed that entails a balan-
ced and complementary set of instruments to support economic transformation
and knowledge-driven growth. The strategy aims at not only enhancing the deve-
lopment of technological innovation, but also that of non-technical innovation,
entrepreneurship and creativity in economics and society. Such a strategy is rela-
ted with certain challenges, among which there is the current system of education
which does not meet the labour market needs, as well as the low capacity of
research and underdeveloped scientific and research infrastructure. Thus, among
REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 217
the priorities of the implementation of Smart Specialization Strategy is modern
education system that promotes the development of competencies, entrepreneur-
ship and creativity at all levels, as well as developed knowledge base and human
capital in fields of science in which Latvia has a comparative advantage and which
are significant for the economic transformation. Based on the decision of the
Cabinet of Ministers currently the Action Plan for the Implementation of the Smart
Specialization Strategy is in progress.
Partnership Agreement for the 2014–2020 EU Funds Programming Period
(submitted to the European Commission on January 15, 2014)
The objective of the EU funds investment is to strengthen the economic, territorial
and social cohesion in Latvia, to promote the rural development and the develop-
ment of agriculture, forestry and fishery with smart specialization, sustainable
and inclusive growth that is based on balanced macroeconomic and fiscal policy.
The EU funds investment strategy is based on the national development axes,
defined needs and challenges that are outlined in the Latvia 2030, NRP and
NDP2020 strategies, taking into account the EP recommendations to Latvia within
the framework of the guidelines on economy and employment policy, as well as
the general Baltic Sea region development directions proposed in the EU Strategy
for the Baltic Sea Region. Investment in higher education envisages the improve-
ment of study quality in cooperation with employers, offering study programmes
in EU languages to attract EU students, consolidation and concentration of higher
education and science resources, modernization of higher education and science
infrastructure, especially in STEM areas.
Operational Programme “Growth and Employment” for the EU Funds Programming
Period 2014–2020
(submitted to the European Commission on March 4, 2014)
Operational Programme sets out the strategy of EU funds investment for smart,
sustainable and inclusive growth. It provides a detailed description and argumen-
tation for investment priorities as a response to the challenges Latvia’s economy
faces. The defined priorities include effective education system integrated with
high quality science, research and innovations. In light of the national Smart Spe-
cialization Strategy which emphasizes the concentration of resources of science
and research and European Council recommendation on the implementation of
effective research and innovation policy, the objectives stated in the Programme
include improvement of education system to reduce the disproportion of labour
market, concentration and consolidation of intellectual and material resources
in HE and science to reduce fragmentation, especially in STEM, modernization of
the material basis and infrastructure, especially at the college and doctoral level,
development of joint thematic doctoral centres at universities and scientific institu-
tions to focus on topical social and economic issues.
Declaration of the Intended Activities of the Cabinet of Ministers headed by Laimdota Straujuma
(endorsed by the Parliament on January 22, 2014)
The current Government’s priorities and policy measures until the parliamentary
elections in October 2014 include the development of the model of an institutional
218 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
network in higher education by implementing the principle of strategic specializa-
tion of the state founded higher education institutions, preventing duplication of
programs within one region and motivating the regional higher education insti-
tutions to participate in ensuring regional development. The Government’s pro-
gram envisages introducing proposals for the development of a higher education
funding model that promotes, inter alia, accessibility of higher education in re-
gions of Latvia, labor market needs, and competitiveness at the international level.
Guidelines for Development of Science, Technology and Innovation 2014–2020
(endorsed by the Cabinet of Ministers on December 28, 2013)
Guidelines for the Development of Science, Technology and Innovation form
a part of the Smart Specialization Strategies and contribute to the achievement of
objectives stipulated in the national long-term and medium-term policy planning
documents. Smart Specialization Strategies anticipate the transformation of
Latvia’s economy by investing in three strategically important directions: (i) pro-
duction and export structure change in the traditional sectors of the economy,
(ii) growth in sectors creating products and services with high added value,
and (iii) industries with significant horizontal impact and contribution to economic
transformation, as well as by identifying seven priorities which include high value-
added products, productive innovation system, energy efficiency, modern ICT,
modern education, knowledge base, and polycentric development.
Guidelines for the Development of Education 2014–2020 (project)
(endorsed by the Cabinet of Ministers on January 7, 2014)
Endorsed by the Cabinet of Ministers and submitted to the Parliamentary Commit-
tee of Education, Culture and Science, the status of the document is still that of
a project under discussion. Nevertheless, the Guidelines serve as the main
medium-term policy planning document stating the principles of education deve-
lopment and viewing education system as a whole with higher education being
an integral part of the education circle. The measures and targets in education are
grouped under three main policy directions: (i) to increase the quality of education
environment by improvement of contents and development of appropriate infra-
structure; (ii) to facilitate value-education based development of an individual’s
professional and social skills for life and competitiveness in the work environment;
and (iii) to improve the efficiency of resource management through development
of institutional excellence of education institutions and consolidation of resources.
Action Plan for the Development of Higher Education and Science for the Time Period
from November 1, 2013 until December 31, 2014
(adopted by the Cabinet of Ministers on November 22, 2013)
Action Plan for the Development of Higher Education and Science stipulates
the short-term policy perspective on higher education and science and measures
to be implemented by the end of 2014. The document states the main goal
— to ensure quality, internationally competitive and science-based higher educa-
tion implemented by efficiently managed institutions with consolidated resources
— and envisages the relevant measures and targets grouped under three main
policy directions: improvement of quality of studies and scientific activity; efficient
REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 219
use of the resources of higher education and science sector and integration
thereof with science; and internationalization and increase of international compe-
titiveness of higher education and science.
The National Concept of the Development of Higher Education and Higher Education
Institutions for 2013 to 2020
(established in accordance with the Higher Education Law)
The National Concept for the Development of Higher Education and Institutions of
Higher Education of Latvia for 2013–2020 have been developed by the Council
of Higher Education pursuant to the Law on Institutions of Higher Education.
The framework of the National Concept defines the strategic goal of higher edu-
cation in Latvia — the development of a system of higher education that ensures
competitive development of Latvia, national economy, and higher education sys-
tem in the common European area based on the cooperation among public,
private, and academic environments.
Law on Higher Education Institutions
(in force since December 1, 1995)
As the main law regulating higher education sector, the Law on Higher Education
Institutions serves as the basis for higher education development policy. It stipula-
tes the principles of autonomy of higher education institutions and their co-opera-
tion with the state institutions for the interest of society and the state. As an impor-
tant objective it stipulates the gradual increase of the expenditure on state-funded
higher education institutions as a proportion of the GDP.
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Appendix 2
Stated Policy Objectives and Targets in Higher
Education, Science and Innovations
A. National Development Plan of Latvia for 2014–2020
The vision of Latvia in 2020 “Economic Breakthrough — for the Greater Well-being
of Latvia”
[…] Latvia has internationally competitive colleges and universities employing
internationally recognized and qualified academic staff. Higher education has
become a widely coveted export service of Latvia. Study programs are provi-
ded in accordance with the language policy of Latvia as a national state: pri-
marily in Latvian and in one of the official languages of the European Union.
The graduates of Latvian colleges and universities demonstrate a competitive
advantage both in domestic and foreign labor markets. Furthermore, a grow-
ing number of graduates continue their careers in research in Latvia.
Latvian science is concentrated in research institutes that are competitive
globally. A significant proportion of the research is co-founded by private
businesses; academia and the private sector work together to create new
and globally competitive products. It is the collaboration of science and busi-
ness that continues to generate new, innovative and creative products and
services that are competitive in the world markets […].
Priority: Growth of the National Economy
Strategic objective: Advanced Research, Innovation and Higher Education
Goal 1: Increase investment in research and development to 1.5% of the gross
domestic product in 2020, with targeted efforts to attract human resources, deve-
lop innovative ideas, improve the research infrastructure, facilitate cooperation
between higher education, science and the private sector, as well as the transfer
of research and innovation to business.
Base value
Measurable Outcomes for the Goal (year) 2014 2017 2020 2030
Private sector investment in research
and development in 2020 reaches at
least 48% of the total investment
37
in research and development 42 46 48 51
(2010)
(private sector investment in research
and development, as a percentage of
the total investment)
Number of researchers employed
16.2
in the private sector, as a percentage 18 21 23 27
(2010)
of the total, full-time equivalent
REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 221
Base value
Measurable Outcomes for the Goal (year) 2014 2017 2020 2030
Number of students obtaining degrees
24.8
or qualifications at universities 23.9 24.1 24.6 28.6
(2011)
and colleges, thousands
Higher education (percentage of
36
the population aged 30 to 34 37 38 40 >40
(2012)
with higher education)
European patents granted, applied for 11
13 18 26 35
by researchers residing in Latvia (2011)
Goal 2: Through the commercialization of knowledge, promote the creation of
innovative and internationally competitive products with high added value as well as
their introduction into production, increasing the share of output of such products
in the national economy.
Base value
Measurable Outcomes for the Goal (year) 2014 2017 2020 2030
Turnover of innovative products 5.9
8 9 11 >14
(as a percentage of the total turnover) (2008)
Proportion of innovative businesses 20.1
22 25 30 >40
(as a percentage of all companies) (2008)
The individual measures to be applied within the Strategic Objective “Advanced
Research, Innovation and Higher Education” in regard of higher education (and
science) include:
•Qualitative and quantitative renewal of science and implementation of funda-
mental and applied research projects, particularly in the priority research field.
•Ensuring access to higher education.
•Establishment and development of the cooperation platform for higher educa-
tion, science and the private sector of the Baltic countries in the following areas:
(i) biopharmaceuticals and organic chemistry, (ii) nano-structured materials and
high-energy radiation, (iii) smart technologies and engineering.
•Measures to support higher education export (combining of outstanding pro-
grams and creation of joint programs in other EU languages in no fewer than
10 fields of study; international publicity of the programs and development of
support centers for foreign students; recruitment of foreign instructors).
•Competitiveness and consolidation of higher education, development of material
and technological provision (equipment), improvement of the internal quality sys-
tem, encouraging a higher rate of scientific publication by university staff, launching
of international journals, increased effectiveness of the governance system.
Responsible institution: MoES; indicative sources of financing: Cohesion Policy
funds and private and state budget funding.
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B. Guidelines for the Development of Science, Technology
and Innovation 2014–2020
In the context of National Development Plan 2020 the Guidelines for Development
of Science, Technology and Innovation place a strong emphasis of the integration
of education with science, ensuring the transfer of knowledge created by educa-
tion into the industry for the development products of high added value. Thus,
one of its stated priorities is the transformation of education system to serve as
the foundation of the national competitiveness — modern education system that
complies with the labor market needs and facilitates the development of compe-
tences, entrepreneurship and creativity at all levels of education. This entails mo-
dernization and integration of education sector with research by increasing its
capacity to respond to the future challenges in research, technology development
and innovations, and by increasing the mobility of education.
The policy directions and measures for the integrated development of higher edu-
cation, science, technology and innovation to be implemented by 2020 include:
Integration of education, science, technology and innovation
•Fostering the cooperation of higher education institutions, research centers and
entrepreneurship and attraction of young scientists to research.
•Development of technology transfer centers at higher education institutions and
formation of creative center of innovations.
•Development of a model of institutional integration to ensure internships for
higher education students in state and municipality enterprises.
•Formation of innovation grants for students and academic staff, especially
in STEM, to strengthen the cooperation with industry and support excellence
in studies and research; and development of innovative solutions for the industry.
Support for research in higher education and increase the contribution of
higher education institutions in science
•Development of regulations on funding principles and establishment of criteria
that foster the investments of higher education institutions in research and moti-
vate the HEIs to commercialize the knowledge and invest in research.
•Defining the criteria according to which higher education institutions plan invest-
ments in scientific research upon the accreditation and licensing of higher edu-
cation study directions and programs.
•Renewal of remuneration principles for the engagement of academic staff in re-
search. Introducing the principle of joint pedagogic and research work according
to which academic staff is engaged in research while scientists working at scienti-
fic institutions are engaged in pedagogic work in higher education institutions.
REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 223
Improvement of doctoral studies and promotion system
•Improvement of promotion process.
•Involvement of the doctoral students in scientific projects.
•Establishing scholarships for excellent doctoral students with high research po-
tential.
•Preparation of Master students and Doctoral students for specific industrial part-
ners; allocate the state budget subsidy for respective Master and Doctoral stu-
dies as priority areas.
•Moving towards a joint system of doctoral studies (common quality principles).
•Strengthening the link between doctoral studies and research and industry, forma-
tion of doctoral centers in Latvia, support for the renovation of infrastructure, etc.
C. Guidelines for the Development of Education 2014–2020
(project)
In the context of the National Development Plan 2014–2020 and in light of the Guide-
lines for the Development of Science, Technology and Innovations 2014–2020,
the Guidelines for the Development of Education 2014–2020 stipulate a number of
policy directions with specific indicators and measurable targets in regard of higher
education (and science) to be reached by 2017 and 2020.
Policy Direction: Improvement of Education Contents focused on Competences required by
Knowledge Society and Facilitating Creativity, Innovative and Healthy Lifestyle
Base value
Policy result Performance indicator (year) 2017 2020
Proportion of study places financed by
Restructured state
the state budget in STEM (%) of 44%
support to HE 50% 55%
the total number of study places (2013)
and science sectors
financed by the state budget
(study directions)
according to
Proportion of students in the 1st level
medium-term labor 18%
professional higher education programs 21% 24%
market forecasts (2013)
(college level programs) (%)
Level of unemployment of graduates
(Bachelors, Masters and Doctors)
18 months after graduation, 7.5%
Ensured education 6.5% 5.2%
as a percentage of the level of (2013)
process according to
unemployment of graduates of
the changing
all education institutions
requirements of labor
market
Proportion of graduates (ISCED-5/6) 19%
in the STEM areas of the total number 4028 25% 27%
of graduates (%) (2012)
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Policy Direction: Increase of the Motivation and Professional Capacity of Teachers
and Academic Staff
Base value
Policy result Performance indicator (year) 2017 2020
Improved professional
competence of teachers Proportion of academic staff
54%
and academic staff (excluding colleges) with a doctoral 60% 65%
(2012)
according to modern degree (%)
education requirements
Increased capacity of Proportion of the number of foreign
0.5%
human resources teaching staff at the ISCED 5-6 level of 5% 7%
(2012)
in education the total number of academic staff (%)
Age structure of academic staff
45%
(proportion of those of 30–49 of age 50% 55%
(2012/2013)
(% of the total academic staff)
Proportion of academic staff having
obtained a doctoral degree (%) of 1%
2% 3%
the total number of those having (2012/2013)
Increased professional a degree or qualification
competitiveness of
academic staff The proportion of the lowest salary level
of professors of institutions of higher
education to the amount of average
monthly work remuneration of 1.5
2.5 2.8
employees in the country during the year (2012)
before last, published in the official
statistical report of the CBS, multiplied
by a certain coefficient
Policy Direction: Ensuring Education Environment and Education Process Compliant
with the 21st Century
Base value
Policy result Performance indicator (year) 2017 2020
Number of doctoral students 138
200 405
in the joint doctoral study programs (2012)
Increased number of students
Improved infrastructure in the STEM programs of the first 5270
5480 6060
of institutions of higher level vocational higher education (2012)
education for the in colleges
implementation of
modern study process Proportion of institutions of higher
education (%) of the total number, 45%
where the equipment and technical (December 31, 10% 50%
infrastructure have been modernized 2012)
using EFRD resources
REPORT 2: Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives | 225
Policy Direction: Improvement of the Monitoring System of Education Quality
Base value
Policy result Performance indicator (year) 2017 2020
Established and maintained a unified
database (study program database,
0
expert database, etc.) necessary for 1 1
(2013)
the assessment of external and internal
quality of higher education
Established a system for monitoring the
Improved state 0
professional experience of graduates of 1 1
information systems (2013)
institutions of higher education
Established unified higher education
information system, which includes
0
registers of academic an scientific staff, 1 1
(2013)
student, diploma registers, as well as
the database required for accreditation
Established national
Established and maintained national
study quality 0
agency for higher education quality 1 1
assessment agency (2013)
assessment
registered with EQAR
Policy Direction: Efficient Management of Education Financial Resources
Base value
Policy result Performance indicator (year) 2017 2020
ISCED-0 0.8%
Increased investments ISCED-1 1.4%
Annual state expenditure for
of financial resources ISCED-2-4 1.9% 3.7% 5%
education as % of GDP
in education ISCED-5-6 0.6%
(2010)
Amendments to the technical
Developed regulation in the Law on Institutions
– 1 1
and implemented of Higher Education and other
a new model for regulatory enactments
financing of higher Sustainable model for financing
education higher education allowing to attain – 1 1
the goals of NDP 2020
Support to improvement
of HEIs study direction
management,
including in colleges,
and to establishment/
development of the
system for monitoring
Established and operating study
the introduction of – 20 40
direction councils
efficient HEIs policy
and ensuring education
quality, which is aimed
at the development of
policy analysis capacity
in HEIs and scientific
institutions
226 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
Policy Direction: Adjustment of the Network of Education Institutions
Base value
Policy result Performance indicator (year) 2017 2020
Higher education (percentage of
Increased accessibility 37.2%
the population aged 30 to 34 38% 40%
of education services (2012)
with higher education)
Provided support for
acquiring higher
education to socially
Total number of recipients of financial
less protected groups of – 1500 3000
aid
inhabitants, including
scholarships and grants
for covering tuition fee
Policy Direction: International Competitiveness of Education
Base value
Policy result Performance indicator (year) 2017 2020
Proportion of foreign students 0.8%
(within the framework of mobility) 736/94474 1.5% 2%
of the total number of students (%) (2012)
Ensured internationally
competitive higher
Proportion of foreign students
education environment 2.9%
studying for obtaining a degree,
2757/94474 6% 8%
qualification of the total number of
(2012)
students (%)
Ensured possibility
to be involved Number of study programs that have
in the internationally acquired documents proving quality
n/a 10 20
recognized at international level (international
accreditation of higher accreditation)
education
Attracted foreign Number of scholarships provided to 80
150 150
students foreign students, per annum (2012)
Ensured professional
perfection and
international exchange
Number of academic staff that have
of experience of 1035 1035 1345
participated in the mobility activities
teachers, academic
staff, adult education
personnel
Number of students of HEIs that have
1960 1960 2548
participated in the mobility activities
Ensured international
practice for learning Proportion (%) of graduates of HEIs
and studies who have studied or have had 13.7%
15% 20%
internships abroad of the total (2012)
number of graduates
Report 3
HIGHER EDUCATION
FINANCING IN LATVIA:
FINAL REPORT
19 September 2014
Contents
232 Abbreviations
233 Executive Summary
236 1 Introduction
238 2 Addressing the Main Challenges of Latvia’s Current Financing
Model
245 3 Revisiting Criteria for Good Funding Models
249 4 Reforming the Funding Model for Latvian HEIs
249 4.1 Funding models considered
253 4.2 Positioning Latvia within European trends
257 4.3 The proposed model
267 4.4 How does the new model address the main challenges of the current model?
