Romania - Strategy Note on Reform of Higher Education

Document of The World Bank FOR OFFICIAL USE ONLY CONFIDENTIAL Report No. 14878 RO ROMANIA STRATEGY NOTE ON REFORM OF HIGHER EDUCATION September 20, 1995 Human Resources Operations Division Country Department I Europe and Central Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. ROMANIA STRATEGY NOTE ON REFORM OF HIGHER EDUCATION Table of Contents Page No. EXECUTIVE SUMMARY I I. INTRODUCTION 1 II. ECONOMIC AND SECTOR BACKGROUND 1 III. KEY ISSUES IN ORGANIZATION AND STRUCTURE OF HIGHER EDUCATION 3 Mismatch Between Demand and Supply 4 Rigidity of Academic Programs 4 Shortage of Teaching Staff in Expanding Fields 5 Graduate Training Programs 7 Quality Improvement and Accreditation 7 IV. KEY ISSUES IN FINANCING OF PUBLIC HIGHER EDUCATION AND ACADEMIC RESEARCH 8 Inadequate Financial Resources for Higher Education 10 Public Financing for Private Provision 12 Improved Cost Recovery 12 Budget Allocation Process 13 V. GOVERNMENT'S REFORM STRATEGY 14 Creating a More Differentiated Higher Education System Through Accreditation and Reform of the Structure of Academic Employment 14 Revitalizing the Academic Community 15 Reforming the Budget Allocation Process 16 Improving Cost Recovery and Targeting Student Support 17 VI. RECOMMENDATIONS 18 Further Diversification of Higher Education Programs 18 Accreditation 18 Development of the Credit-Hour System 19 New Employment Status for Academic Staff 19 Expanded Post-Graduate Education 19 Increased Budget Resources 19 Increased Cost Recovery 19 Improved Budget Allocation Procedures 20 ROMANIA STRATEGY NOTE ON REFORM OF HIGHER EDUCATION EXECUTIVE SUMMARY The transition has fundamentally transformed the setting in which higher education institutions operate. Freedom of student choice and increased autonomy of individual institutions have lifted enrollment constraints. Budgetary transfers of all kinds have been sharply reduced; cost recovery through student fees and other charges has increased. Centrally mandated research subsidies have come to an end. At the same time, marked earnings differentials in the labor market are rewarding skills which are required by the evolving market economy and are in relatively short supply. As a result of these changes, higher education enrollments have surged, and the composition of specializations has been completely reconfigured by the revealed preferences of student demand. Much of the increase in student demand has been accommodated by spontaneous and very dynamic expansion of private, self-financed programs of higher education, particularly in the growing specializations. Public higher education institutions have responded to this situation by using staff and facilities more intensively and efficiently in a number of areas, and by introducing cost recovery through student fees and charges for other services. To address the potential adverse equity effects of increased student fees, the Government has provided some needs-based scholarships. ii. To accommodate these changes, the Government of Romania has developed and begun to implement a comprehensive strategy for higher education reform that is ambitious by comparison to efforts underway elsewhere in Central and Eastern European countries. Reforms are underway in the management and financing of the higher education system which will: a) strengthen responsiveness to changing student and labor market demand, b) increase efficiency of resource allocations at both the system and institutional levels, c) mobilize additional private financing to supplement the limited public resources available to support quality improvements, and d) facilitate expansion of high quality private provision and better articulate public and private sector roles. iii. The actions taken by the Government to reform management and financing of higher education constitute an impressive start in reshaping the higher education system to respond to the evolving needs of a market economy. But to achieve the full benefits of this change, it will be important to carry reform actions further in a number of key areas. Further changes are necessary in two broad categories of initiatives, involving: a) organization and structure of higher education, and b) procedures for financing for higher education and academic research. iv. Romania's system of higher education and academic research suffers from several organizational and structural problems. There is a sharp mismatch between labor market and student demand for training in various fields, and installed capacity to deliver training in those fields. Academic programs are excessively rigid, and do not provide the flexibility needed to respond to rapidly changing labor-market demands. Teaching staffing in fields of high student demand is grossly deficient in quantity and quality, and Romanian capacity for postgraduate education to address this problem is severely underdeveloped. The rapid development of private higher education has helped absorb the growth of student demand. v. Further changes are also needed in higher education finance to bring about more flexibility and accountability. For students, increasing even further the diversity of higher education programs would offer an unprecedented richness of choice among higher education programs to respond to evolving labor demands. At the same time, a requirement that all students pay for higher education in relation to the duration and cost of programs would encourage students to weigh carefully the choice among programs, and would help prevent excessive growth in enrollments which could degrade educational quality. For institutions of higher education, the necessity to compete for enrollments and rely upon cost recovery through student fees and other charges would encourage higher education institutions to be more responsive to market needs, and would provide an ongoing incentive to use resources as efficiently as possible. vi. To achieve these goals, the report argues in favor of: a. Public expenditure going to higher education should gradually increase, as Romania's fiscal situation improves. However, this increase should not be at the expense of the budgetary allocations to compulsory education which should be the priority