270 4.5 Impact on different stakeholders
272 5 From Conceptualization to Implementation
272 5.1 Alternative scenarios
275 5.2 Implementation roadmap
281 Appendices
281 Appendix 1 Sample Performance Agreement
281 Appendix 1.A Guidelines for a performance agreement
284 Appendix 1.B Example structure performance agreement
288 Appendix 2 Stakeholder Reactions
288 Appendix 3 Stakeholder Consultations
300 References
Boxes Tables
241 Box 1 Executive Summary from “Higher 239 Table 1 Overview of main challenges
Education Financing in Latvia: Analysis of
242 Table 2 Strengths and weaknesses of the Latvian
Strengths and Weaknesses”
higher education and research funding system
243 Box 2 Executive Summary from “Assessment of
244 Table 3 Strategic fit of the four components of
Current Funding Model’s ‘Strategic Fit’
the funding system with the nine Thematic
with Higher Education Policy Objectives”
Goals
245 Box 3 Models of public funding
246 Table 4 The importance of input- versus
251 Box 4 Higher education as public and private output-related drivers of HEIs operational grants
good
248 Table 5 Overview of assessment criteria
253 Box 5 Latvia’s position vis-a
` -vis European trends
250 Table 6 “Good-Practice” models highlighted
in the evaluation that address challenges
similar to those in Latvia
Figures 251 Table 7 Potential private and public benefits from
higher education
246 Figure 1 Relative importance of indicators used
253 Table 8 Models of public funding — European
in funding formulae in European higher
trends and Latvia
education systems
254 Table 9 Resource diversification — European
259 Figure 2 Three-pillar model of state funding
trends and Latvia
278 Figure 3 Possible development of funding pillars
255 Table 10 Financial autonomy — European trends
under scenarios A, B, and C
and Latvia
256 Table 11 Student funding — European trends
and Latvia
256 Table 12 Overview — European trends
and position of Latvia
268 Table 13 Overview of how new model addresses
current challenges and meets criteria
276 Table 14 Cabinet Regulation No. 994
232 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
Abbreviations
EU European Union
ESF European Social Fund
EUA European University Association
HE Higher Education
HEI Higher Education Institution
MoES Ministry of Education and Science
MoE Ministry of Economics
RAS Reimbursable Advisory Services
RTA Reimbursable Technical Assistance
R&D Research and Development
SEDA State Education Development Agency
STEM Science, Technology, Engineering and Mathematics
REPORT 3: Higher Education Financing in Latvia: Final Report | 233
Executive Summary
n Latvia: Final Report
This report is the last in a three-paper series prepared by the World Bank
Latvia Higher Education Financing Team between December 2013 and Sep-
tember 2014. The first paper, delivered on 18 March 2014, analyzed the strengths
and weaknesses of Latvia’s existing funding system, in accordance with criteria
derived from good practice in European and international trends. The second
paper, dated 18 April 2014, focused on how well the current funding model aligns
with the strategic policy objectives specified by the Ministry of Education and
Science (MoES). The findings from both of these papers pointed towards
a misalignment between levels of public funding and the stated objectives of
the government. Building on these insights, this report aims to develop a pro-
posal for a new higher education financing model in Latvia. It outlines and
evaluates this reform model against the same criteria used in the first report,
taking into consideration existing data, feedback from the MoES, and stakeholder
consultations.
Evaluating and developing a funding model requires a mutual understanding
of what features, or criteria, constitute a “good” funding model. These criteria,
which were initially used to evaluate the strengths and weaknesses of the current
approach to higher education financing in the first report, now constitute the re-
quirements or expectations around which a new funding model is elaborated.
Examples of the criteria for a “good” funding model include: the strategic orien-
tation of the system, and its ability to promote institutional profiles or national
strategies; its incentive orientation, to the extent that the system provides
clear performance rewards and sanctions to create a competitive environment;
its sustainability, and whether it enables long-term planning for institutions
or continuity in the system; legitimization, to the extent that there are unam-
biguous, balanced and transparent funding structures; autonomy and freedom,
and whether institutions are able to make autonomous decisions about internal
resource allocation; and practical feasibility, including administrative efficiency
and coherence with funding levels and approaches.
These criteria and the primary challenges associated with Latvia’s current
approach to financing higher education and research provide the basis for
developing a new funding model. Among the many strengths and weaknesses
identified, two primary challenges emerge.
First, the system is significantly underfunded, compared not only to other
European countries but, importantly, also vis-a ` -vis the government objec-
tives, and legally-set targets — as a proportion of public spending and per
study-place. Overall funding levels are very low (and the lowest in all Baltic sta-
tes), and Latvia is well below European peers in terms of public funding for higher
education.
234 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
Second, the current model’s emphasis on inputs (i.e., enrollment) and its lack
of a performance orientation actually appear to work against the spirit of
quality education and research, especially given recent levels of funding for
higher education as a sector. The current funding model provides limited incen-
tives to promote national higher education strategies or strengthen institutional
profiles.
In addition to these two primary challenges, the current dual track system, with its
heavy emphasis on merit-based selection, is presumed to have negative conse-
quences on widening access to higher education (e.g. for students from dis-
advantaged backgrounds) without some corresponding offering of means-tested
financial aid.
The World Bank proposes a “three-pillar” funding model designed to provide
a balance of stability, performance, and innovation orientation.
•For continuity, the first pillar would mainly consist of a modified version of
the study-place model, as its input-oriented approach remains an important
element of the state-funding system. It also includes a per-capita funding com-
ponent based on the number of professors or academic staff to enhance the
available funding for basic research and to align further the teaching and re-
search funding.
•The second, performance-oriented pillar, contains a small number of indicators
derived from national strategies and of general relevance for all Higher Educa-
tion Institutions. Part of the allocation under the second pillar is reserved for insti-
tutional performance indicators which are university-specific and related to the
profile and strategic development of the institution. This leads to a situation
where specific performance criteria do not have equal importance for every insti-
tution and fosters institutional diversity. Considering these nuances, the formula
should contain an element with institutional performance indicators (specific for
each university and agreed upon in the performance agreement). A university’s
performance, for example, could be measured using up to three specific indica-
tors with institution-specific weights. This part of the formula needs a different
algorithm: as the indicators per institution differ, a formula is needed that makes
the outcomes comparable and the distribution calculable.
•The third, innovation-oriented pillar, provides funding for activities that contribute
to the targets set in a university target or performance agreement. This pillar also
contains the funding of research centers of excellence, accounting for research
evaluation outcomes and a national strategy for research priorities. The targets
incorporate national priorities, and operationalize university profiles and stra-
tegies. Although the performance-oriented (Pillar 2) component of the perfor-
mance agreement is focused on selecting a few relevant indicators that are
specific to the institution’s mission, the third pillar is assessing more broadly how
the institution will contribute strategically to Latvia’s higher education vision,
mission, and objectives. The priorities must naturally address teaching and re-
search, but they should also extend to all kinds of third mission and knowledge
transfer activities. The performance agreement also defines innovative measures
to be taken to achieve these goals if there is a need for pre-funding of actions.
This funding comes from a pool of money and is defined per action.
REPORT 3: Higher Education Financing in Latvia: Final Report | 235
In such a model, stable funding is combined with a performance-oriented
component, using a formula with performance indicators, and an innovation-
oriented component allocated via performance agreements. The performance
partly rewards and sanctions past performance (ex-post funding), whereas the
innovation-oriented component provides financial support for the attainment of
future objectives determined by a negotiation between individual universities and
the ministry (taking into account state goals and institutional profiles). To comple-
ment the three-pillar model, the report also addresses the issue of cost-sharing
and emphasizes that means-tested or need-based financial support can widen
access and address equity concerns.
On the basis of the three-pillar state-funding model, three scenarios emerge
in which a new funding model for higher education in Latvia could potentially
operate. These scenarios are determined by the extent to which the system could
garner additional funding from the state (and, to a lesser extent, funding from
private entities), and indicate the priority components for implementation in each
instance.
The report provides overall direction for Latvia’s future higher education
funding model; however, its adoption and subsequent implementation lie
with the Government of Latvia and the sector. Similar to the process employed
to develop this proposal, the implementation of a new funding model and student
financing should be conducted in close collaboration between the government,
ministries, higher education institutions, and various other stakeholders. A high-
level implementation roadmap outlines the strucutre and next steps should Latvia
proceed with the recommended reforms.
236 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
1 Introduction
This is the third and final report in a series of three papers produced under
the World Bank Reimbursable Advisory Service on Higher Education Finan-
cing in Latvia between December 2013 and September 2014.58 The World Bank
was invited, as an external partner, to develop a proposal for a new higher educa-
tion financing model in Latvia that takes into account jointly developed criteria and
feedback from the Ministry of Education and Science (MoES), good international
practice, and stakeholder consultations.59
The topic of higher education financing in connection with envisaged quality
enhancement has been on the agenda for a long time in Latvia, spurring disagree-
ments between key actors. Interest in the development of a new funding model
was further fueled by the European Commission’s 2012 and 2013 Country
Specific Recommendations for Latvia. The design of an adequate funding model
is crucial for the development of higher education and research, as it determines
the performance and competitiveness of higher education institutions.
To accomplish its objectives, the project was planned in three stages, each
with corresponding deliverables. The first stage in the project’s methodology
was an analysis of the strengths and weaknesses of Latvia’s current approach to
higher education financing based on European and international good practice.
The outcomes (including a description of the status quo of higher education finan-
cing) of this phase are detailed in a report dated 18 March 2014.
The first report discussed prominently the significant structural underfunding of
the Latvian higher education system and the lack of further-reaching performance
orientation and incentives for agreed strategic goals, which also emerged as
a major finding in the second report. In addition, the first report discussed the
existing dual track system of student fees (with relatively high fees for many full
fee-paying students as opposed to free higher education for students on state-
subsidized study places).
The second stage of the project, which focused on how well the current funding
model aligns with the policy objectives specified by the MoES, resulted in the
World Bank’s report dated 18 April 2014. This third and final paper builds upon
these previous two by exploring options for the way forward.
58 The term ‘higher education’ is used in this report in a comprehensive and inclusive manner; i.e., it is
used to describe any form of tertiary education at the post-secondary level, if not specified otherwise.
59 Members of the World Bank’s Latvia Higher Education Team are Dr. Nina Arnhold, Senior Educa-
tion Specialist and Task Team Leader, World Bank; Adjunct Professor Jussi Kivistö, University of
Tampere, Finland; Professor Hans Vossensteyn, Director of the Center for Higher Education Policy
(CHEPS), the Netherlands; Jason Weaver, Senior Education Specialist, World Bank; and Professor
Frank Ziegele, Director of the Centre for Higher Education (CHE), Germany.
REPORT 3: Higher Education Financing in Latvia: Final Report | 237
Readers of the final report are encouraged to refer to the first two reports
with questions regarding the team’s assessment of the strengths and weak-
nesses of the current higher education funding model, related data, and dis-
cussions on the fit of the current model with the strategic objectives of the
government. Although excerpts from the prior two reports are contained within
this final report, the three reports and their respective conclusions are to be
seen as a unit.
As with the prior reports, the findings and recommendations contained within
this report are based primarily on the correlation of existing data, document
review, international experience, and multiple rounds of interviews, round-table
discussions, and workshops.
These stakeholder consultations played a vital role in the project methodo-
logy and, thus, in the preparation of this final report. The World Bank team
would like to express its gratitude to the MoES and SEDA as well as to the many
stakeholders (see Appendix 3) who provided valuable feedback throughout
the engagement. In fact, the World Bank team would also like to encourage MoES
to disseminate this report together with stakeholder reactions, which could form
part of the report (e.g., Appendix 2).
Before turning to the recommendations, it should be noted that the implementa-
tion of recommended reforms, though a critical step, is not part of Latvia’s
existing agreement with the World Bank. Implementation activities, which,
for example, might focus on (i) structural aspects of the model proposed, (ii) pro-
cedural and legal aspects of introducing the new financing model, and (iii) capa-
city building, are the responsibility of the Government of Latvia.
The nature of the World Bank team’s task was to prepare a proposal. The de-
cision to accept and implement the proposal will, however, lie with the Govern-
ment of Latvia and the sector.
238 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
2 Addressing the Main
Challenges of Latvia’s Current
Financing Model
This section summarizes the primary challenges associated with Latvia’s
current approach to financing higher education and research according to
the World Bank assessment in prior reports “Analysis of strengths and weaknes-
ses of higher education financing in Latvia” and “Assessment of current funding
model’s ‘Strategic Fit’ with higher education policy objectives” (Table 1).60 These
challenges are then reinterpreted as requirements for the new model. Consistent
with the organizing structure of the World Bank’s prior reports, the observations
are organized by the four elements that are identified as crucial of a funding mo-
del in Latvia in this assignment, specifically for the operating budget (as opposed
to capital investments) for higher education:
•State funding for teaching and research (allocation of state budget via study pla-
ces and public research funding)
•Diversification of financial sources for higher education institutions (EU funds,
tuition fees, market revenues, external research income, etc.)
•Financial autonomy of higher education institutions (lump-sum versus line-item
allocations, freedom to spend money flexibly and build financial reserves, finan-
cial regulations, discretion to set salaries, etc.)
•Student funding and support (tuition fees, individual financial situation of stu-
dents, loans, scholarships, etc.)
60For more information, refer to “Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher
Education Policy Objectives” dated 18 April 2014.
REPORT 3: Higher Education Financing in Latvia: Final Report | 239
Main Challenge Requirement for Table 1 Overview of main
Category for Current Model New Model challenges
State funding Latvian higher education To create a “package deal” by
(teaching is underfunded, in terms of both public modernizing the financial model
and research) and private funding, in comparison and strengthening its link with policy
to most other European countries and objectives, which should make for
to its own governmental objectives. a strong case to increase the level of
It is likely that structural underfunding public funding. The new model needs to
leads to performance constrains create added value in terms of
and quality problems in all respects stimulating use of strategic orientation
(teaching, research and service), and national objectives in order
as well as to problems with to justify possible increases of public
international competitiveness of funds.
the sector.
The study place model and state To introduce teaching and research
research funding model are not related performance-based funding
creating meaningful and appropriate elements in order to create financial
performance incentives for HEIs. incentives for higher education
The model does not offer significant institutions to produce desired outputs
incentives for improving teaching and outcomes.
and research quality, employability of
graduates, research productivity
and internationalization.
The study place model and research To offer clear and transparent
funding streams (including EU incentives for diversifying institutional
Structural Funds) can be profiles, consolidation activities,
administratively burdensome incentives to promote collaboration
and do not always contain clear between HEIs, research organizations
and transparent incentives for and external partners.
diversifying institutional profiles, To create a model that minimizes
consolidation activities between HEIs, the administrative burden as much as
collaboration between research possible.
organizations or with external partners
(specifically industry).
The funding model lacks alignment of To lead to a closer alignment of
basic funding of teaching and research. teaching and research streams
Divided funding streams for teaching in overall architecture of state funding.
and research hinder an alignment of
the HEIs core missions of teaching
and research.
The state funding model is rather To make a transition towards
“one-dimensional” and static as a “three-pillar model” consisting of
a whole, as it offers HEIs only limited pillars (1) basic funding,
incentives for promoting national (2) performance-oriented funding,
higher education strategies and (3) innovation-/profile-oriented
and strengthening institutional profiles. funding for achieving greater balance
More specifically, it is lacking two between stability,
important pillars of funding, namely performance-orientation, ex-post
performance-oriented funding and and ex-ante incentives.
innovation-/profile-oriented funding.
240 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
Main Challenge Requirement for
Category for Current Model New Model
Diversification of The high reliance on tuition revenues To support further and more balanced
financial resources (education) and EU Structural Funds resource diversification (both public
(research) is likely to harm and private resources) that reduce
the long-term financial viability of HEIs. too high and potentially harmful
At the same time, income from private resource dependencies of HEIs.
sources such as industry or community To provide long-term funding for
services appears to be relatively long-term activities.
underdeveloped.
Financial autonomy Latvian HEIs enjoy significant financial To enable state and institutional
of HEIs autonomy and, as such, can flexibly, decision-makers to make full use of
efficiently and effectively spend the potential of autonomy. Supporting
their resources and act as competitive greater accountability by emphasizing
organizations. HEIs do not always fully performance measurement with regard
use the autonomy they have. to the volume and quality of teaching
This great level of autonomy is not and research. However, increased use
always accompanied by a high level of of accountability measures should
accountability towards external not negatively affect the level
stakeholders (both public and private). and scope of HEIs’ financial autonomy.
Student financing The dual track system (i.e., state To ensure access and participation by
supported study places and tuition fee introducing more need-based elements
funded study places) with merit-based in the student funding system
selection of students for state-funded (including state supported study
study places is likely to subsidize places, scholarships, loans, and other
full-time students from better-off subsidies). To enhance transparency
socioeconomic backgrounds. and equity, the allocation of student
The current student support system support needs stronger central
is highly decentralized, and its strong coordination.
merit-based emphasis (including
the requirement to find a loan
guarantor) is likely to have a negative
impact on higher education access
and participation for students
from disadvantaged backgrounds and,
to some extent, part-time students.
For additional context on the main challenges of Latvia’s current funding model,
the executive summaries from the World Bank team’s two prior reports are excerpted
below in Box 1 and Box 2:
REPORT 3: Higher Education Financing in Latvia: Final Report | 241
Box 1 Executive Summary from “Higher Education Financing in Latvia: Analysis of Strengths and Weaknesses”
Higher education is an increasingly important topic on national policy agendas for many countries. As a significant driver of national
economic competitiveness in an increasingly knowledge-driven global economy, higher education policy issues have received increased
attention. Alongside the increased policy importance of higher education, many systems also face serious challenges maintaining their quality
and relevance and in increasing the efficiency and securing equity in the field of higher education. New higher education financing models are
being developed in many European countries as policy responses to these challenges.
The Latvian higher education system has been underfunded for years. Overall funding levels are very low (and the lowest in all Baltic
states); however, in terms of public funding for higher education, Latvia figures at the bottom across European comparisons, with
an allocation of 0.8 percent of GDP as compared to 1.27 in Lithuania; 1.23 in Estonia and an EU27 average of 1.26.a Although the report at hand
will largely focus on funding mechanisms as opposed to funding levels, it is important to keep this point in mind when the current Latvian funding
system’s strengths and weaknesses are discussed.
The topic of higher education financing often spurns controversy, in Latvia as elsewhere, with the discussion focusing on the question of
whether higher education is a public or a private good, whether it should be funded from public resources or students’ contributions – with related
policy implications for public and private funding. The report argues that the outcomes of higher education have characteristics of both public
and private goods, and that acknowledging economic arguments might help to avoid political reform blockades.
Student funding – that is, student contributions (mainly tuition fees or other fees paid by the students) and student financial support
systems (mainly grants and loans) – is clearly among the most controversial issues in the sphere of financing higher education.
Approaches that place fees and loans at the center tend to meet criticism all across Europe on the grounds of their expected negative effects on
equity. However, tuition fees – combined with adequate and well-targeted student support schemes – generate additional revenues for HEIs,
thus enabling increases in participation rates. They are also regarded as more equitable by some, since they transfer part of the instruction costs
to those who will directly (and disproportionately) benefit from higher education.
Latvia’s Funding System in the Light of European Developments
Compared to other European countries, Latvia scores high in the area of financial autonomy. It is ranked 4th among the 28 European
higher education systems in EUA’s “University Autonomy Scorecard”. Providing a higher level of institutional autonomy is often expected to
improve the performance of higher education institutions (HEIs) and higher education systems as a whole. It is assumed that the more autono-
mous HEIs are, the better equipped they are to generate additional resources through fund-raising or efficiency measures, with the freedom
to orient their strategy towards available funds, focusing potentially on their specific research strengths or shifting the balance between
education and research. Based on this assumption, many governmental authorities among European countries have granted HEIs more freedom
to manage their resources and develop new income-generation policies.
Contrary to many other European systems, the current funding model in Latvia does not offer significant incentives for greater
performance- and output-orientation. The main purpose of performance-based funding is to create financial incentives for higher education
institutions to produce outcomes in certain areas of their activities which want to be encouraged by the funder. There are different ways in which
to cluster allocation models in the funding of higher education institutions. Three typical pillars of funding models concern basic funding, per-
formance funding, and innovation-/profile-oriented funding. The innovation-/profile-oriented funding component in Latvia is currently composed
of a number of different types of smaller and larger third-party funding streams (including EU Structural Funds) but not included in the system of
state funding. In contrast to the tendency of many European higher education systems to adopt more performance-based elements in their funding
mechanisms, the Latvian model has remained predominantly input-related and formula-based. The elements that are said to be performance-
oriented, such as the European structural funds as well as the national competitive research programs, are not perceived by the authors to use
transparent competitive criteria. This implies the system does not fully exploit its competitive capacity and strife for excellence.
Latvia has a dual-track tuition fee system with – in some cases – relatively high fees and relatively many fee-paying students.
The Latvian higher education system offers mainly merit-based support in the form of state funded study places, and relies more on
government-subsidized, mortgage-style loans offered by commercial banks, rather than grants. While there are concerns amongst stakeholders
that ‘the best students migrate to countries where students do not pay fees’, this causal chain appears in fact unlikely, given that these students
study for free in Latvia. To the extent that such migration of particularly gifted students takes place at the tertiary level – and more research would
certainly need to be done on this issue – it would most likely be fueled by quality concerns and more general economic considerations as opposed
to the current fee structure in Latvia. There is no general European trend in this area: some European countries that have previously introduced
tuition fees later decided to abolish them either entirely or partly. At the same time, other European countries have decided to increase the share
of private investment by allowing public HEIs to introduce fees or charge higher fees while at the same time promoting equity of access by restruc-
turing their student support systems. Need-based grants are the most frequently used modes of student support across European higher educa-
tion systems.
Strengths and weaknesses of the Latvian funding model
Derived from European trends and international practice, Table 2 provides an overview of the strengths and weaknesses of the Latvian
higher education and research funding system according to the aforementioned categories of criteria. It distinguishes between the context of
the funding system and the features of the funding system itself. Many of these issues relate to more than one criteria dimension.
242 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
Table 2 Strengths and weaknesses of the Latvian higher education and research funding system
Strengths Weaknesses
Context: Strategic orientation
• Diverse system of HE (many institutions, niche players, different • Apparently low political priority given to HE and science
profiles, public-private) (regarding low spending on HE and R&D)
• Substantial number of private HEIs • Inconsistent policy measures and political reform blockade
• Start-up of quality assurance for study programs and research because of polarized discussions (public vs. private good)
institutes • Many relatively small study programs
• Research institutes with more mass and focus • Tendency to study abroad
• High percentage of young people who qualify for HE • Opaque HR structures in HE, with opportunities to have more than
• High employment rate and high rate of return on HE one job
• A functioning data monitoring system (including performance • High teaching loads for staff; little time for research
and financial data) • Quality assurance for teaching and research only in start-up phase
• High adaptability of system and HEIs demonstrated in times of • Many graduates seeking employment abroad
economic crisis • No clear way to consolidation vs. competition yet
• MoES and line ministries are multiple voices for the interests of
HEIs
Financing: Incentive Orientation
• Study places allow national planning according to labor market • One-pillar model of state funding instead of several pillars
needs with balanced functions
• Study places offered on basis of merit including rotation • No real performance orientation in state funding (hence also weak
possibilities stimulate competition links to national or institutional strategies)
• EU structural funds for research allocated with some form of • No funding for innovative initiatives
competition • No clear approach to the role of state money for private HEIs
• Attract many fee paying students (willingness to pay/additional • No funding options for research-related developments such as
resources for HEIs) post-docs, knowledge transfer activities, etc.
• Existence of performance contracts between HEIs and ministry
Financing: Sustainability
• Study places funding provides cost-oriented stability • Underfunding of the HE and research system compared to most
in the system, but with a “money follows student” element other European countries and to own governmental objectives
• Availability of substantial EU structural funds for HE and R&D • Promised funding increase not yet effectuated
(reason for survival in economic crisis) • Lower funding tariffs for HE students compared to primary
and secondary education
• Cost basis for subsidized study places outdated
Financing: Legitimization
• Availability of student loans for many students with attractive • Many competing needs in case of budget increases (more quality
repayment conditions in teaching, PhD schools, post-doc careers, triple helix, etc.)
• Full-fee paying option creates access opportunities • Opaqueness and subjectivity in allocation of subsidized study
places, planning problems through yearly interventions
• Subsidized study places particularly benefit students from better
socio-economic backgrounds
• No subsidized study places for part-time students
• Student loans not attractive to some groups, e.g., the “guarantor
requirement” forms a big hurdle
• Hardly any need-based support nor means-testing mechanism for
students from low-income families
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Strengths Weaknesses
Financing: Autonomy and freedom
• Large degree of (financial) autonomy for HEIs • Heavy reliance on EU structural funds for R&D, which may not be
• Financial autonomy allows entrepreneurial freedom a sustainable long-term situation (plus co-funding problem
• Substantial level and good framework conditions of resource in case of matching funds)
diversification • Relatively low funding from industry/ companies
Financing: Practical feasibility
• Substantial outward international student mobility (many systems • Decentralized system for student loans and scholarships
have problems to send students abroad). This means other (efficiency risks and problems for HEI with needs assessment)
countries pay for the instruction costs. • Debt cancellation mechanisms too generous
• Mismatch between academic year and fiscal year
Latvia has a diversified higher education sector including capital, regional, public and private higher education institutions. Universities enjoy
a significant amount of financial autonomy which allows for resource diversification. The funding model based on study-places provides some
basic stability for the sector and is related to sector-level planning geared towards labor market needs. In addition, Latvia has a high number of
full cost-covering fee paying students and a significant share of research funding coming from EU funds.
However, as mentioned above, the system is significantly underfunded in comparison to not only other European countries but, impor-
tantly, also vis-a ` -vis the government objectives and legally-set targets, both as a proportion of public spending and per study-
place.
While, in principle, public funds are allocated according to study places, i.e., educational needs, this is de-facto nearly the only
public funding instrument, and thus has to accommodate many competing needs (partially related to research and wider institutional
missions) of universities. The small performance-oriented elements, such as small competitive research funds, use criteria which are not trans-
parent to the stakeholders and thus miss the desired effects. In practice, the system is partially opaque and leaves room to subjectivity, both
with relation to the allocation of study places and research funds. Also, there are planning problems due to annual interventions (while MoES
has a different fiscal year from higher education institutions). The cost basis for the study places in legislation is outdated while universities
only receive 80 percent of the defined minimum costs.
The current strong merit-based approach to budget places and grants raises questions about equity, as subsidized study places
and scholarships are available to the “best students” and thus are most likely to particularly benefit students from better socio-economic back-
grounds. It can be questioned if this really stimulates academic excellence within the whole system. The decentralized loan system appears to be
generous, but in reality creates practical problems and appears not to be attractive to those who might need it most. There is very little needs-
based support or means-testing mechanisms for students from low-income families.
The current public funding model appears as a largely input based ‘one-pillar’ model which, overall, does not represent a balance
between stability, performance, and innovation orientation. This also means weaker links between public funding and national and institu-
tional strategies. In addition, the system relies heavily on EU funds, in particular for research and development which might not be a long-term
solution to stable research funding while also funding from industry and other private sources appears to be underdeveloped.
Note:
a. http://ec.europa.eu/eurostat/web/education-and-training
Box 2 Executive Summary from “Assessment of Current Funding Model’s ‘Strategic Fit’ with Higher Education Policy Objectives”
For the purposes of this assessment, the strategic objectives for higher education identified in the key policy planning documents
were clustered into the following nine thematic goals:
1. Increase the quality of education and link with the national economy
2. Increase the quality and (international) competitiveness of research
3. Increase sector efficiency
4. Enhance technology, innovation, creativity, and entrepreneurship
5. Renew and develop the human resources of higher education institutions
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6. Stimulate participation in and access to higher education
7. Stimulate internationalization in higher education
8. Enhance funding base of higher education
9. Establish a new and transparent approach to quality assurance
Consistent with the Bank’s first report, this paper also explores the current funding model for Latvian higher education through
four components (instruments of state funding, diversification of financial resources, financial autonomy, and student funding)
to determine how each aligns with the thematic goal. Table 3 below summarizes the overall assessments regarding the strategic fit of
the four components of the funding system with each of the nine Thematic Goals. The scores vary from a strong positive strategic fit (indicated
with “++”) to a strong negative fit (indicated with “- -”). A neutral relationship is indicated with “0”.
Table 3 Strategic fit of the four components of the funding system with the nine Thematic Goals
State Resource Financial Student
Thematic goals Funding Diversification Autonomy Funding
1. Quality of education -- + + -
2. Quality of research -- + + +
3. Sector efficiency -- - + +
4. Technology, innovation, creativity and entrepreneurship - -- 0 0
5. Human resource development - + + 0
6. Participation and access -- ++ 0 --
7. Internationalization - 0 0 -
8. Funding base -- - 0 +
9. Transparent quality assurance + 0 0 0
As the table demonstrates, the overall funding model, particularly the basic funding for teaching and research, does not align well
with the Thematic Goals for Latvian higher education. In general, this does not mean the policy objectives cannot be met, since other policy
instruments can also be effective. However, the structural underfunding of the system together with the current model’s emphasis on inputs
(i.e., enrollment), and its lack of a performance orientation actually appear to work against the spirit of quality education and research. Increases
in state investment in higher education, in accordance with current legislation, could go hand-in-hand with the introduction of more perfor-
mance-driven and innovation-oriented funding instruments that provide incentives for the system to move in the desired direction of enhanced
teaching and research quality.
Though the strong reliance on tuition fees and on EU structural funds should, in theory, steer higher education towards greater
relevance to societal and economic needs, the incentives are not strong enough. Both tuition fees and EU funds are currently relied upon
to maintain the functioning of the system and support the status quo, so they are unable to work effectively as instruments that guide towards
greater quality, creativity, innovation, and entrepreneurship, especially in light of current economic and quality assurance realities.
While financial autonomy is high in Latvia, some institutions have not utilized their full potential in this respect. Certain institutions
are being creative in developing alternative revenue sources, but the resultant funds are necessary to offset the low level of state investment
in the system, so there is not much ability to reinvest in new opportunities, partnerships, or innovation. Additionally, some other institutions do not
appear to be fully aware of their autonomy. The system would benefit from financing instruments that allowed it to incentivize, for example,
partnerships with the private sector for revenue-generating research or training collaborations.
Finally, Latvia’s current approach to student funding appears to have a slight misalignment with the Thematic Goals, particularly
as it relates to internationalization and expanding access. Latvia would be well advised to reconsider how student financing could better
align in a more supportive way with key policy objectives.
REPORT 3: Higher Education Financing in Latvia: Final Report | 245
3 Revisiting Criteria for Good
Funding Models
In order to analyze the strengths and weaknesses of the current higher edu-
cation funding system in Latvia and recommend adequate reform strategies,
one must start with a clear understanding of what is meant by a funding mo-
del and then consider normative criteria representing the features of a “good”
higher education funding model. In other words, any recommendations should be
based on and justified by mutually agreed criteria.
To start, Box 3 clarifies what is meant by the funding model and provides examples
of different types of funding models commonly employed throughout Europe:
Box 3 Models of public funding
There are a number of different ways in which to categorize or cluster alternative allocation models in the funding of higher education institutions.
A frequently applied categorization distinguishes between negotiated, incremental, formula, and competitive funding (e.g., Eurydice, 2008;
Jongbloed et al., 2010). For practical purposes, this report adopts the categorization of Ziegele (2013) who has identified three typical pillars of
funding models: (i) basic funding; (ii) performance funding; and (iii) innovation-/profile- oriented funding.61 Regardless of the diversity
throughout higher education systems and funding models in Europe, these three pillars can, to a certain extent, be identified in most systems.
Negotiated, incremental, formula and competitive funding are instruments that could be applied within the three specific pillars.
Basic funding can be described as an amount of public funding that remains largely stable over a specific period of time. The purpose of basic
funding is to provide predictable and reliable financing that covers the main part of operational costs, thereby enabling HEIs to perform their core
tasks of teaching and research (Ziegele, 2013, pp. 73–74). As previously discussed, in most European systems, public authorities distribute basic
funding to HEIs through the use of block grants. The overall amount of the block grant may be determined in different ways; through negotiation,
incrementally on a historical basis, or via a funding formula. The importance of these different elements in determining the overall amount of
the block grant varies across the systems (Estermann, Bennetot Pruvot & Claeys-Kulik, 2013, p. 8).
Incremental funding, where historical allocations play a large role, is becoming less common, and in many systems, has already been replaced by
formula-based approaches with input-oriented indicators. In 20 out of 34 European higher education systems, funding formulae were of very large
importance in 2008, compared to 1995 when only seven systems attached a large importance to it (Jongbloed et al., 2010, p. 47–48).
The importance of input and output drivers in determining the operational grant for teaching, research and ongoing activity is shown in Table 4
below. Input-related drivers remain extremely important or important in almost all European higher education systems. The most important input
criteria include the number of students or publicly-funded study places, the number of staff, and past costs of an institution. However, compared
to 1995, when there were only 6 systems in which output-related criteria played an important or extremely important role, in 2008, 24 European
systems considered output-related drivers important or extremely important. Frequently used output criteria include elements from teaching
and research activities: degrees conferred, study credits accumulated, assessment results, indicators related to publications, or competitive
research grants (Jongbloed et al., 2010, pp. 49–51). Where funding formulae are used to calculate the block grants, these are largely dominated
61 In most European higher education systems, the public funding of research takes place through a dual
support system meaning that research is funded both through basic funding and through innovation-/profile-
oriented funding (mainly competitive research grants allocated by intermediary allocated by research coun-
cils, national academies or other national/federal intermediary bodies (cf. Jongbloed et al., 2010, p. 53).
246 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
by input-oriented indicators, namely student numbers (at Bachelor level, then at Master level). The corresponding output-oriented indicators
(number of Bachelor and Master degrees conferred) are used less frequently or else have less weight in the formula (Estermann, Bennetot Pruvot
& Claeys-Kulik, 2013, p. 9). Output-oriented indicators are typically part of the performance-based funding pillar, to be presented next.
Table 4 The importance of input- versus output-related drivers of HEIs operational grants
Number of systems and relative Number of systems and relative
importance of input-related drivers importance of output-related drivers
1995 2008 1995 2008
Extremely important 38 24 3 8
Important 4 18 3 16
Minor importance or unimportant 3 3 39 21
Source: Jongbloed et al., 2010, p. 51
The main purpose of performance-based funding is to create financial incentives for HEIs to produce outputs and outcomes in certain areas of
their activities by applying formula funding62. Performance-based funding arrangements reward HEIs ex post – that is, they reward their past
teaching and research performance (Ziegele, 2013, p. 74). Despite the simplicity in terms of definition, it seems that performance-based funding
is understood very differently across Europe. Nevertheless, a majority of systems consider their funding allocation mechanisms at least partially
performance-based for teaching (via graduate-related criteria) and partially or mainly performance-based for research, where indicators related
to publications and external research funding are normally taken into account (see Figure 1).
Figure 1 Relative importance of indicators used in funding formulae in European higher education systems
Source: Estermann, Bennetot Pruvot & Claeys-Kulik, 2013, p. 10
62 Or performance contracts which are related to part of the budget.
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The third typical pillar of funding models, innovation-/profile-oriented funding, underscores intentions expected to be carried out in the future.
Concretely, this type of funding is often utilized under the label of “targeted/earmarked funding”, “competitive funding”, “strategic funding”, “pro-
ject-based funding”, “excellence initiatives” or “centers of excellence” – to name but a few. Regardless of the name, all these funding instruments
basically aim to finance and incentivize innovations, research (or sometimes teaching) excellence, or the development of institutional profiles
in advance (cf. Ziegele, 2013, pp. 73–74, p. 78). Innovation-/profile-oriented funding can take many forms, such as funding that is allocated on
a competitive basis (e.g., the “Strategic Innovation Funding” in Ireland, established as a mechanism for institutional restructuring and moderni-
zation) or a non-competitive basis directly allocated to HEIs (e.g., Higher Education Innovation Funding scheme in the United Kingdom, which
focuses on knowledge exchange). Innovation-/profile-oriented funding includes excellence initiatives (e.g., Germany’s “Excellence Initiative”),
as well as project funding programs for carrying out strategic research found in many European countries.63
Performance contracts (synonymous with target agreements, performance agreements), whereby certain goals are agreed between the funding
authority and HEIs, are used in different ways within the funding pillars. With performance contracts, certain objectives, often in line with national
strategic priorities and institution-specific missions, are agreed between the funding authority and HEIs. If performance contracts are connected
to basic funding, they usually do not have to have a direct impact on funding. However, if the performance objectives are measured clearly and
linked to financial incentives, performance contracts often become an organic part of performance-based funding arrangements64. Concretely,
those performance contracts would be very broad, based on framework agreements, but might also take the form of more detailed contracts,
highlighting specific and measurable objectives and targets (Jongbloed et al., 2010, p. 30). In this case, they would belong to the third, innova-
tion/profile-oriented pillar. Over the recent years, performance contracts have become a common feature in many European higher education
systems. Currently, performance-based contracts are in use in 15 out of 22 European systems. These contracts have a clear impact on funding
allocations for instance in Finland, Austria, Germany and the Netherlands (Estermann, Bennetot Pruvot & Claeys-Kulik, 2013, p. 11).
When taking into account the latest developments of higher education funding models across Europe, some clear trends can be observed.
First, it is likely that basic funding becomes more dynamic and demand-oriented (rather than supply-oriented) through the “money-follows-the-
student” approach, where rewards and incentives are based more heavily on factors related to student enrolment, rather than on staff numbers
or past institutional costs. Second, the relevance and weight of the performance-based funding, including the formula funding, is likely
to increase. Performance-orientation sets HEIs incentives for improvement of quality and efficiency; both of which are crucial aspects in the
increasingly competitive environment. Third, it is foreseeable that the relevance and weight of the innovation-/profile-oriented funding compo-
nent increases especially in the form of competitive and targeted funding with a special emphasis on innovation and excellence, of which both
are considered important prerequisites for regional or national competitiveness. Furthermore, it is likely that performance contracting becomes
more widely used within the funding pillars due to the increasing performance-orientation in public funding modalities (Ziegele, 2013,
pp. 74–79).
The responsibility for identifying the criteria was first assumed by the World Bank
team, and then subjected to a feedback cycle with the MoES to ensure agree-
ment. The criteria were derived from three different sources:
•International experiences and standards regarding the features of “good” fund-
ing models65;
•Feedback and approval from the MoES; and
•Stakeholders’ assessment of the importance of different criteria as obtained
through interviews.
Whereas these criteria were applied to Latvia’s current higher education funding
model to determine its strengths and weaknesses in the World Bank’s first report,
they have now become requirements or expectations vis-a ` -vis the proposed
model. Table 5 summarizes the intentions of each criterion.
63 See http://www.excellence-initiative.com/
64 It is important to note that performance contracts are applicable to all three funding pillars (basic
funding, performance-based funding, innovation-/profile-oriented funding) and not restricted to only
performance-based funding arrangements.
65 For a more comprehensive discussion, see first report (dated 18 March 2014).
248 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
Table 5 Overview of Strategic orientation Promote national strategies
assessment criteria66 Promote institutional profiles
* Only relevant for institutions,
not for student funding. Incentive orientation Provide clear, non-fragmented incentives
Avoid undesired effects
Create performance rewards and sanctions
Create a competitive environment
Sustainability Guarantee continuity in funding mechanisms
Allow long-term planning*
Take into account cost differences
Promote risk-spreading and management*
Legitimization Provide unambiguous and balanced funding structures
Make funding transparent
Support the perception of fairness
Allocate lump sums*
Guarantee academic freedom
Autonomy and freedom Implement an adequate level of regulation
Guarantee autonomy of internal resource allocation*
Promote accessibility of diverse income sources*
Practical feasibility Use available data
Ensure administrative efficiency
Respect methodological standards
Ensure coherence with funding levels and steering approaches
66 Minor adjustments have been made in comparison to an earlier version of this table provided by
the World Bank team in an ‘Information Note’ in July 2014.
REPORT 3: Higher Education Financing in Latvia: Final Report | 249
4 Reforming the Funding
Model for Latvian HEIs
This section provides an overview of the desirable elements and suggested features
of a new funding model for Latvian higher education. The new model is evaluated
to identify how it may address the current challenges of the existing model as well
` -vis the aforementioned criteria for good funding models.
as vis-a
4.1 Funding models considered
In developing recommendations for Latvia’s new approach to financing
higher education, the team considered several alternative funding models
and options. As discussed in Section 3 of the second report, a range of funding
mechanisms and options have been taken into consideration for not only evalua-
ting current funding practices in Latvian higher education, but also to provide
realistic alternatives that help Latvia achieve its objectives (ibid.), such as enhan-
ced quality of teaching and research, greater efficiency, access, and internationa-
lization, and stimulate innovation, entrepreneurship and staff development.