for public expenditures in education. b. Public universities should be allowed to charge fees for their services, including instruction. Budgetary allocations should be increased, rather than reduced, to public universities that raise resources in this manner. c. An improved budgetary allocation process. The report suggests that funding for recurrent costs be a function of enrollment with consideration for system-wide unit costs (phased in over a period of three years). It suggests that about 25% of the budget for higher education be allocated on the basis of competition between private and public institutions for the development of new programs and other long term investments. Finally, the report urges the authorities to allocate up to 25% of the budget directly to students, who could use them in either public or private institutions. These grants would be provided on the basis of merit but with priority for poorer students. vii. After extensive consultation with Parliament, university rectors and the academic community, the Government developed, and approved in November, 1994, a strategy for comprehensive reform of the higher education system which addresses the issues described above. The strategy comprises a broad range of policy reforms to: a) stimulate development of a more differentiated higher education system in order to increase students' choices and respond to the needs of a fundamentally altered labor market, as well as to accommodate further enrollment growth at lower public cost, b) train the academics needed to revitalize the higher education system, c) mobilize private resources to expand access and improve quality, while better targeting public subsidies to increase equity, and d) establish positive incentives for public and private higher education institutions to improve their efficiency, to restructure their academic programs, and better respond to changing student demand. viii. The actions already taken by the Government to reform higher education are an important initiative to start the process of reshaping Romania's higher education system to meet the needs of the evolving market economy. The initial actions taken by the Government provide a sound basis for the actions needed to achieve the full benefits of its strategy. It will be important to carry reform actions further in a number of key areas: a) further diversification of higher education programs, b) further development of accreditation, c) development of the credit-hour system, d) establishment of a new employment status for academic staff, e) expanded post-graduate education. ROMANIA STRATEGY NOTE ON REFORM OF HIGHER EDUCATION I. Introduction 1. There are compelling reasons why reform of higher education and academic research is a high priority for public policy in Romania. The objective of the transition is a decentralized, open, and internationally competitive market economy based on private ownership. This requires of its professional, technical, and managerial workforce radically different knowledge and skills and attitudes from those needed during the socialist era. Romania's universities and colleges must provide the new knowledge and skills essential for the development of economically competitive private enterprises in a diversified labor market. To do so, structural changes that increase student choice and program flexibility are needed, and higher education must be transformed from an elite to a mass system serving a more heterogeneous student body and many national and local constituencies. The university community also seeks to benefit more fully from the political freedoms which have opened up academic life, and thereby to rejoin the European intellectual mainstream. But this, too, presumes significant reorganization and revitalization of the system of higher education and academic research. Finally, the necessary reforms will entail sizeable expenditures, whose financing in the context of Romania's austere budgetary realities is unavoidably a central question of public policy. 2. The Government has developed and begun to implement a comprehensive strategy for higher education reform that is ambitious by comparison to efforts underway elsewhere in Central and Eastern European countries -- and even by comparison to reforms in many Western European countries. Systemic reforms are already underway in the management and financing of the higher education system. These reforms will: a) strengthen responsiveness to changing student and labor market demand, b) increase efficiency of resource allocations at both the system and institutional levels, c) mobilize additional private financing to supplement the limited public resources available to support quality improvements, and d) facilitate expansion of high quality private provision and better articulate public and private sector roles. 3. This note first sketches the pertinent economic and broad education sector background for these ambitious reforms. Key issues regarding the organization, structure and financing of higher education are then briefly presented. Next are a description of the Government's reform strategy, and recommendations for further actions to improve the effectiveness of this strategy. II. Economic and Sector Background 4. Romania achieved a high level of basic education coverage during the socialist period. Eight years of basic education became nearly universal, while about 80 percent of primary school graduates obtained access to some form of academic or vocational secondary education. Higher education expanded to cover 11 percent of the age group in 1970, but enrollments stagnated during the last decades of the Ceaucescu period, growing at just 0.4 percent per year between 1970 and 1989. Most secondary students were directed into programs of overspecialized vocational education. Many of these programs did not offer the prospect of progressing to higher education. Even for those secondary programs which did meet the entrance requirements for higher education, few graduates succeeded in gaining entry to 2 university. At the start of the transition, higher education enrollments in Romania had shrunk to 9 percent of the age group -- versus, for example, 27 percent in Slovakia, 30 percent in Bulgaria, and 50 percent in the OECD countries. During the 1980's Romanian higher education was also deprived of the contacts with the West which it had enjoyed in the early 1970s, leading to progressive intellectual isolation and obsolescence. 