As higher education challenges, objectives and practices differ from country
to country, one cannot easily copy or import successful funding models from
other systems and apply them in a system with different structures, tradi-
tions, challenges, objectives and interests. External options and models must
be assessed against and adjusted to the local needs — as is intended to be
the case in Latvia. Reforms should be informed by international experiences and
adopt good practices that correspond to the specific situation, but they should not
just copy something that is done abroad.
The range of funding approaches and instruments that inspired the team
to select relevant funding options for the Latvian higher education system
— including its challenges, ambitions and aims — includes various interna-
tional practices with regard to the funding of teaching, research and stu-
dents. Examples of state funding models to allocate resources among higher
education institutions included funding formula that can be driven by the number
of students, new entrants, graduates, internationally mobile students, research
outputs, international staff, etc. Other approaches included ways of capacity fund-
ing with governments and institutions agreeing on how many students institutions
will teach and how many graduates they will “produce” within specific disciplines
and against what tariffs. Funding options that enhance sector efficiency include
sector consolidation programs (as in Denmark) or performance agreements be-
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tween national ministries and individual higher education institutions on various
aspects of teaching and research such as quality, completion, drop out, institutio-
nal profiles, etc. (as in Germany, the Netherlands, Australia, Hong Kong, and New
Zealand). Other funding approaches concern more performance and innovation
stimulators such as excellence initiatives, research assessment exercises or targe-
ted innovation funds.
In the area of student funding, not only the above mentioned tuition regimes
were explored, but also the ways in which students are supported by grants
and scholarships, and how many students benefit from them and based on
what criteria — either need-based (depending on family income and resources)
or merit-based support (depending on the study achievements). Also various
alternative loan schemes, including their eligibility criteria and repayment mecha-
nisms, have been considered.
Various approaches have been explored with regard to resource diversification.
In the area of teaching, one can think of whether to charge tuition fees or not and
to whom. Related to the question of whether higher education ought to be
considered a public or a private good — or a mixture of both and to what extent
— the team has examined funding models where higher education is tuition free
to all students (e.g., Estonia’s new model under certain conditions67) as well as
models where students have become the main source of teaching revenues
(as in the English case of very high tuition fees accompanied by income-contingent
loans). In the area of research, resource diversification is more often related to invol-
ving business and industry in research funding, which can be stimulated by specific
funds based on public-private partnerships, innovation vouchers for companies, etc.
To summarize, Table 6 highlights many of the models explored as part of this study:
Table 6 “Good-Practice”
State Funding Netherlands’ performance-based funding
models highlighted
in the evaluation that address Sweden’s capacity funding
challenges similar to those Finland’s performance formula for universities
in Latvia Germany, Denmark, France’s Excellence initiatives
English Research Assessment Exercise
Hong Kong, Netherlands, Australia, New Zealand, and Germany’s use of target agreements
Denmark’s comprehensive sector consolidation
Resource Various German states/ länder
Diversification Netherlands’ knowledge vouchers
British universities recruitment of various disadvantaged students
Financial Germany’s consolidation process in Lower-Saxony
Autonomy Promote institutional profiles
Student Funding Netherlands’ performance-related grants
Estonia’s student loans
German BAFöG loans
German Bundesausbildungsförderungsgesetz (BaFöG), the English National Scholarships
Programme, the Dutch Supplementary grants, the Australian Commonwealth Grants Scheme
and the New Zealand Student Allowance Scheme (need-based grants)
67 It is free for students who complete the required 60 ECTS per year/30 ECTS per semester.
REPORT 3: Higher Education Financing in Latvia: Final Report | 251
Finally, the issue of whether higher education is a public or private good has
been heavily debated in Latvia. Below, an excerpt from an earlier report for this
project has been provided to re-iterate the World Bank team’s perspective, to con-
textualize the other models considered, and to preface the proposed model:
Box 4 Higher education as public and private good
From an economic perspective, HEIs produce outputs that can be categorized as “public” or “private” goods. Using a standard economic definition,
public goods (e.g., products, services) are goods that are non-excludable and non-rivalrous. Non-excludability means that a good cannot be
provided exclusively to only some individuals in a way that other individuals could be excluded from consuming the same good. This, therefore,
implies that consumption by some individuals does not diminish the consumption levels of others of the same good. In the case of private goods,
the situation is the opposite; individuals can be excluded from consuming the service or product if they are not willing or able to pay for it
(i.e., a good is excludable), and consumption of a service or product reduces the possibilities of others to consume the same good or service
(i.e., a good is rivalrous). In addition, public goods create spillover effects. If they are being offered, people who do not purchase the goods never-
theless enjoy their benefits, e.g., dikes that are used to protect from water floods, etc. A public good has to be provided by the state and funded by
taxes, as private markets would not lead to a sufficient provision of the good. A private good does not require state intervention and should be
provided by the market.
The public vs. private good argument regarding higher education is an explanation for the diverse tuition fee developments in Europe. In many
European countries, politicians tend to “buy” either one of the two positions, often leading to a politically polarized debate where the two positions
are opposed in contradiction, leading either to political reform blockades or to an unreliable sequence of introducing and later abolishing tuition
fees.
This paper proposes economic analysis and rational arguments to overcome the political impasse. Economists have been clear that there are
private benefits to be gained from higher education, meaning that there is rivalry and excludability. But, they are also convinced that there
are public benefits of higher education (see Table 7). Public benefits refer to positive externalities of the good, i.e., benefits for society not taken
into account in the individual cost-benefit-analysis of the student (hence justifying public funding).
Table 7 Potential private and public benefits from higher education
Benefits from
higher education Private Public
Economic Higher salaries Greater national productivity and development
Employment Reduced reliance on public support
Higher savings Increased consumption
Improved working conditions Increased potential for transformation from low-skill industrial to
knowledge-based economy
Personal and professional mobility
Social Improved quality of life Nation-building and development of leadership
Better decision-making skills Democratic participation; increased consensus; perception that
society is based on fairness and opportunity for all citizens
Improved personal status Social mobility
Increased educational opportunities Greater social cohesion and reduced crime rates
Healthier lifestyle and higher life expectancy Improved health
Improved primary and secondary education
Source: Steier, 2003, p. 167
Higher education has elements of both private and public goods. People can be excluded from higher education, from a particular institution, from
a particular program, or from a particular teacher. This exclusion can be based, for example, on differences in academic merit; i.e., given that
an individual has to meet certain conditions in order to have access to, and to graduate from, higher education institutions. However, nobody can
be excluded from the higher productivity graduates exhibit at the labor market and the advancements made through their creativity and applica-
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tion of skills after successfully completing quality higher education. There is also wide agreement that higher education creates both public
and private benefits as well as costs, and that those who benefit from higher education should also contribute to its costs (equity principle).
Higher education creates multiple social and economic public benefits thereby justifying significant public investments in higher education.
However, individuals (mainly graduates) also receive significant private economic and social benefits, making the recommendation that they
bear directly at least part of the costs of their training, both efficient and equitable.
Economic rationales provide no arguments for 100 percent public or private funding. Differences in opinion nevertheless arise when determining
what the “right” balance might be between benefits and costs and on how to measure up the benefits and costs (especially in terms of money).
In any case, several scholars consider the full public-funding model of higher education as inequitable and regressive, based on the fact that
higher education students are disproportionately from middle- and higher-income families (e.g., Barr, 2004; Bevc & Uršiè, 2008; Johnstone
& Marcucci, 2010).
OECD’s statistical yearbook Education at a Glance provides calculations annually on the public and private costs and benefits of higher education.
According to OECD (2013, p. 135), it is very difficult to generate correct and comprehensive estimates of public and private returns, meaning
that rates of return must always be interpreted with caution. Nevertheless, large discrepancies between private and public returns “should
prompt additional analysis to assess whether government tax schemes or subsidies are strongly distortionary” (ibid., p. 135). Based on OECD
calculations, average net private returns in EU21 countries slightly exceed public returns (ibid., pp. 144–147). However, in some specific coun-
tries (Estonia, Turkey, Poland, Slovakia) private returns are considerably higher than public returns. On the other hand, e.g. in Belgium, Greece
and Italy public returns are moderately higher than the private ones.
This leads to the following conclusions:
• Higher education is a “mixed good” creating both public and private costs and benefits.
• Determining the exact public and private costs and benefits is difficult from a conceptual and methodological perspective. However, one-
sided financing models emphasizing only public or only private dimensions (full public or full private funding) are neither adequate nor
equitable.
• Since the real balance between private and public costs and benefits is unclear, there is a wide range of potential arrangements between
private and public funding that might be considered when developing an appropriate financing model. However, neither a pure market model
nor a 100 percent free higher education model is within this range.
In the case of Latvia, the first conclusion would be that economic analysis provides no basis for the polarized political discussions of the previous
years, favoring either the argument of the pure private or public good. Acknowledging economic arguments might help in avoiding political
reform blockades. Secondly, if we take the mixed good approach to the individual level, the dual track model seems to be problematic. Each
student benefits from private returns and contributes to positive externalities. The economic rationale would instead suggest a certain cost-
sharing for each student rather than an overall cost-sharing for all students combined. Third, the major question for Latvia will be where to move
from the current situation: towards greater private or public funding shares (or might the current situation be adequate)? The status quo section
analysis where public and private funding in Latvia stand in comparison to other European countries, and concludes that, at present, total societal
investment in higher education is too low due to both limited public funding for HE and R&D, as well as limited private contributions, particularly
in the R&D sector. Private contributions through tuition fees tend to typically come from students who cannot attend HE on subsidized study
places, and have to pay the full costs. Analysis shows that it is in particular students from more advantageous backgrounds that profit from
the subsidized (tuition-free) study places.
Overall, examining the current funding situation in Latvian higher education,
the team is convinced that Latvian higher education demonstrates characte-
ristics of both public and private goods, which should one way or another be
reflected in the funding model and its policy implications. The team believes that
any policy recommendations for a new funding model will have to bring about
a major change in the way Latvia funds its higher education system, institutions,
and students in order to bring about stability as well as a stronger orientation
towards quality, performance, efficiency and equity. In the section that follows,
the team proposes a new model that contains various elements of the current
Latvian funding model combined with elements that are being used elsewhere
and are attuned to the Latvian context, reality and feasibility. Although stability
is an important feature of any funding model, the team encourages Latvia to
periodically assess its funding model to reflect evolving fiscal circumstances, poli-
cy priorities, and cultural perspectives.
REPORT 3: Higher Education Financing in Latvia: Final Report | 253
4.2 Positioning Latvia within European trends
Positioning the Latvian financing model within the context of European trends
in higher education provides additional context for the evaluation. Importantly,
it should be noted that the team does not consider European trends to be
the main criteria to evaluate the strengths and weaknesses of Latvian financing
model. What seems to be popular or good in Europe does not automatically
mean that it would be applicable or good for Latvian higher education financing.
Funding models are tightly bound to the features (society, economy, demograp-
hics, etc.) of different countries, and it is acknowledged that Latvia differs in these
features with many respects.
The following tables in Box 5 (Tables 8 to 12) are excerpted from the World Bank
` -vis European
team’s first report and offer an overview of Latvia’s position vis-a
trends:
`-vis European trends
Box 5 Latvia’s position vis-a
Table 8 Models of public funding – European trends and Latvia
Models of public funding European trend Current situation in Latvia Position of Latvia
Structure of funding model • Three typical pillars for • Latvia applies only the pillar of Inconsistent with European
allocating public funding for “basic funding” in allocation trend
HEIs can be found from most of core public funding to HEIs
of the European countries: • Performance contracts
(1) basic funding; are applied between HEIs
(2) performance funding; and and MoES
(3) innovation-/profile-
oriented funding
• Performance contracts /
target agreements are in use
in 15 out of 22 European
Basic funding • Basic funding: • Latvia applies formula Inconsistent / consistent
and performance-based Formula-based approaches funding mainly with with European trend
funding: modalities with demand-based input-oriented indicators
input-oriented indicators (funded study places,
are substituting incremental research equipment)
funding with historical • The overall public budget of
emphasis (mixed approach the HEIs remains largely
is common) constant and develops
• Performance-based incrementally on
funding: Majority of systems a historical basis (rather
consider their funding than demand)
allocation mechanisms at • Current funding model does
least partially not offer significant
performance-based incentives for greater
• In 2008, 24 European systems performance-
considered output-related and output-orientation
drivers important or extremely
important (in 1995: 6 systems)
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Models of public funding European trend Current situation in Latvia Position of Latvia
Innovation-/profile oriented • Innovation-/profile-oriented • The innovation-/profile- Inconsistent with European
funding: modalities funding is used more frequently oriented funding component trend
to support national policy in Latvia is currently
priorities and development of composed of a number of
institutional profiles different types of smaller
• The relevance and weight of and larger third-party
the innovation-/profile-oriente funding streams (including
d funding component is likely EU Structural Funds) but not
to increase; especially included in the system of
in the form of competitive state funding
and targeted funding
Table 9 Resource diversification – European trends and Latvia
Resource diversification European trend Current situation in Latvia Position of Latvia
Public / private funding • Private expenditure on HEIs • Private funds (tuition) Consistent with / ahead of
diversity has increased in 16 out of accounted total 23% European trend
the 19 European OECD and “other funds” (excluding
countries between 2000 international/EU funding)
and 2010 20% of Latvian HEI revenue
• EU21 average of private in 2012
expenditure on HEIs was 23% (Source: MoES, 2014)
in 2010
Diversity of sources • Funding of European public • Latvian HEIs funding structure Inconsistent with / ahead of
HEIs in 2008: on average (2012): European trend
– 67% from public sources – 36% state budget funding
through operational grants – 23% tuition fees
(in 1995: 78%) – 41% “other sources”
– 12% from private (out of which 21% were
households as tuition from international funding,
fees (in 1995: 8%) mainly EU Structural Funds)
– 21% as third-party funds (Source: MoES, 2014)
(in 1995: 15%)
• On average, EU funding
ranges from 3–4%
(Estermann & Bennetot
Pruvot, 2011) to over 10%
(Estermann, Bennetot Pruvot
& Claeys-Kulik, 2013) of
the total income of HEIs
REPORT 3: Higher Education Financing in Latvia: Final Report | 255
Table 10 Financial autonomy – European trends and Latvia
Financial autonomy European trend Current situation in Latvia Position of Latvia
HEIs freedom in internal • Block grants are used • One-year block grant split Consistent with European trend
allocation of public funding in 25 systems, line-item into sub-categories
budgets in 3 systems
• No restrictions on the internal
allocation of the block grant
in 14 systems
• Some restrictions for internal
allocations of the block grant
in 11 systems
HEIs ability to keep a surplus • HEIs are able to keep a surplus • State funded HEIs can keep Consistent with European trend
in 27 systems, not able a surplus with an approval of
to keep in 4 systems external authority
• No restrictions in keeping
a surplus in 15 systems
• Some restrictions in keeping
a surplus in 12 systems
HEIs ability to borrow money • HEIs are able to borrow money • Latvian HEIs are able borrow Consistent with European trend
from financial markets money with an approval of
in 23 systems, not able external authority
to borrow in 7 systems
• No restrictions for borrowing
in 7 systems
• Some restrictions for
borrowing in 16 systems
HEIs ability to own • HEIs are able to own their • Latvian HEIs own their Consistent with / ahead of
their buildings buildings in 22 systems, buildings European trend
not able to own in 6 systems • Latvian HEIs can sell
• No restrictions in selling their buildings (restrictions
assets in 8 systems apply in the case of State
• Some restrictions in selling property)
assets in 14 systems
HEIs ability to set • HEIs are not able to set • Latvian HEis are free to set Ahead of European trend
the salaries of their staff salaries freely in 28 systems, the salaries of their staff
salaries can be set freely (above the minimum wage)
in 5 systems
HEIs ability to set the level of • In most European systems, • Latvian HEIs are able to set Ahead of European trend
tuition fees HEIs ability to set the level of their fees at all levels
tuition fees is restricted by
the external authority,
especially in the case of
domestic/ EU students
Overview on financial • The overall level of financial • HEIs have a high level of Ahead of European trend
autonomy autonomy across Europe financial autonomy, Latvia
has increased significantly was ranked 4th position
over the last 15–20 years in EUA’s “University Autonomy
Scorecard”
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Table 11 Student funding – European trends and Latvia
Student funding European trend Current situation in Latvia Position of Latvia
Tuition fees / fees • A large diversity of fee • Latvia applies a dual track No clear European trend
systems, no clear European tuition fee system
trend • 49% of all students
• Majority of students pay (full-time and part-time)
fees in 28 systems, minority pay fees (37% of full-time
of students pay fees and 97% of part-time
in 13 systems (2009/10) students)
• During the past years, some (Source: MoES, 2013)
systems have abolished fees, • Compared to many other
whereas some systems have European systems, relatively
introduced fees or raised high fees are charged
the level of fees in Latvian HEIs
Student support • A large diversity of student • Latvian higher education No clear European trend
support systems, no clear system offers mainly
European trend merit-based support
• Need-based grants are most in the form of state funded
frequently used in European study places, and relies more
higher education systems, on government-subsidized,
but still 20 out of 39 European mortgage-style loans
systems still apply also offered by commercial banks,
merit-based schemes rather than grants
• Publically-supported student
loan systems exist in 2/3 of
European countries
Table 12 Overview – European trends and position of Latvia
European trend Position of Latvia
Models of public funding Inconsistent with European trend
Resource diversification Mixed
Financial autonomy Ahead of European trend
Student support No clear European trend
REPORT 3: Higher Education Financing in Latvia: Final Report | 257
4.3 The proposed model
Importantly, a new funding model could help to overcome the political
blockades caused by the public versus private good debate and the current
underfunding of higher education in Latvia. As higher education is a mixed
good with public and private benefits, it needs mixed funding.
It is clear, however, that the current level of funding, both public and private,
for higher education in Latvia is not sufficient. This is illustrated by the signifi-
cant gap between overall spending on higher education in Latvia vis-a ` -vis other
68
EU countries. Consequently, the government considers increasing its higher
education expenditure. Private sector investments in higher education are also
relatively low — except for the tuition contributions from part-time and full fee-
paying students on non-state-funded study places. It is not clear how fast
the current situation could be changed (see the subsequent section that addres-
ses different funding level scenarios), but it is evident that proposals for a new
funding system must acknowledge that the current system is substantially under-
funded.
The capacity to improve the system and to realize the potential benefits of
a new model are directly related to funding levels. Increased government
expenditure would not only serve as an example to stimulate increased private
(business) funding but could also include incentives to help private partners to
invest in higher education and research. The task would then be to increase pub-
lic funding in connection with the implementation of new funding components
and private funding through further diversification with an emphasis on sources
such as small and medium enterprises and industry, research funds, etc. In the
proposed model, the overall income stemming from tuition fees would not be
expected to rise in the medium term; however, tuition fees would be ‘generalized’
as an important element of a more egalitarian system with a sufficient funding
basis.
Taking this approach, however, would be a political decision which is indepen-
dent of the main emphasis on a changing nature of the allocation of public fun-
ding. The team would advise the government and sector leaders to include
political economy considerations in its further exchange on the model and its
possible implementation.
Considerations of higher education funding levels in Latvia should not be
mixed with the funding levels of the education system as a whole; i.e.,
a potential funding increase related to lower levels of education would most likely
not resolve the quality and performance issues which the tertiary sector faces
and which were discussed in earlier reports.
Funding increases should not be realized without changing the system. It is
difficult to argue for a larger investment in a suboptimal structure; on the contrary,
the potential for additional funds is greater if it is clear how these funds will add
68 “In 2010 (most recent data), public expenditure on higher education represented only 0.8 percent
of GDP in Latvia, versus an average of 1.26 percent in the EU27 countries and 1.23–1.27 percent
in Estonia and Lithuania respectively” (see first report and this final report, Box 1).
258 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
value to the system and advance policy objectives. Greater transparency in the
way higher education is funded and is related to improvements of the quality
of education and research will add to the willingness of various stakeholders to
invest, so that the envisaged added value of higher education and research will
not only be realized but also demonstrated.
An important feature of the recommended funding model for Latvia is “balance.”
Balance must be achieved in many areas to present a foundation for successful
reform, including:
•A balance between stability and incentives;
•A balance between input- and output-orientation;
•A balance between ex ante funding of innovations and ex post rewards of perfor-
mance;
•A balance between the promotion of national objectives and institutional profiles;
•A balance between teaching and research as criteria of funding (plus an align-
ment of both in the funding model);
•A balance between basic across-the-board funding of research and focused,
prioritized funding of (excellent) research;
•A balance between public and private sources of funding;
•A balance between need-based and merit-based student funding;
•A balance between accountability and autonomy.
As became clear in the first report within this World Bank Advisory Service,
such a balanced approach does not exist at the moment but could result from
the features of a new model which are discussed in this section.
Some of the recommendations are closely related, while others do not depend
on each other. The following paragraphs give a number of recommendations.
In some cases, recommendations only make sense if they are combined. In other
cases, it would be worthwhile to realize one recommendation even if another can-
not be realized at the same time. Important aspects include the following:
•The implementation of a new state funding model could be done without refor-
ming the student funding system at the same time (and the other way round).
•Within the state funding model a combination of all pillars is desirable, but new
pillars could be implemented one after the other.
•A general tuition fee model (and even the existing tuition fee model) definitely
has to be linked to the proposed reforms in need-based student support and
student loans. However, it can be organized separately from a new state funding
model (including its various pillars).
State funding would benefit from a three-pillar model. In such a model, stable
funding is combined with a performance-oriented component, using a formula
with performance indicators, and an innovation-oriented component allocated via
performance agreements.69 The performance part rewards and sanctions past
69A performance agreement is a contractual arrangement between the MoES and a single university,
defining clear and measurable goals of the university for a multi-year period within the framework
of national objectives. In return to the obligation to attain the goals, the state provides funding.
The agreement results from a structured negotiation process. For details, see Appendix 1.
REPORT 3: Higher Education Financing in Latvia: Final Report | 259
performance (ex post funding), whereas the innovation-oriented component pro-
vides financial support for the attainment of future objectives determined by
a negotiation between individual universities and the ministry (taking into account
state goals and institutional profiles). This also means that performance measure-
ment and performance agreements are no longer bound to the study place model
but constitute separate elements of the state funding model. Since teaching and
research are partially separate but also interrelated activities, the funding mecha-
nisms should reflect this with both separate and aligned approaches. There is, ho-
wever, one multi-component public funding model which aligns teaching and re-
search-oriented allocation criteria.
The basic features of the three-pillar model for Latvia are described below; Figu-
re 2 provides an overview.
Figure 2 Three-pillar model of
state funding
The first pillar would mainly consist of the study place model. The study place
model with its input-oriented planning approach remains an important element of
the state funding system, since it continues to create a stable funding base.
In the new model, however, the study place allocation is not intended to be the only
component to cover the cost of the educational experience. Unlike the current
model, the institutions would be intentionally expected to cover the cost of teaching
and research from all sources of the three-pillar model, whereas the study place
model is limited to the function of basic funding. With possible additional funding
allocated through pillars 2 and 3, the level of overall public funding allocated
through the model could come closer or correspond to the budget that would
result from the currently envisaged “optimal price” of a study place.
The ministry would still conduct periodic studies on the costs of delivering
discipline-specific educational programs, but the intention is to understand
the relationship among different areas of study as opposed to the precise
cost. The relative cost relationship across different programs is then employed
in the funding model as three to five different funding or tariff bands (e.g., social
sciences and humanities, science and engineering, medical programs, arts
— which would mean a simplification of the current cost coefficients). If it is deter-
mined that programs in science and engineering, for example, cost approximately
1.5 times more than those in the social sciences, then the amount allocated
260 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
for a study place in science and engineering would be 1.5 times the amount for
a study place in the social sciences.
Keeping in place the study place model is predominantly meant to guarantee
some base-level funding. Unlike in the current funding model, it is not the objec-
tive of the new study place model to provide an exact representation of the pre-
cise costs per student or some proportion of that (currently HEIs only receive
around 80 percent of the “defined minimum costs of a study place”). The “new”
study place model, however, is meant to provide stability within the overall sys-
tem. The relationship to the politically decided number of study places indicates
the socially desired balance between disciplines. This is the function of the first
pillar. This tranche of funding should be topped up with the other funding ele-
ments, such as the performance-based second pillar and profile- and target-orien-
ted third pillar funding. Thus, keeping the first pillar funding as a basic financial
foundation of the system allows for space in the public budget to also allocate
performance- and profile-oriented funding at levels that will create real incentives
within the system. Performance-oriented allocation implies that a university with
high performance will have more state funds available per student than a low
performing one.
The study place model must become less complex and more transparent, flexi-
ble, and strategic. The process to determine the number of study places should be
optimized. A revised study place system would work in the following way:
•The ministry plans the overall numbers for study places in different disciplines.
The immediate emphasis is on the upcoming year, but a multi-year outlook
is provided as guidance to institutions, students, and stakeholders. This plan
is informed by stakeholder consultations (especially regarding employer
needs), labor market forecasts, and data on the development of real demand.
The overall target numbers for fields for the Latvian system would be published.
This results in an incremental change from the plan’s starting point, which would
be the current number of study places per field and institution. From this start-
ing point certain overall increases and decreases per field are planned, and
a certain percentage of the study places could be used for innovative programs
suggested by the institutions. Reallocations of study places between universities
are possible (putting an end to the practice of generating funds for new study
places only from existing ones in the same institution).
•The ministry makes an offer to each university, as part of the annual communi-
cations around the performance agreement, mentioning the planned increases
and decreases per field and inviting the institution to offer places in new pro-
grams. The university develops a proposal, and the ministry makes a final deci-
sion based on the available budget and quality of the proposal. For added
transparency, the Higher Education Council or an independent panel (MoES re-
presentatives, institutional representatives, employers with international experts)
may serve in an advisory role when new study places are allocated. Through
these proposals, the universities compete with their best arguments for additio-
nal places or to establish new innovative programs. The private universities
could take part in this competition for the pool of innovation-related study
places, so they have an equal chance to gain study places with curriculum
innovations (however, private institutions will not become a full part of the public
system, as they are not subject to the overall study place planning and funding
but could only get public funding for innovative programs). Each university could
REPORT 3: Higher Education Financing in Latvia: Final Report | 261
decide whether to offer full-time or part-time study places; a part-time place
would be apportioned based on a student’s progress towards degree (e.g.,
rewarded with 50 percent, assuming that half-time studies are a feasible model).
There is no in-period micromanagement of study places by the ministry.
•The amount allocated per study place in each discipline or field (e.g., social
science, medicine, etc.) is based on the costing relationship among the study
fields (i.e., cost coefficients described earlier) and on the available budget for
study places (basic funding). Their relationship is analyzed and, if necessary,
updated based on studies of the current cost structures in HEIs.
•As long as the real number of students per field and per year does not fall below
or exceed a certain amount of the study places planned (e.g., +/- 5 percent),
there is no reaction by the state. If these thresholds are reached, this will have
an impact on the ministry’s offer for the next period (by a negotiated adaptation
of study places to demand).
•Periodically, the ministry will conduct a review of the study places in a specific
field (e.g., every three to five years and if needed). So the incremental approach
per field would be questioned from time to time and the review could lead to
broader reallocations. The review could use criteria such as proposed cost of
programs, qualifications of academic staff, employment rates upon graduation,
research activities, employer partnerships, student satisfaction, etc.
•The current system with different line ministries involved will either be integrated
or be replaced with a mechanism in which the funding incentives and levels
are more closely related for institutions that have similar programs.70 The aim
here is to create a more level playing field for teaching and research throughout
the system. This requires a process of inter-ministerial collaboration and adjust-
ments that needs to be addressed by an inter-ministerial committee.
The first pillar also includes a per-capita funding component per number of
professors or academic staff to enhance the available basic funding and
to align teaching and research funding. The current basic research funding for
those research institutes operating inside universities should be discontinued,
as it restricts the university’s potential to use research funds flexibly and, accord-
ing to the recent research evaluation, does not guarantee that research funds are
allocated to real centers of excellence. Therefore, some basic research funding
should be integrated into the first pillar by a per-capita premium per professor
or academic staff (which of course does not mean that the money goes directly
to the individual, as it should be used within the university strategically to promote
publications or other agreed research outputs, allow networking in research,
etc.).71 Institutions themselves can decide how these funds are allocated among
their different faculties, departments and individual academics, but preferably
stimulating focus and mass that enhance research quality and (international) com-
petitiveness. As in most higher education institutions worldwide, some academics
have more teaching intensity, while others have stronger research intensity, often
70 However, the proposed model may not be directly applicable to some specialized institutions ope-
rating under a distinct institutional model and/or jurisdiction, like those subordinate to the Ministry of
Defence.
71 “Academic staff” can include both teaching staff (such as associate professors, docents, lecturers,
assistants) as well as research staff (such as leading scientists, scientists, research assistants).
262 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
in relation to personal capacities and preferences. Similar to the study place
model, there could be a weight according to the relative cost situation in different
disciplinary clusters. The per-capita funding that respects current organizational
size guarantees that institutions can gradually grow into a new situation in which
performance- and innovation-based funding become more important. As such,
research funding follows a multi-faceted approach: a) widely available basic funds
to strengthen the autonomous use of funds by the universities (as described
above), b) through the use of agreed upon research-related performance metrics
(as referenced with the second pillar, and c) targeted investments in a few innova-
tive centers of excellence (related to the third pillar).
The second, performance-oriented pillar contains a small number of indica-
tors derived from national strategies and of general relevance for all HEIs.
The budget reserved for formula allocations and the percentage that each indica-
tor takes from that sum are defined. The indicators are measured for all institu-
tions and the available budget per indicator is distributed according to the share
of an individual institution related to the overall system performance. For instance,
if a university “produces” 10 percent of the graduates, it will receive 10 percent of
the budget allocated by numbers of graduates. The ministry also has the option
of implementing some weighting on graduates in certain disciplines (e.g., science
and engineering graduates could be weighted higher than social science gra-
duates). In addition, the allocation can be smoothed by assessing three-year ave-
rages rather than annual fluctuations.
Latvia’s policy objectives72 suggest a variety of output-driven performance me-
trics that could be part of a formula. The following indicators with across-the-
board relevance for universities are worth considering (but subsequently require
a political decision concerning priorities):
•Number of graduates. This is complementary to study places and addresses
output. It creates incentives to minimize drop-outs (or to induce inevitable drop-
outs early) and to limit time to degree.
•Number of PhDs, to stimulate PhD “production”.
•Number of incoming and outgoing mobile students (and possibly academic
staff), to address the internationalization objective.
•A bibliometric indicator, to stimulate dissemination of research findings. An amount
allocated via such a research-related indicator may help ensure that basic research
funding rewards output and performance and does not favor large institutions over
smaller ones in terms of the number of academic staff. Again, the model will create
a balanced approach between performance orientation and stability.
•Third-party funding of research and teaching, to reward and stimulate the gene-
ration of external income. A higher weight for funds from European sources
could be considered, given the assumption that there is a high preference for
that kind of financial revenues.
72 For details, see second report under this Advisory Service.
REPORT 3: Higher Education Financing in Latvia: Final Report | 263
The weights between the different indicators would be decided by the mini-
stry according to policy preferences. A balanced representation of teaching and
research indicators is being recommended. The Higher Education Council could
be involved in this decision. If the plans for comprehensive alumni surveys/tracer
studies are realized, an employment-oriented indicator could be added.
Part of the allocation under the second pillar is reserved for institutional per-
formance indicators which are university-specific and related to the profile
and strategic development of the institution. One of the political objectives is to
strengthen and even diversify the profiles of HEIs in Latvia. For instance, there are
some universities with a research focus, and there are others with more focus on
knowledge transfer or regional engagement. Similarly, internationalization does
not play the same role for every institution. This leads to a situation where specific
performance criteria do not have equal importance for every institution. Innova-
tion, smart specialization and knowledge transfer are highly relevant areas where
objectives should be set and rewarded, but not in the same way for every universi-
ty. If the ministry wants to promote internships in industry, this is also not of equal
importance for every field and HEI. To take all this into account, the formula
should contain an element with institutional performance indicators (specific for
each university and agreed upon in the performance agreement). The individual
indicators represent major national strategic objectives. An institution could have
up to three specific indicators with university-specific weights. This part of the
formula needs a different algorithm: as the indicators per institution differ, a for-
mula is needed that makes the outcomes comparable and the distribution cal-
culable. This could be done by analyzing the progress made in reaching the goals
(measured by percentage of change in individual indicators and comparing
the percentages between the universities). The negotiation of institution-specific
indicators and weighting allow the sector to diversify in meaningful ways that are
consistent with the ministry’s policy objectives. If an institution wanted to pursue
an alternative direction, then the institutional autonomy would still allow that
to happen albeit without public funding.
The third, innovation-oriented pillar provides funding for activities that contri-
bute to targets set in a university performance agreement. The targets would
take into account national priorities and operationalize university profiles and
strategies. The contract between the ministry and each university would be
renewed every three years. This performance agreement (which is different from
what now exists in Latvia as a contractual arrangement) refers to national goals
and the university strategy and defines a limited set of priorities for the university
in the coming three years. Whereas the performance-oriented (pillar 2) compo-
nent of the performance agreement is focused on selecting a few relevant indica-
tors that are specific to the institution’s mission, the third pillar is assessing more
broadly how the institution will contribute strategically to Latvia’s higher education
vision, mission, and objectives. The second pillar provides ex post rewards, while
the innovation fund (pillar 3) supports future plans by ex ante support. The prio-
rities must naturally address teaching and research, but they should also extend
to all kinds of third mission and knowledge transfer activities. The performance
agreement also defines innovative measures to be taken to achieve these goals if
there is a need for pre-funding of actions. This funding comes from a pool of
money and is defined per action. The indicators to measure success regarding
the priority areas are defined in the performance agreement (and used in the
second pillar as mentioned above). The performance agreements follow a stan-
dard format discussed between ministry and universities and subsequently
264 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
defined by the ministry (Annex 1.B shows a proposal for this format). National go-
als could also be integrated by mentioning some state priorities for actions to be
taken.
Activities aimed at the longer-term development of university profiles are
represented in the third pillar of state funding rather than in the allocation of
EU Structural Funds.73 The current use of Structural Funds does not always
reflect a secure, sustainable, long-term perspective on funding. It is, therefore,
important to get long-term goals and developments into the “normal” funding
model or annual operating budget. Through integration in the performance agree-
ments, there is a periodic assessment of success every three years, but a longer-
term perspective for renewal is possible. Looking at current strategic goals, there
is a strong emphasis on the establishment of joint doctoral schools with non-uni-
versity research institutions, post doc programs and the international accreditation
of study programs. These developments should become elements of the perfor-
mance agreements. The ministry announces that these aspects will be among
the prioritized activities, and the universities then take this into account when
drafting performance agreements.
The third pillar also contains the funding of research centers of excellence,
taking into account research evaluation outcomes and a national strategy for
research priorities. As noted above, the funding of research institutes is replaced
by widespread per-capita-funding. This research component would be part of the
university’s lump sum allocation and combined with focused funding for a limited
number of specific research units (i.e., centers of excellence) with the capability
to generate internationally competitive research outcomes. The latter is included
in the performance agreement. The ministry in consultation with key stakeholders
defines the criteria for the centers of excellence, the universities prepare propo-
sals, and a peer review supports the selection process (the results of the recent
research evaluation could be used in the first round). It is possible (or even pro-
moted) to have cooperative centers of several universities or universities and
research institutes. Due to some similarities between the proposed centers of
excellence and the former “State Research Program,” it is advisable that the expe-
riences of the “State Research Program” be taken into account in the context of
the development process of centers of excellence. Together with EU Structural
Funds, business and industry funds could support the development of pillar 3.
EU Structural Funds continue to help modernize the higher education and re-
search sector and also focus on short-term change processes and the diver-
sification of funding sources. A parallel debate is underway in Latvia on the
appropriate use of EU Structural Funds in the higher education and research sec-
tor. It is recommended that the incentives set through Structural Funds align with
those in the new funding model for higher education and research, such as to sti-
mulate quality, improve performance and attract young research talent. As Struc-
tural Funds generally have a temporary and short-term character, these funds can
particularly support important immediate changes, such as the following:
•Incentivize the generation of other income streams. Resource diversification
beyond tuition fees and the EU Structural Funds is a key to the sustainable
financial development of the higher education and research sector in Latvia.
73 Though EU Structural Funds could potentially be used to kick off this pillar.
REPORT 3: Higher Education Financing in Latvia: Final Report | 265
•The implementation of “knowledge vouchers” (according to the Dutch system)
that allow small and medium enterprises to finance cooperation with universities,
thus stimulating viable university-industry relations.
•The set-up of a sector consolidation incentive program to create economies of
scale and scope through voluntary strategic cooperation or mergers between
programs and/or institutions, and to create quality and critical mass by linking
with societal partners (similar to the process in Denmark which was not centrally
planned).
There is no need to change the rules of financial autonomy, but more trans-
parency would be beneficial. Financial autonomy in Latvia is ahead of broad
European developments. There is no need to change the existing regulations.
However, financial autonomy and transparency of funding are two sides of the
same coin. Universities have to publish an annual financial statement of revenues
and expenditures and, for example, avoid declaring major parts of the revenues
as “other.” Transparency is the basis for trust in the capabilities to deal with finan-
cial autonomy. Another element of transparency is annual reports addressing pro-
gress against the performance agreements.
Decision-makers at some institutions should be encouraged to make more
use of the financial autonomy they have. To reap the benefits of financial discre-
tion, university managers have to be highly qualified in planning, budgeting, and
financial management. To ensure this, several actions are recommended: training
and capacity-building activities in financial management need to be provided to
clarify and illustrate the potential of financial steering and planning, and examples
of good practices (or of problems) need to be shared so that all institutions
become aware of their opportunities and limitations, for example, by benchmar-
king financial strategies. The profound experiences with financial management
in the higher education institutions are a good basis to implement peer learning
activities.
Tuition fees are likely to remain part of the Latvian higher education funding
system. However, the current approach to tuition fees needs to be reconside-
red. Instead of the dual track system there could be a more general cost-
sharing model. On the one hand, to avoid the current socially selective effects,
the number of (partially) state-subsidized study places would be enlarged
(to an amount around the current total number of students). On the other hand,
as a general principle, all students have to pay a share of the cost of their study
place. The state could set the shares per discipline together with the numbers of
study places. The shares could be differentiated according to cost or labor market
perspective of the field, or according to policy preferences (for example, lower
tuition fees for STEM in order to make such fields more attractive to students).
This general principle secures the income stream from tuition fees — which cur-
rently is shrinking due to demographic developments — and reduces social selec-
tion (in combination with the following recommendations on student funding). Ho-
wever, if the revenue from tuition fees were to remain stable compared to the cur-
rent situation, then more students would pay lower tuition fees.
Means-tested or need-based financial support can widen access and address
equity concerns. The current practice of having scholarships fund only the very
best students would be discontinued, and merit-based considerations become
a second-order criterion. Students from disadvantaged social backgrounds/low
266 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
income families would be eligible for a scholarship to refinance the private cost
share. The continuation of such a scholarship would be decided every year based
on the performance of the student (e.g., completion of modules/ECTS or grant
turns into a loan). The transition from a mainly merit-based to a mainly need-
based system may require a stronger centrally organized system that can better
assess financial need (e.g., based on parental income). Need-based elements
require a mechanism to determine the financial need of students, which could be
established in cooperation with the Ministry of Welfare and potentially tax authori-
ties. One could imagine replacing the current decentralized institutional scholar-
ship administration by moving this function to the Study Administration Centre
that currently also administers the student loans. This may also enhance unifor-
mity in award criteria and as such stimulate transparency, equity and access.
Part-time students would also be eligible for need-based scholarships. The scho-
larships would primarily cover tuition fees, but students in need could also apply
for them to cover living expenses if the pool of funds allows for it. In the current
system, around 14 percent of the “budget place students” receive scholarships,
which is low by international comparison. Most countries offer between 15 percent
and 35 percent of the students’ need-based support in the forms of grants and
scholarships. Depending on the investments foreseen by the Latvian government,
such proportions may also be reachable in Latvia, particularly because of the alre-
ady envisaged establishment of need-based scholarships that come in addition to
the current scholarship budgets.
Student loans would be made available to everyone by introducing a general
state guarantee. The private guarantor for student loans is replaced by a state
guarantee. So everyone (all full- or part-time students) is able to get a student
loan. The state could introduce a merit-based element: for example, if a student
belongs to a predefined percent of best graduates, a certain part of the debt
is remitted. Student loans can be partially related to tuition costs as well as to
the cost of living. Both scholarships and loans would ideally be administered by
a central authority to guarantee students in different programs and institutions
have equal opportunities and transparency in the system to underpin their study
choices.
The funding model should not be regarded as an isolated instrument;
it needs to be part of a more comprehensive steering model. It is important
to set favorable framework conditions by complementary reforms in other
areas. The effects of a funding model result from its interaction with other ele-
ments of higher education planning and steering. Several favorable conditions
would maximize the effectiveness of the new model; a few of these conditions are
listed below74:
•A strategy on national research priorities and focused strategic plans of the higher
education institutions.
•A valid and trusted national database to monitor the system with key indicators.
Synergies with existing datasets should be realized. For instance, it could be
interesting to take the development of the U-Multirank75 dataset into account,
74 A critical condition is further a viable system to determine student financial needs, an aspect which
would need to be discussed further with the Ministry of Welfare.
75 http://www.umultirank.org/
REPORT 3: Higher Education Financing in Latvia: Final Report | 267
where indicators for the individual objectives in performance agreements could
be found. This will require common data definitions and may suggest the use
a standardized accounting and financial system that links with the performance
data.
•Information to inform student study choices. The comprehensive data system
provided by U-Multirank, including data from student surveys, could help stu-
dents to compare different study options. An additional initiative providing impor-
tant data is the establishment of an alumni database and information about labor
market perspectives collected from alumni.
•Verification and potential enhancement of the administrative capacities of MoES
and other relevant public agencies is required for successful implementation of
the model.
•A robust quality assurance process, both for teaching and research, the out-
comes of which should regularly inform the system, institutions, students,
parents, employers, business and other stakeholders in an objective way.
•A reasonable level of inter-ministerial coordination to create transparency and
consistency in funding incentives, methods, and levels when multiple ministries
are involved in higher education funding.
•In principle, similar funding mechanisms ought to apply for teaching and re-
search throughout colleges, universities, and research institutes to foster one
singular (yet diverse) higher education and research system. Some of the sector
diversity can be captured with proposed institutional indicators and by utilizing
performance agreements (for example, see Appendix 1) for acknowledging
specialized institutional missions. The drivers behind each sector’s allocation
can reflect the primary activity area or emphasis for those institutions. As such,
universities would have a stronger alignment of funding mechanisms for
teaching and research, whereas colleges would be predominantly funded
for teaching, and research institutes for research only.
4.4 How does the new model address the main
challenges of the current model?
Table 13 briefly explains how various aspects of the new model address key
challenges of Latvia’s current model and how these aspects meet the aforemen-
tioned criteria for a good higher education and research funding model.
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Table 13 Overview of how new model addresses current challenges and meets criteria
Assessment Criteria
Supporting New Model and Alignment
Challenges of Current Model New Model with Strategic Policy Objectives
Latvian higher education is underfunded, Modernization of the funding model and Strategic orientation: Promotes national
especially in terms of public funding. strengthening its links with policy objectives strategies.
to justify the possible increase of public funds. Legitimization: Provides unambiguous
and balanced funding structures.
Practical feasibility: Ensures coherence
with funding levels.
Supports strategic objective: “Enhance funding
base of higher education”.
“One-dimensional” and static state funding Implementation of the three-pillar funding Strategic orientation: Promotes national
model lacking two important pillars of funding, model consisting of pillar 1 (basic funding), strategies and institutional profiles.
namely performance-oriented funding pillar 2 (performance-oriented funding), Incentive orientation: Provides performance
and innovation-/profile-oriented funding. and pillar 3 (innovation-oriented funding). rewards, competitive environment, clear
and non-fragmented incentives and aims to
balance ex post and ex ante performance
orientation.
Legitimization: Provides unambiguous
and balanced funding structures.
Supports strategic objectives: “Increase quality
of education and link with the national
economy” and “Increase the quality
and international competitiveness of research”.
Funding model lacks alignment of basic funding Implementation of pillar 1 (basic funding) Sustainability: Supports stability and takes into
of teaching and research. which aligns the teaching and research funding account cost differences.
streams. Incentive orientation: Provides clear
and non-fragmented incentives.
Practical feasibility: Uses available data
and ensures administrative efficiency.
Supports strategic objective: “Increase sector
efficiency”.
Study place model and state research Implementation of pillar 2 Incentive orientation: Creates performance
funding model are not creating meaningful (performance-oriented funding) to create rewards.
and appropriate performance incentives performance incentives for HEIs. Strategic orientation: Promotes institutional
for HEIs. profiles.
Legitimization: Makes funding transparent
and supports the perception of fairness.
Practical feasibility: Respects methodological
standards.
Supports the strategic objective: “Increasing
quality of education and link with the national
economy”.
REPORT 3: Higher Education Financing in Latvia: Final Report | 269
Assessment Criteria
Supporting New Model and Alignment
Challenges of Current Model New Model with Strategic Policy Objectives
Model offers HEIs only limited incentives Implementation of pillar 3 (innovation-oriented Strategic orientation: Promotes national
for promoting national higher education funding) to provide state funding for strategies and institutional profiles.
strategies and strengthening institutional activities that contribute to the targets set Incentive orientation: Provides competitive
profiles. in a performance agreement. The targets take environment, balances ex post and ex ante
Research funding streams (including into account national priorities and HEI profiles performance orientation.
EU Structural Funds) do not contain clear and strategies (for long-term development).
Sustainability: Allows long-term planning,
and transparent incentives for diversification of EU Structural Funds are to be included promotes risk spreading.
institutional profiles, consolidation activities in pillar 3, although they have mainly
between HEIs, collaboration between research a short-term character supporting Practical feasibility: Ensures administrative
organizations or with external partners. important immediate changes in the sector efficiency.
High reliance on EU Structural Funds harms (e.g., diversification of funding sources, Supports strategic objective: “Enhance
the long-term financial viability of HEIs. consolidation activities, and collaboration technology, innovation, creativity,
Income from private sources like industry with external partners). and entrepreneurship” and “Increase the quality
or community services appears to be relatively Pillar 3 contains state funding of research and international competitiveness of research”.
underdeveloped. centers of excellence taking into account
evaluation outcomes and a national strategy of
research priorities.
Great level of financial autonomy is not always Offering training and capacity-building Autonomy and flexibility: Allocates lump sums,
utilized by HEIs and it is not accompanied activities in financial management in order to guarantees academic freedom, implements
with a high level of accountability towards stimulate peer learning in financial steering adequate level of regulation, guarantees
external stakeholders (both public and private). and planning. autonomy of resource allocation and promotes
Maintaining the high level of financial accessibility of diverse income sources.
autonomy, but increasing accountability Supports multiple strategic objectives.
and transparency through
performance-measurement, annual
performance agreement reports, and published
financial statements.
Dual track system with merit-based selection of Continued reliance on tuition fees Incentive orientation: Creates performance
students for state-funded study places is likely in a cost-sharing approach, but introduces rewards.
to subsidize full-time students from better-off more need-based scholarships to widen access Sustainability: Guarantees continuity in funding
socioeconomic backgrounds. and address equity concerns. Merit-based mechanisms, promotes risk spreading.
Current student support system is highly elements are included in the scholarship
and loan scheme, but only as a second-order Legitimization: Supports the perception of
decentralized, and its strong merit-based fairness.
emphasis is likely to have negative impact on allocation criterion.
access and participation especially in the case Introduction of state guarantee for student Autonomy and flexibility: Promotes accessibility
of students from disadvantaged backgrounds, loans enabling all students (full-time of diverse income sources.
and to some extent, part-time students. and part-time) to benefit from loans. Practical feasibility: Ensures administrative
Loan debt of the highest performing graduates efficiency.
could be partially remitted with public funds. Supports strategic objective: “Stimulation of
Scholarships and loan schemes should be participation in and access to higher
administered by a central authority. education”.
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4.5 Impact on different stakeholders
Implementing the proposed new funding model will affect many stakeholder
groups. A major factor for the quality of the new model lies in its benefits for
the stakeholders. This section gives answers to the question “How will we benefit
from the funding reforms?” from the perspective of the different stakeholder
groups. The listed implications for different groups are related to different ele-
ments of the reform: Whereas many effects of the state funding model are likely to
affect the institutions, the students are more likely to be affected by student fun-
ding (and to a smaller extent by the other reform components). As a major focus
lies on the reform of state funding, the number of impacts on private higher edu-
cation institutions is smaller. The impacts listed below will be generated by imple-
menting all the proposed changes in the funding system; a partial realization of
the recommendations would lead to a partial realization of the listed impacts.
Public higher education institutions
•The overall financial situation improves
•Basic budgetary stability is guaranteed
•State micromanagement of study places is reduced
•Good performance is rewarded
•Autonomy is guaranteed (also regarding mechanisms of internal resource allocation)
•The development of specific profiles and of own goals are promoted
•Performance is measured according to the indicators the institutions choose
to represent their own objectives, which leads to more impact on the definition of
success criteria
•Financial sources become more diverse
•Professional financial management is promoted by peer learning
•The funding source of tuition fees is retained
•Reduced social selectivity leads to a larger potential to attract good students
Private higher education institutions
•Public funding for program innovations is provided
•Tuition fees are a general feature of the whole higher education system
•Modified student loan program would also benefit private institutions.
Non-university research institutions
•Research excellence in cooperation with universities is promoted
•Cooperative activities such as joint doctoral schools are promoted
University staff
•The potential to do research increases
•Good performance is rewarded
•Autonomy is guaranteed
•Engagement in the strategic development of universities is promoted
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Students
•Attractive and innovative study programs are established
•Improvement of funding situation and competitive environment for higher educa-
tion institutions offer the potential to increase teaching quality
•Study place planning process better adjusts study places to labor market needs
•Public funding, scholarships and loans become available for part-time students
•As more students pay tuition fees, the volume per student is reduced, and tuition
fees are charged in a fairer way
•Social selection in access is reduced
•Students with a lack of own financial means get better access to scholarships
and loans
•Students do not have to bring a guarantor to get a loan
Government
•Political blockades to reform could be overcome
•The study place system allows governmental planning
•Sector consolidation is promoted
•Horizontal diversity of higher education institutions is promoted to cover all kinds
of societal needs
•The attainment of national goals is measured and incentivized, and a compe-
titive environment is created
•Political preferences directly lead to budget allocations through performance-
oriented funding
•Financial statements increase transparency
Employers/industry
•Employability is a relevant issue for study place allocation and performance
measurement
•Employers are actively involved in state planning processes
•Cooperation with higher education and research institutions is promoted (e.g.,
through possible industry participation in innovation funds)
•Knowledge vouchers offer chances for small and medium enterprises to coope-
rate with universities
General public
•Political blockades could be overcome
•An efficient and effective higher education system is promoted
•Horizontal diversity of higher education institutions is promoted to cover all kinds
of societal needs
•The attainment of national goals is measured and incentivized
•Financial statements increase transparency
•Accessibility of higher education is promoted
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5 From Conceptualization to
Implementation
5.1 Alternative scenarios
This section presents three scenarios in which a new funding model for Lat-
vian higher education could operate. The three scenarios are related to the
extent to which the whole system can attract more funding from the state and,
to a lesser extent, from private entities. The three scenarios are as follows:
A. Develop the knowledge society model
B. Limited expansion model
C. Scarcity model
For each scenario, a brief table is provided to clarify the components of the fun-
ding model described in the previous section that should be prioritized for imple-
mentation, and those aspects that would likely need to be postponed until suffi-
cient funding was available to introduce them. In other words, the “Extra Com-
ponents” should not be forgotten but would likely be postponed until enough
funding was available to support their implementation. Additionally, the final row
in each table briefly describes other options or alternatives to consider.
Based on the findings of its overall engagement in Latvia, the team would stron-
gly support the first scenario aimed at developing a knowledge society in Lat-
via. However, this scenario would need significant political commitment not
only from the government but from all main stakeholders involved.
A: Develop the knowledge society model
The basic assumption in this scenario is that the government will have the
opportunity and willingness to substantially increase its investment in higher
education, as originally envisaged in its higher education legislation. This
would provide the system with a resource level that can support the various
incentive mechanisms of the three-pillar model.
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Extra Components Introduced When
Components Included Future Funding Levels Allow
• Revised study place model (pillar 1) • Not applicable
• Basic research funding per faculty member (pillar 1)
• Universal indicator-based funding formula (pillar 2)
• University-specific indicator funding (pillar 2)
• Performance agreements negotiated by MoES
and each institution that cover both teaching
and learning initiatives and centers of excellence
(pillar 3)
• Provision of financial management training
and support for institutional management
to maximize autonomy
• Transitional use of Structural Funds
(e.g., for consolidation)
• Some reliance on tuition fees in a cost-sharing
approach
• Need-based student aid (with merit component),
as tuition fee waiver plus support of living costs
• Enhanced student loan program with state
as guarantor
Alternatives for Consideration
• Establish tuition levels to complement the amount of public funding for the sector (e.g., higher public
funding could allow lower tuition fees)
• ‘Innovation Fund’ for internationally competitive research in collaboration between higher education
and/or research institutes, industry and international research organizations as a specific, separate part of
the third pillar
For Latvia to transition to this or any reformed funding model, the MoES will have
to prioritize and sequence initiatives based on significant sector consultation to
ensure institutions and individuals are adequately prepared for the change.
B: Limited expansion model
In this second scenario, the amount of public funding enables limited invest-
ment increases in higher education. The main difference is that the system
is not likely to have enough funding to fully support the components in pillar 2
or pillar 3. In order to make better progress towards Latvia’s higher education
policy objectives, this scenario emphasizes the performance agreements for each
institution as a way to agree on the expected contributions of each institution in ex-
change for the funding received from the state. It also integrates some needs-based
elements of student funding.
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Extra Components Introduced When
Components Included Future Funding Levels Allow
• Revised study place model (pillar 1) • Basic research funding per faculty member
• Performance agreements negotiated by MoES (pillar 1)
and each institution • Universal indicator-based funding formula
• Continued financial autonomy and support (pillar 2)
for institutions • University-specific indicator funding (pillar 2)
• Transitional use of structural funds • Funding to cover both teaching and learning
(e.g., for consolidation) initiatives and research centers of excellence
• Increased reliance on tuition fees (pillar 3)
• Need-based student aid but only as fee waiver
• Provision of financial management training
and support for institutional management to
maximize autonomy
• Modified student loan program
• Limited teaching innovation fund provides start-up
capital for promising new programs with enough
resources to seed about x initiatives per year
under the assumption that y programs will be
sunset (this would occur on a larger scale under
pillar 3 in scenario A)
Alternatives for Consideration
• With the higher private cost-share (i.e., tuition), a portion of those additional funds (e.g., 20 percent) must
be immediately reallocated as need-based aid to support students unable to afford the tuition fee
• Relative funding model based on the numbers of new entrants, students, graduates, PhDs according to
3 different funding tariffs (social sciences, science and engineering, medical programs) and relative
success in attracting third-party funding
• Repurpose EU Funds into an ‘Innovation Fund’
C: Scarcity model
The third and final scenario is designed around a situation in which the govern-
ment cannot afford to make additional investments in higher education. This sce-
nario is completely geared towards an attempt to optimize the current funding levels
and mechanisms towards the strategic objectives that receive highest priority in Lat-
vian higher education.
To be clear, the current system is significantly underfunded in comparison to
not only other European countries but, importantly, also vis-a ` -vis the govern-
ment objectives and legally set targets per study place. Acknowledging that
Latvia has many competing demands for its limited resources, flat funding
will continue to negatively impact the quality of higher education and thus
jeopardize the country’s competitiveness. Without any incremental funds, there
is minimal capacity to reform the financing model. Allocating fewer or even
the same amount of resources differently may create substantial volatility within
the system. Although the components may look similar to Scenarios A and B,
the anticipated outcomes, as they relate to quality and the pursuit of policy objec-
tives, are expected to be significantly lower in this final scenario.
REPORT 3: Higher Education Financing in Latvia: Final Report | 275
Extra Components Introduced
Components Included When Future Funding Levels Allow
• Revised study place model (pillar 1) • Basic research funding per faculty member
• Performance agreements negotiated by MoES (pillar 1)
and each institution (no additional funding • Universal indicator-based funding formula
for financial incentives unless funds are pulled (pillar 2)
from the study place model – not to be • University-specific indicator funding (pillar 2)
recommended under this scenario) • Funding to cover both teaching and learning
• Provision of financial management training initiatives and research centers of excellence
and support for institutional management (pillar 3)
to maximize autonomy • Need-based financial aid
• Transitional use of Structural Funds • Modified student loan program (based on need
(e.g., for consolidation, innovation funds, etc.) and state as guarantor)
• Further increased reliance on tuition fees
• Repurpose merit-based scholarship to
need-based student aid
Alternatives for Consideration
• Maintain the study place model but add a fixed allocation per student to include a premium per graduate
with different funding tariffs (social sciences, science and engineering, medical programs)
• Align allocation mechanism of Structural Funds with those of the Science Council and operate
a few programs for competitive research funding, one based on academic criteria, one on collaboration
with private partners and one on international collaboration for EU funding
• Limited scholarships based on need and merit
5.2 Implementation roadmap
As indicated in the previous parts of this report as well as in the previous reports
within this project, many stakeholders within and outside Latvian higher edu-
cation indicate that the system requires change in its financing structures
and instruments in order to make Latvian higher education and research
more competitive internationally and better serve the needs of society.
As argued before, the system needs stronger incentives towards quality, perfor-
mance, efficiency as well as maintaining a healthy level of stability. Latvia’s current
funding model, at least for allocating funding, is specified in Cabinet Regulation
No. 994, “Procedures for the Financing of Institutions of Higher Education and
Colleges from the Funds of the State Budget.” Table 14 below reiterates many of
the weaknesses of Latvia’s current funding and highlights potential modifications
necessary should Latvia move forward with any of the recommended changes.
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Table 14 Cabinet Regulation Cabinet Regulation No. 994
No. 994 Procedures for the Financing of Institutions of Higher Education and Colleges
from the Funds of the State Budget
• Single pillar model of state funding does not offer the advantages of a multi-pillar approach
• Little to no real performance orientation in state funding, except that internal allocation for
the development of scientific work should be based on competition results (but what results?) Limited
incentives for promoting national higher education strategies and in strengthening institutional profiles
• Little to no integration of funding for teaching and research
• Little to no funding for innovative initiatives
• No clear approach to the role of state money for private HEIs
• No funding options for research-related developments such as post-docs, knowledge transfer activities,
etc.
• Performance contracts between MoES and HEIs are under-utilized compared to their potential
• Suggestion that it is known what the actual basic costs of a study place are, regardless of the institution,
teaching/research intensity while in the end institutions have a high degree of spending autonomy
• Calculating many support facilities per study place with subjective expert opinions and no relationship
to potential economies of scale
• No reasoning why an optimal and minimum value of the coefficient of study costs per field of study
is necessary and why the differences between these vary from discipline to discipline
• Complicated formula when in practice prices are substantially reduced
• Is it necessary to include transportation and vehicles, hostels etc. in the social security part?
• Promised funding levels not yet effectuated
• Cost basis for subsidized study places outdated
• Opaqueness and subjectivity in allocation of subsidized study places, relation to Doctoral Degree holding
academic staff, planning problems through yearly interventions
• State-subsidized study places are likely to benefit students from better socio-economic backgrounds
• No state-subsidized study places for part-time students
The previous section has described three scenarios for the further development of
the financing structures and instruments in Latvian higher education. However,
implementing new structures and instruments that support the system to de-
velop in the desired direction has to be done in a careful way, particularly
because the good elements of the current system — such as a diversified institu-
tional landscape, institutional autonomy and a dedicated academic workforce —
should not be lost but strengthened. Nevertheless, the system requires a strong
incentive impulse in the short run in order to immediately initiate a system-wide
move towards the national strategic objectives of a high quality and competitive
higher education and research system.
There are a few conditions favorable to initiate the required change. First of
all, the government’s intention to increase its investments and expenditure
on higher education — if materialized — will provide the opportunity to deve-
lop new funding instruments that can be developed with “new money” flowing
into the system. It is generally known that changes in the funding regime are
much more likely to be acceptable and successful if “new money” is involved
— unless all stakeholders are convinced that something in the current funding
regime has to change.
The second favorable condition for funding reform is the forecasted decline
in student numbers. Besides the negative effects this may have on the develop-
ment of a knowledge economy and reduced tuition revenues from self-funded
students, this may also lead to relatively higher future expenditure per student
compared to current levels. The money “freed up” due to a decline in student
REPORT 3: Higher Education Financing in Latvia: Final Report | 277
numbers, can be used to intensify and improve the quality of teaching and re-
search. It is assumed that the government’s intention to intensify higher education
investments will at least secure current absolute funding levels.
When implementing a new funding regime, governments can use various
strategies. First, one could use a “shock therapy” including radical changes and
accepting substantial changes for various stakeholders and institutions in the sys-
tem. This is not a preferred option. The second strategy would be of a more gra-
dual — but certain — shift towards the new situation. This can be accomplished
through a transition towards a new funding regime but with a cautious implemen-
tation path, e.g., with maximum changes in institutional budgets of plus or minus
5 percent per year in the first five years. The third strategy would be a gradual re-
duction of the relative size of the basic funding method (in Latvia the study place
model). This would be accompanied by the introduction of new funding instru-
ments that will gradually grow in importance over the years up to the levels that
are politically desired. This development is depicted in Figure 3 below, one for
each for the three proposed scenarios.
In the scenarios, it is also mentioned that Latvia could consider a revised (and
fairer) tuition fee model. This is not a precondition for the other elements of
the funding reform, but — besides equity considerations — it may substan-
tially help to diversify institutional resources and to maintain the income stream
that institutions may lose in the coming years through the declining numbers of
(part-time) full fee-paying students as a result of the demographic change.
This, however, remains a political decision. Tuition revenues have also been
integrated in the graphs below, but are not critical to the changing state funding
regime.
The three scenarios demonstrate the main elements of the new public funding
structure to allocate teaching and research funds to higher education institutions:
pillar 1 funds (a modified study-place model), pillar 2 funds (performance based
funding) and pillar 3 funds (innovation funds for teaching and research).
Figure 3 shows the implementation paths of the different scenarios. All scenarios
set the 2014 higher education budget at one hundred and then demonstrate
an increasing or decreasing pattern for the various pillars. In 2014, the total
budget is assumed to consist of pillar 1 funding and some tuition revenues
(currently from full-fee paying students). As indicated, above figures are only pro-
vided for the illustration of a possible phasing-in of the three-pillar model under
different scenarios. The tuition fee revenue stream is kept constant and remains
included in the three figures.
In Scenario A, which assumes a growing investment path, all sources of reve-
nues are considered to grow. Pillar 1 funding grows at an annual increase of
2.5 percent; in addition, a performance-based budget (pillar 2) and an innovation
fund (pillar 3) have been installed, both growing by 15 percent annually. Most
of this growth comes from government investments, but the innovation fund
is assumed to be shared with business and industry. Generic tuition fees are
an optional instrument to generate additional revenues.
Scenario B demonstrates a less intensive growth pattern. Regardless of the
decline in student numbers, pillar 1 funding is kept stable and is topped up with
a performance-based budget (pillar 2) and an innovation fund (pillar 3). Both are
278 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
assumed to increase by 5 percent76 annually, including some additional funds
from business and industry.
Scenario C shows a situation where public spending is kept relatively stable,
while the decrease in student numbers (assumed — for illustration purposes
— to be 2.5 percent annually) will lead to a similar decline in pillar 1 funding.
However, in this illustrative example the budget that becomes available will be
reinvested in setting up pillar 2 and pillar 3 funding which will make the system
more competitive and oriented towards Latvia’s strategic objectives.
Figure 3 Possible development
of funding pillars under
scenarios A, B, and C77
76 These figures are only used to illustrate the possible phasing-in of the model. In practice, this deve-
lopment is likely to be less linear, as political decisions are made for a legislation period — or diffe-
rent time span — impacting on the graph.
77 These scenarios are provided for illustration purposes only. The actual developments and alloca-
tions will depend on political — and subsequent funding — decisions of the Government of Latvia.
REPORT 3: Higher Education Financing in Latvia: Final Report | 279
Over time, all scenarios create some space to make the system as a whole
more competitive and quality-oriented while maintaining a stable basis of pillar 1
funding; however, under scenario C this happens to a more limited extent and
with a significant time lag.
The implementation trajectory for student financing is different from the pub-
lic funds for higher education institutions. The transition towards a more need-
based than merit-based scholarship system can be accomplished in several ways.
First, the current merit-based scholarship system can be topped up with need-
based scholarships, as foreseen in the government plans. One can also increase
the need-based criteria within the current scholarship programs and increase the
budget by a level desired by the government. However, a stronger need-based
orientation may require a more uniform and transparent need-testing (parental
income test) which in most countries is most efficiently organized at the central
level, e.g., based on tax information. This may require a shift in replacing insti-
tutional infrastructures to distribute scholarships to a national (ministerial) unit
to provide the scholarships. This may cause some additional investment in setting
up such a unit, processes and procedures, but may lead to a nationally more
transparent scholarship system that enhances access and equity through more
uniformity and certainty to students about what they may be entitled to regardless
where they study.
With regard to student loans, the transition from a guarantor requirement and
various debt remittance structures towards a more need-based system requires
administrative changes as well as a potential redistribution of funds. If students
from lower income backgrounds can receive loans — maybe topping up their
scholarships if they receive these — than the same need-test that applies for
scholarships can be applied for loans. The current subsidies through debt remit-
tance for graduates with particular types of jobs and who have children can be
used to guarantee repayments or debt remittance for graduates who cannot repay
due to low income.
Finally, the process towards the real reforms requires intense stakeholder
consultation and monitoring. Similar to the current process of developing
the ideas for a new funding arrangement for Latvian higher education, the imple-
mentation of a new funding model and student financing should be achieved
in close collaboration between the government, ministries, higher education
institutions and various other stakeholders. As a start, one could ask the various
stakeholders for their feedback, e.g., in the form of short statements about
the elements that should definitely be in the new funding model. Later in the pro-
cess, the new model should be tested against its “real world impact.” This could,
inter alia, include a model simulation in the first year (though funding could,
de facto, still follow the previous model) so that everyone has advance notice
for how they fair in the new system. During subsequent phases, some funds could
be set apart to initially “soften” the impact for some institutions more severely
affected. These and other considerations will need to be discussed before imple-
mentation.
To monitor and evaluate the implementation, a committee of representative
stakeholders should be convened and charged. Aside from certain ex officio
members and MoES leadership, other committee members should be selected
to represent the interests of key stakeholder groups (e.g., students, academic
staff, institutional leaders, employers, government representatives, etc.), serve
280 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
staggered terms to ensure continuity, and vow to act in the interests of Latvia’s
entire tertiary education sector.
As a proposal, this document intends to provide important overall direction
for Latvia’s higher education funding model, but considerable work remains
to implement this program and then monitor its success. This Committee
would provide guidance and feedback to identify, implement and evaluate actions
that address the arguments and recommendations contained within the World
Bank team’s reports. Sample activities for the committee include:
i. Develop detailed implementation plans and operational activities, utilizing
international experts and stakeholder feedback, that align with the approved
funding model
ii. Facilitate collaboration among stakeholders in Latvia higher education sector
as they implement a revised funding model
iii. Monitor progress and expected goal attainment utilizing performance indica-
tors and metrics
iv. Disseminate information and annual progress reports about the implementa-
tion throughout the higher education sector and to external parties
v. Identify training and resources required to implement the funding model
vi. Adapt objectives/action steps of the funding model in light of future develop-
ments or as needed
Focusing on specific next steps for implementation, the MoES and the new Com-
mittee could appoint a Task Force of experts to work with select MoES and insti-
tutional leaders with technical expertise in the funding of higher education to pre-
pare detailed implementation plans, including activities, phasing (if appropriate),
timelines, resource requirements, roles and responsibilities, risks, and mitigation
strategies. The Task Force could then submits its detailed implementation plans
for the Committee’s feedback.
The World Bank team is convinced that all stakeholders in Latvian higher
education have a strong interest in the enhancement of the higher education
sector in terms of quality, efficiency, strategic orientation, international com-
petitiveness and equity. The positive spirit that was experienced in the process
until now has to be used to materialize the steps that will really bring about
the sector-wide improvements that Latvian higher education deserves. Bringing
about financial reforms will not only change the mechanics of financial instru-
ments, but will also stimulate a cultural change towards an identity that is related
to quality, efficiency and strategic orientation.
REPORT 3: Higher Education Financing in Latvia: Final Report | 281
Appendices
Appendix 1
Sample Performance Agreement
Appendix 1.A
Guidelines for a performance agreement
1. Role of the guidelines: Performance agreements (also performance contracts
or target agreements) are based on trust between the contract partners. Trust
is endangered if the partners have different ideas about the function and the
right way to deal with the contracts and if these differences emerge during
the process. The consensual definition of the “rules of the game” should
guarantee that everyone could rely on a common notion about performance
contracts. The contract partners (MoES and higher education institutions)
should regard the rules as binding guidelines for the steps taken and the beha-
vior in the process. In each phase each partner could remind the other of
the rules set. Both partners of a contract should be aware that it takes many
steps to build trust in such a process, but one mistake is enough to destroy it
again. It is extremely important that both sides see the objectives in the perfor-
mance contract as an obligation; contracts must not be broken.
2. Objectives and role of the performance contracts in Latvia: The performan-
ce contracts intend to bring “to life” — together with the formula in pillar 2
— the national objectives for the higher education sector through stimulating
the universities to engage for these objectives. But at the same time they want
to stimulate institutional strategic planning and the development of university
profiles. This means the contracts play a coordinative role in national and insti-
tutional strategies. All this is supported by connecting a financial “innovation
pool” to the objectives (pillar 3 of state funding). The performance contracts
will turn objectives into clear and controllable/measurable targets. They should
promote the dialogue between ministry and universities on the level of objecti-
ves and output/outcome, and they should legitimize the allocation of public
resources through transparency of funding criteria. As innovative processes
take time, performance contracts should also lead to a multi-year funding
perspective. A period of three years seems to be adequate. The performance
contracts should refer to the whole set of performances, teaching, research
and third mission activities.
3. Strategy base: The idea of performance contracts is based on negotiations
between the ministry and the individual university about objectives. The objec-
282 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
tives have to be derived from strategies of both sides. The national strategy
should set the corridor in which the individual university has the discretion
to move according to the institutional strategy. Even in a situation without per-
fect national strategies the contract process could be started by defining a stra-
tegic orientation at least for the contractual period. The „strategic fit” analysis
reflects the state of national goals; this should be taken as a starting point for
the contracts. If national goals are considered, the development of academic
qualification paths (through joint doctoral schools with non-university research,
post doc programs) or the quality development of study programs through
international accreditation, to give just a few examples, could be mentioned
in the contracts as state priorities. In the end, this does not mean that a univer-
sity has to pick up all of the strategic items; universities should prioritize accor-
ding to their profile and strategic focus and select areas where they could
make the best contributions to national goals.
4. Steps in the contract process: The following steps of the contract process
are derived from experience (and could be adapted to the specific situation
in Latvia):
•Ministry and universities agree on rules of the game
•Ministry communicates broad national objectives, sets up all relevant proces-
ses, and defines timelines for the following steps
•Ministry sends an offer to universities to start negotiations on performance
contracts, defining formal structure/format of the contract
•Each university develops a contract draft in an internal participative process
and sends it to ministry
•Ministry analyzes all drafts from universities, compares the drafts, and deve-
lops a negotiation position
•Negotiation, separate with each university (meeting, discussion of positions)
•Revision of contract drafts by universities
•Agreement (if necessary additional meetings, exchange of papers)
•Signing and publishing of the contract
•Allocation of budget
•Workshop with ministry and all universities on experiences with the instru-
ment, conclusions for the next round
•Controlling, report by each university
•Annual meeting with each university, if necessary revisions of contract
•Financial rewards/sanctions
5. Partnership and division of rights: Performance contracts intend to stimulate
negotiations between autonomous partners. However, even in a situation of
university autonomy an asymmetry remains in the partnership: The ministry
provides the public budget and the university wants to have it. In order to gua-
rantee a respectful partnership, there should be clearly divided rights to do
specific things in the contract process (establishing a top-down/bottom-up
process).
Only the ministry has the right to do the following:
•Take all measures to guarantee that the process stays in line with the legal
requirements.
•Define general national objectives as a framework to the development of indi-
vidual strategies and profiles of autonomous universities.
•Define the steps of the contract process and set schedules.
•Collect the necessary data from the universities.
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Only the university has the right to do the following:
•Develop autonomously an institutional strategy within the general framework
of national objectives.
•Make the first draft of the performance contract.
•Suggest measures that have to be taken to realize the intended objectives.
•Make the first suggestion for university-specific indicators and aspired indica-
tor values.
6. Procedural and funding rules and mechanisms:
•In general the signing of contracts by universities is voluntary. If a university
does not provide a draft for a contract, it will receive no funding from the third
pillar. There is only one obligatory element: The definition of institution-speci-
fic indicators that go into the funding formula.
•The performance contracts should run for three years, with talks and possibi-
lities for revision every year.
•The funding from the innovation pool should be linked to the degree of aspi-
ration and also to the level of attainment of objectives. This means that it has
to provide pre-funding according to the level of future objectives and to speci-
fic measures to be taken, and it has to define rewards and sanctions if targets
are met or missed.
•The contracts are signed by the rector and the minister. They are published
on the internet.
•The targets have to be measurable/controllable (by indicators, by yes/no).
Yearly reports and discussions should be used to analyze the reasons behind
the development of indicators. All targets should be performance-/output-/
outcome- oriented.
•Targets could only be interpreted on the basis of a status quo analysis. This
should be provided in the performance contract.
•Activities and measures done by the universities could appear in the con-
tracts (and in reports) if the universities want to present them. Their descrip-
tion is helpful in order to generate trust that performance targets could really
be achieved. But they are not linked to the assessment of success of the uni-
versity; the success parameters are the performance indicators. The univer-
sities should have the flexibility to change measures within the contract
period if they find better ways to achieve the goals. Sometimes the borderline
between activities and goals is not perfectly clear; for example, is quality
assurance through international accreditation just an activity or already
a goal? Here the system has to stay flexible.
7. Format: For the performance contracts there should be a standardized format
that guarantees that certain standards are fulfilled:
•The contracts should be focused on a few priorities and not all aspects of uni-
versity activities.
•The contracts should provide measurements and controlling approach which
focus on performance/output/outcome; they should not see the fact that
money is spent for the predefined purposes as a success factor.
These standards lead to the grid for performance contracts shown below. This
gives a general structure for contracts to be used by all universities. There should
be some discretion in handling this structure for the university; the way of using
the structure could adapt to the culture practiced in each of the universities,
without losing the “storyline” and the level of specification defined in the format.
284 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
Appendix 1.B
Example structure performance agreement
Performance contract between the University X and MoES (201X – 201Y)
1. Preamble
The performance contract intends to bring the national objectives for the Latvian
higher education sector “to life” through stimulating the universities to engage for
these objectives. But at the same time they want to stimulate institutional strategic
planning and the development of university profiles. This means the contracts
play a coordinative role in national and institutional strategies. All this is supported
by connecting a financial “innovation pool” to the objectives. The contract will turn
objectives into clear and controllable/measurable targets. The performance con-
tract should promote the dialogue between ministry and universities on the level
of objectives and output/outcome, adding a performance element to traditional
study place funding, and it should legitimize the allocation of public resources
through transparency of funding criteria.
University X and MoES share this understanding of performance contracts and
will contribute to the realization of these objectives.
2. National objectives in Latvian higher education
In the period 201X – 201Y, the major national objectives and priorities of the Latvian
government for the performance contracts include the following:
XXX
These objectives define the boundaries and the general framework for institutional
strategies of Latvian universities. MoES and University X agree to promote the
autonomous development of strategies and a profile of University X. The bounda-
ries defined by the national priorities will leave sufficient discretion for autono-
mous target setting of the university.
Not each university could contribute by the same degree to different goal areas.
Depending on the strengths and strategies of University X, it should prioritize
the national goals, mention the objectives it wants to focus on, and if necessary
add specific goals relevant on the institutional level.
3. University profile
In the period 201X – 201Y, the major objectives and priorities of University X
according to the specific development of a profile include the following:
XXX
4. Prioritization of objectives by University X
Based on the institutional strategy, the national objectives (and if relevant for the
profile additional compatible goals) are prioritized in the following way:
REPORT 3: Higher Education Financing in Latvia: Final Report | 285
Degree of priority Explanation
Objectives (A-B-C) (regarding the situation of the university)
The A-priorities form the major part of this contract.
5. Operationalization of objectives and status quo analysis
Each of the top priorities of University X has to be operationalized by breaking
it down to sub-goals and their measurement:
Priority 1: XXX
Indicator/measurement
Sub-goal (including exact operationalization how to measure, which data to use, etc.)
Priority 2: XXX
Indicator/measurement
Sub-goal (including exact operationalization how to measure, which data to use, etc.)
Etc.
Out of the proposed indicators, the following indicators will go into the funding
formula:
XXX
For all indicators/measurements used the status quo looks like the following:
Available data within last Interpretation/explanation of
Indicator/measurement 3 years current situation
286 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
6. Performance obligations of University X
The intention of University X is to achieve substantial developments, improve-
ments and changes in the priority areas. The indicators provide the relevant infor-
mation to assess these developments. University X and MoES agree to set the
following targets for the contract period:
Indicator/measurement Target Timeline for achieving target
7. Activities and measures to realize the objectives
University X will undertake the following activities and measures to realize the
objectives:
•XXX
The description of the activities intends to make the efforts of University X
to achieve the goals plausible and understandable. The realization of certain
activities does not indicate performance and will not be controlled as success
criteria within this contract. University X will adapt activities (and report the adapta-
tion) within the funding period if better ways to achieve the goals are discovered.
8. Financial support and incentives for achieving the targets
MoES financially supports the activities to achieve the objectives from an “innova-
tion fund” (not all objectives require additional funding):
Activity Contribution to goal achievement Funding (Year 1, 2, 3)
The achievement of the targets in paragraph 6 is measured and rewarded/sanctio-
ned by the following mechanism:
XXX
(there are alternatives for incentives: reward/sanction according to achieved per-
centage of targets, measurement after year 2 and cut of funding for year 3 if goals
are not achieved, etc.)
9. Centers of Excellence
Centers of excellence in research have been defined out of a peer review process.
University X has the following centers with the following partners:
XXX
REPORT 3: Higher Education Financing in Latvia: Final Report | 287
For the contract period, the following research performance goals are directly
linked to the center of excellence:
Indicator/measurement Target Timeline for achieving target
For the center of excellence, the university receives a basic funding of XXX. The full
payment of this funding depends on goal achievement using the following mecha-
nism: XXX.
10. Time horizon, controlling, dialogue
The performance contract will run for the period 201X – 201Y and terminate on
XXX. Every year in (MONTH) University X will write a short report on goal achieve-
ments, using the indicators and measurements in this contract. Based on the re-
port, every year in (MONTH) MoES and University X will meet for a discussion of
the developments and further perspectives. If both parties agree, performance
contracts could be adapted to unforeseen developments.
Minister Rector
288 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
Appendix 2
Stakeholder Reactions
MoES would be invited to collect feedback on final report/all three outputs (e.g.,
in format of 1-pager) which could then be attached here.
Appendix 3
Stakeholder Consultations
Workshop: 2 December 2013
Institution, organization Representative(s) Position
Ministry of Education Iveta Graudiòa Councilor to the Minister
and Science
Lîga Lejiòa Director of the Department of Political Initiatives
and Development
Inese Stûre Deputy Director of the Department of Higher
Education, Science and Innovations
Marina Mekša Senior Expert of the Department of Higher
Education, Science and Innovations
Anatolijs Melnis Senior Expert of the Department of Higher
Education, Science and Innovations
Inta Švirksta Expert of the Department of Structural Funds
and International Financial Instruments
Laura Treimane Officer of Higher Education/Local Consultant
State Education Development Dita Traidâs Director
Agency
Stakeholder Roundtable: 3 December 2013
Institution, organization Representative(s) Position
Higher Education Council Andris Teikmanis Associate Professor
Latvia Students’ Union Ingûna Zariòa Member
Asnâte Ka oka Member
Latvia Confederation of Anita Lîce Expert
Employers
Latvia Chamber of Commerce Karîna Zariòa Director of Political Department
and Industry
REPORT 3: Higher Education Financing in Latvia: Final Report | 289
Institution, organization Representative(s) Position
Ministry of Economics Vita Skuja Official/Department of Economic Development
and Labour Market Forecasts
Riga Stradins University Toms Baumanis Prorector of Development
Jânis Bernâts Legal Advisor
Business Higher Education Aldis Baumanis Lecturer
Institution, “Turîba”
Latvia Academy of Arts Andris Teikmanis Associate Professor
Ventspils University College Ligita Blumberga –
Riga Graduate School of Law Kitija Freija Director
University of Latvia Gundars B çrzi òš Chancellor
Riga Academy of Pedagogy Tija Zîriòa Associate professor, Manager of the Department
and Education Management of the Organization of Studies
Vidzeme University of Agnese Lapetrova Rector’s Assistant – Research Coordinator
Applied Sciences
Stockholm School of Rita Kaša Pro-Rector
Economics in Riga B.Sc. Thesis Faculty Advisor
Daugavpils University Participated.
Liepaja University
Riga Technical University
Ventspils University of
Applied Science
Latvia University of
Agriculture
Stakeholder Interviews: 5–7 February 2014
Institution, organization Representative(s) Position
Ministry of Culture Roventa Putni òa Officer at Budget Department
Barba Krišj âne Head of Budget Department
Latvia Academy of Arts Sandra Plota Director
Gita Se òka Deputy Director of International Cooperation
and Development
Latvia Academy of Culture Zane Šiliòa Vice Rector
Latvia Academy of Music Normunds Vîksne Vice Rector of Academic Affairs
Ir çna Balt âbola Director of Study Programs
Vita Daudiša Head of Finance Department
290 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
Institution, organization Representative(s) Position
Riga Academy of Pedagogy Dace Markus Rector
and Education Management
Daina Voita Vice Rector of Science
Latvia Academy of Sports Svetlana Panova Chief Accountant
Education
Juris Grants Vice Rector of Science
Janis îdens Rector
Latvia Maritime Academy Andrejs Zvaigzne Vice Rector
J ânis Br ûnavs Professor
J ânis B çrziòš Rector
BA Business School of Dr. Andris Sarnoviès Rector
Business and Finance
L îga Peiseniece Vice Rector for Academic Affairs
Ministry of Defense Ilona Dreìe Under State Secretary of Administrative
and Legal Affairs
Inese Kaive Deputy Director of Section of Military Education
and Science of Department of Human Resources
National Academy of Defense Georgs Kerlins Vice Rector
Daugavpils University Several participants Students, PhD students
and PhD students
from Institute of
Systematic Biology
Inese Kokina Vice Rector for Research
Ir çna Kaminska Vice Rector for Studies
Rectors’ Conference78 J ânis Bern âts Legal Expert
Agnese Rusakova Expert
Higher Education Council Several –
representatives
from the Higher
Education Council
Ministry of Interior Alda Strode Financial Specialist
Larisa Tumanana Director of Department of Financial Management
Agnese Laure Office at Department of Financial Management,
Section of Financial Policy and Methodology
Gints Rozenbils Officer at Department of Human Resources
Management
78 Separate meeting with Andrejs Rauhvargers, Secretary General of Rectors Conference on 18 Fe-
bruary 2014.
REPORT 3: Higher Education Financing in Latvia: Final Report | 291
Institution, organization Representative(s) Position
Ministry of Agriculture Ilze Slokenberga Official of Department of International Affairs
and Strategic Analysis
Ministry of Environmental Edgars Pauloviès Officer at Zemgale Planning Region Development
Protection and Regional Department (counterpart of Latvia University of
Development Agriculture)
Latvia University of J ânis Sprukts Chancellor
Agriculture
Daira Treigute Head of Financing Department
Dita Stefenhagena Rector’s Assistant
State Police Nat âlija Doro ko Head of Financial Department
Gunta Gregersone Head of HR Department, Section of Professional
Competence Building
State Police College M âris Rieksti òš Deputy Director
State Border Guard Aivars Uzulnîks Deputy Director
Velta Grecka Head of Finance Department
Sandra Keiša Senior Specialist of Human Resources
Department
State Border Guarding Iveta Plasa Head of Department of Finance and Planning
College
Daiga Kupc âne State Border Guard
Fire Safety and Civil Vilis Students Deputy Director
Protection College
Ministry of Health Inese Andersone Head of Department of Coordination of Financial
Analysis and Investment
Biruta Kleina Deputy Director of Health Care Department
Ministry of Welfare Danute Jasjko Director of Department of Social Services
Aldis D ûdinš Senior Expert of Department of Social Services
Riga Stradins University Toms Baumanis Vice Rector of Development
J ânis Bern âts Rector’s Legal Advisor
Juris L âcis Vice Rector of Administration
Red Cross Medical College Gastons Neimanis Director
(of Riga Stradins University)
In âra Urpena Deputy Director in Academic Affairs
and Research
Social Integration State Jana Pulkstene Deputy Director in Professional Rehabilitation
Agency
Inese Urpena Administrator of College Study Programs
Business Higher Education Aldis Baumanis Associate Professor
Institution “Turîba”
292 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
Institution, organization Representative(s) Position
Riga International School of Irina Se òòikova Rector
Economics and Business
Administration Ilm ârs Kreituss Vice Rector of Academic Affairs
Tatjana Vasi ï jeva Vice Rector of Science
Ieva Brence Head of Department of Economics and Finance
Transport Irina Yatskiv Acting Rector
and Communications
Institute Igors Kabaškins President
Igors Graurs Vice Rector of Academic Affairs
Ministry of Economics Vita Skuja Officer of the Department of Economic
Development and Labor Market Forecasts
Ludis Neiders Head of Department of Structural Policy of National
Economy, Economic Coordination Section
Ruta Rimša Officer at Department of Structural Policy of
National Economy, Economic Coordination Section
Ministry of Environmental Veronika Jurèa Senior Expert of the Department of Regional
Protection Development Planning
Cross-Sectoral Coordination Elîna Petrovska Consultant
Center
Latvia Confederation of Inga Šîna National Coordinator in Professional Education
Employers and Employment
Latvia Chamber of Commerce Aldis Baumanis Associate Professor
and Industry
Latvia Students’ Union Ing ûna Zari òa Member
Lîva Vikmane Member
Vidzeme Planning Region Kristaps Rocâns Project Manager
Ministry of Finance Ilonda Stepanova Director of Budget Department
Lîga Šulca Head of Division
Ministry of Education Inese St ûre Deputy Director of the Department of Higher
and Science Education, Science and Innovation
Gunta Ar âja Deputy State Secretary – Director of the Department
of Structural Funds and International Financial
Instruments
Marina Mekša Senior Expert, Department of Higher Education,
Science and Innovation
Anatolijs Melnis Senior Expert, Department of Higher Education,
Science and Innovation
J ânis Paiders Officer, Department of Higher Education, Science
and Innovation
REPORT 3: Higher Education Financing in Latvia: Final Report | 293
Institution, organization Representative(s) Position
Reinis Lasmanis Officer, Department of Higher Education, Science
and Innovation
Kristîne Keièa Officer, Department of Higher Education, Science
and Innovation
Karîna Aleksandra Officer, Department of Higher Education, Science
and Innovation
Evita Sarma –
University of Latvia J ânis Stonis Administrative Director
Gundars B çrzi òš Chancellor (supervises Department of
Development and Planning, and Department of
Finance and Accounting)
Ventspils University College Gita R çvalde Associate Professor and Rector
Vidzeme University College Gatis Krûmiòš Rector
Iveta Putniòa –
Liepaja University J ânis Rimš âns Rector
Riga Technical University Ingars Eriòš Chancellor, Associate Professor
Uldis Sukovskis Vice-Rector for Academic Affairs
Tâlis Juhna Zin ât òu prorektors
Uìis Bratuškins Dean of the Faculty of Architecture and Urban
Planning
Juris Smirnovs Dean of the Faculty of Building and Civil
Engineering
State Education Development Dita Traid âs Director
Agency
Elita Zondaka Head of Department of Structural Funds
Management and Monitoring
Ansis Pekšs Head of Science Project Monitoring Unit,
Department of Structural Funds Management
and Monitoring
Ingus Zitmanis Head of European Social Fund Project Monitoring
Unit, Department of Structural Fund Management
and Monitoring
Atvars Sauss Head of Infrastructure Project Monitoring Unit,
ERDF Infrastructure Project Control Department
Agnese Aivare Head of the ERDF Infrastructure Project Control
Department
294 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
Stakeholder Workshop: 12 March 2014
Institution Representative(s) Position
Ministry of Education Ina Druviete Minister
and Science
Sanda Liepi òa State Secretary
Lîga Leji òa Director of the Department of Political Initiatives
and Development
Agrita Kiopa Director, Department of Higher Education,
Science and Innovations
Jolanta Silka Officer, Department of Higher Education, Science
and Innovations
J ânis Paiders Officer, Department of Higher Education, Science
and Innovations
Anatolijs Melnis Senior Expert, Department of Higher Education,
Science and Innovations
Reinis Lasmanis Officer, Department of Higher Education, Science
and Innovations
State Agency of Education Dita Traid âs Director
Development
Elita Zondaka Head of the Department of Structural Funds
Management and Monitoring
Agnese Aivare Head of the Department ERDF Infrastructure
Project Control Department
Viktors Kravèenko Head of Eurydice Programme
Laura Treimane Project Coordinator
Ministry of Economics Vita Skuja Officer of the Department of Economic
Development and Labor Market Forecasts
Ruta Rimša Officer of the Department of Economic
Development and Labor Market Forecasts
Ministry of Interior Agnese Laure Officer at Department of Financial Management,
Section of Financial Policy and Methodology
Ministry of Defense Liene Liepi òa Head of the Department of Military Education
and Science
Ministry of Agriculture Ilze Slokenberga Official of Department of International Affairs and
Strategic Analysis
Ministry of Environmental Çriks Leitis Senior Expert
Protection and Regional
Development
Ministry of Health Inese Andersone Head of the Department of Coordination of
Financial Analysis and Investments
Ministry of Culture Lolita R ûsi òa Senior Officer
REPORT 3: Higher Education Financing in Latvia: Final Report | 295
Institution Representative(s) Position
Ministry of Welfare Daina Fromholde Senior Expert, Labour Market Policy
Cross-sectoral Coordination Elina Petrovska Consultant
Centre
Rector’s Conference Andrejs Rauhvargers Secretary General
Janis Bernats Legal Advisor
Agnese Rusakova Expert
Higher Education Council Janis Vetra Chairman
Latvia Union of Teachers Ilze Trapenciere Representative
Latvia Students’ Union Inguna Zarina Member
Latvia Confederation of Ina Sina National Coordinator in Professional Education
Employers and Employment
Latvia Chamber of Commerce Aigars Rostovskis Vice President
and Industry
University of Latvia Gundars Berzins Chancellor
Riga Medicine College of Astra Bukulîte Director
the University of Latvia
Latvia University of J ânis Sprukts Chancellor
Agriculture
Riga Technical University Ingars Eriòš Chancellor
Uìis M âlmanis Deputy Chancellor
Daugavpils University Inese Kokina Vice Rector of Science
Aivars Stankeviès Researcher
Rezekne Higher Education Ir çna Beinarovièa - Chief Accountant
Institution Litvinova
Ventspils University College Marina Mekša Vice Rector
Vidzeme University College Iveta Putni òa Administrative Vice Rector
Latvia Academy of Arts Andris Teikmanis Associate Professor
Latvia Academy of Culture Zane Šili òa Vice Rector
Latvia Academy of Music Normunds Vîksne Vice Rector of Academic Affairs
Latvia Maritime Academy J ânis Br ûnavs Professor
Riga Stradins University Tatjana Ko íe Vice Rector of Academic Affairs
Red Cross Medical College In âra Upmale Deputy Director in Academic Affairs
(of Riga Stradins University) and Research
Riga Academy of Pedagogy Daina Voita Vice Rector of Science
and Education Management
296 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
Institution Representative(s) Position
Latvia Academy of Sports Andra Fern âte Vice Rector of Academic Affairs
Education
Transport and Igors Graurs Acting Rector
Communications Institute
Business Higher Education Aldis Baumanis Associate Professor
Institution “Turîba”
Stockholm School of Rita Kaša Vice Rector
Economics in Riga
Riga Institute of Aviation Sandija Z çverte-Riv a Programme Director
State Police College Anita Fišere Head of Education Coordination
State Border Guarding Aivars Uzulnîks Deputy Director
College
National Information Agency Laura Celmiòa Reporter
(LETA)
Stakeholder Workshop: 23 April 2014
Institution, organization Representative Position
Parliamentary Committee of Dana Reizniece-Ozola Chair of the Committee
Education, Science and Culture
Ministry of Education Sanda Liepiòa State Secretary
and Science
Lîga Lejiòa Deputy State Secretary, Director of the Department
of Political Initiatives and Development
Gunta Ar âja Deputy State Secretary, Director of the Department
of Structural Funds and International Funding
Instruments
Agrita Kiopa Deputy State Secretary, Director of the Department
of Higher Education, Science and Innovations
State Agency of Education Dita Traid âs Director
Development
Laura Treimane Project Coordinator
Rector’s Council Andrejs Rauhvargers Secretary General
J ânis Bern âts Legal Advisor
Latvia University Gundars B çrziòš Chancellor
Riga Technical University Leonîds Ribickis Rector
Latvia Academy of Arts Andris Teikmanis Vice Rector, Associate Professor
Latvia Academy of Culture Zane Šili òa Vice Rector
R ûta Muktup âvela Chair of Centre for Scientific Research
REPORT 3: Higher Education Financing in Latvia: Final Report | 297
Institution, organization Representative Position
Vidzeme University of Sarmîte Rozent âle Vice Rector
Applied Sciences
Ventspils University of Gita R çvalde Rector
Applied Sciences
Marina Mekša Vice Rector of Finance and Administrative Issues
Rezekne Higher Education Ir çna Beinarovièa - Finance and Planning Department
Institution Litvinova
Liepaja University J ânis Rimš âns Rector
Dzintars Tomsons Vice Rector for Development
Daugavpils University Inese Kokina Vice Rector for Research
Latvia University of Agriculture Santa Rutkovska Finance Department
Latvia Academy of Sports Andra Fern âte Vice Rector of Studies
Education
Riga Teacher Training Dace Markus Rector
and Educational Management
Academy
Latvia Maritime Academy J ânis Bçrziòš Rector
BA School of Business Andris Sarnoviès Rector
and Finance
Delegation of the European M ârti òš Lustiks Representative
Commission in Latvia
Agency of Commercial Activity Andris N âtri òš Director
and Funding Research
Stockholm School of Nellija Titova Director of Executive Education and Executive
Economics in Riga MBA Department
Cross-Sectoral Coordination Elîna Petrovska Counsellor at the Department of Development
Centre and Assessment Monitoring
298 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
Stakeholder Workshop: 8 July 2014
Institution, organization Representative Position
Ministry of Education Ina Druviete Minister
and Science
Agrita Kiopa Deputy State Secretary, Director of the Department
of Higher Education, Science and Innovations
Reinis Lasmanis Officer at the Department of Higher Education,
Science and Innovations
J ânis Paiders Officer at the Department of Higher Education,
Science and Innovations
Velta Basevièa Officer at the Department of Higher Education,
Science and Innovations
Elîna Zari òa Officer at the Department of Structural Funds
and International Financial Instruments
Delegation of the European Inna Šteinbuka Head of the Delegation
Commission in Latvia
M ârtiòš Zemîtis Economic Analyst
State Agency of Education Dita Traid âs Director
Development
Laura Treimane Project Coordinator
Higher Education Council Jânis Vçtra Chairman
Rector’s Council J ânis Bern âts Legal Advisor
Latvia University Gundars B çrziòš Chancellor
Indra Dedze Project Manager at the Academic Department
Riga Technical University Ingars Eriòš Chancellor
Uldis Sukovskis Vice Rector for Academic Affairs
Riga Stradins University Ingrîda Kalvi òa Director of the Department of Development
and Projects
Je ï ena Davidova Director of Finance Department
Latvia Academy of Arts Aleksejs Naumovs Rector
Andris Teikmanis Vice Rector, Associate Professor
Latvia Academy of Culture Zane Šili òa Vice Rector
Latvia Academy of Music Toms Ostrovskis Deputy Director of Study Programs
Vita Daudiša Head of Finance Department
Riga Teacher Training Maira Koc çna Head of the Development and International
and Educational Management Relations Unit
Academy
Latvia National Academy of Skaidrîte Ivanišaka Methodologist
Defence
REPORT 3: Higher Education Financing in Latvia: Final Report | 299
Institution, organization Representative Position
Daugavpils University Ir çna Kaminska Vice Rector for Studies
Vidzeme University of Gatis Kr ûmiòš Rector
Applied Sciences
Ventspils University of Aivars Stankevics Rector’s Advisor
Applied Sciences
Latvia University of Kaspars Vârtukapteinis Vice Rector for Studies
Agriculture
Ilze Stokmane Head of the Project Department
Latvia Academy of Sports Andra Fern âte Vice Rector for Studies
Education
Latvia Maritime Academy J ânis Br ûnavs Professor
Riga International School of Ilm ârs Kreituss Vice Rector for Studies
Economics and Business
Administration Tatjana Vasi ï jeva Vice Rector for Science
Ieva Brence Head of the Department of Economics and
Finance
BA School of Business Lîga Peiseniece Vice Rector for Studies
and Finance
Turîba University Aldis Baumanis Associate Professor, Chairman of the Board
Employers’ Confederation of Anita Lîce Advisor on Education and Employment Affairs
Latvia
Vilnis Ranti òš Board Member
Latvia Association of Colleges Juris Gerasimovs Chair of the Board
Latvia Trade Union of Ilze Trapenciere Representative
Education and Science
Employees Rasma Mozere Representative
Latvia Students’ Union Kirils Solovjovs President
Ing ûna Zari òa Officer of Academic Affairs
KOFI Andris N âtri òš Director
Riga Stradins University Ingrida Kalvina Director of the Development of Project
Department
Latvia National Television (LTV) Lîva Rauhvargere Reporter
National Information Agency Anastasija Teterenko Reporter
(LETA)
300 | Focus on Performance – World Bank Support to Higher Education in Latvia | VOLUME 1: System-Level Funding
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