5. The transition unleashed the long-pent-up demand for higher education. The proportion of secondary-school graduates admitted to higher education increased from 10 percent in 1989 to over 50 percent in 1994. As shown in Table 1, below, enrollments in higher education increased by 71 percent between 1989 and 1990, and grew at an average rate of 18 percent per year between 1989 and 1994. Much of this increase was in private higher education. Nowhere in Eastern or Central Europe has private higher education developed more rapidly than in Romania, which had no history of private university education prior to 1989. A law passed in 1990 allowing non-government entities to provide educational services was the foundation for the creation of a private sector in higher education. High student demand and the limited absorptive capacity of public institutions led to the establishment by 1994 of as many as 73 private institutions, almost all of which claim university status and propose to grant degrees. These institutions, which rely largely upon part-time teaching staff from the public universities, enroll about a third of total university enrollments -- higher than the share of private higher education enrollments in the United States. While the private institutions mainly recruit students who fail to gain entry to a public university, admission is reported to be competitive. For example, the Ecology University in 1993/94 accepted about one of six applicants, a decrease from a ratio of one to ten in 1990/91 but sufficient to ensure continued growth. Further expansion of the private sector is likely to be constrained principally by the shortage of teaching staff in the rapidly growing specializations. Table 1. Growth of Higher Education Enrollment 1989/90-1993/94 89/90 90/91 91/92 92/93 93/94 94/95 Public 44 48 56 56 NA 58 Institutions Public 101 186 220 237 NA NA Faculties Enrollments 164,507 230,088 288,586 326,281 362,537 401,153 Public 164,507 202,810 225,226 236,561 251,657 255,273 Private 0 27,278 63,360 89,720 110,880 145,880 6. Many students who fail to gain entry to university enter a postsecondary vocational training establishment. In 1993, there were 420 of these institutions, with a total enrollment of 37,000 students. Although individual institutions tend to be quite small, together they account for a large increase in enrollments by comparison with the 18,000 students in such programs in 1990/91. The postsecondary vocational institutions offer certificate programs of between one and three years' duration. Most offer courses in traditional fields such as kindergarten and primary school teacher and technical training. Some also offer courses in new fields of higher student demand, such as tourism and business 3 administration. The development of these institutions is a positive development in that they provide short programs of training of relevance to the local job market. 7. The sharp decline in output and fiscal revenues since the start of the transition has created acute problems of financing for the education sector, making it difficult to add capacity in rapidly growing areas, and to modernize pedagogy in line with the needs of a market economy. The Government has struggled to maintain education programs as public revenues fell. As government revenues fell even faster than GDP after 1989, the Government allocated an increasing share of public expenditures to education in order to maintain the share of GDP (3.9 percent) devoted to public education. In real terms, however, education expenditures fell sharply (paragraph 31). Within the education sector, the Government initially gave priority to higher education in order to compensate for the extreme neglect of the prior two decades, and to accommodate the extraordinary public pressure for expanded access to higher education. While GDP declined by 47 percent between 1989 and 1994, real allocations to higher education fell by 27 percent; allocations for compulsory education (up to age 16) declined by 55 percent. At the same time, the Government moved energetically to mobilize non-budgetary resources for higher education -- in particular, by imposing student fees. As revenues from non-budgetary sources have grown, the Government has reoriented budgetary resources toward compulsory education. Budget allocations for compulsory education increased by 22 percent in real terms in 1994, while allocations for higher education continued to fall. Compulsory education was also the subject of the country's first World Bank loan for education.' Participation in basic education has remained high through the transition. Overall, more than 94 percent of children between the ages of 7 and 16 currently attend school. The declining birthrate will make it easier to attain full coverage of basic education, and to give due attention to investments in quality improvements, especially at the secondary level. 8. This budget priority for basic education is fully appropriate in view of the social benefits of basic education and the prospects for increasing cost recovery in higher education. Education expenditures are projected to increase further through 1995 and beyond. The Government plans a slight increase in public expenditures on education as a share of GDP (to four percent). Even when this target is achieved, public budget allocations to education as a share of GDP in Romania will remain modest by comparison with the OECD average of 5.2 percent. In the area of education finance, the priority is not to reduce education's overall claim on public resources in Romania, but to improve the efficiency of education resource use and to raise private inputs to higher education financing. III. Key Issues in Orianization and Structure of Higher Education 9. Romania's system of higher education and academic research suffers from several structural problems. There is a sharp mismatch between labor market and student demand for training in various fields, and installed capacity to deliver training in those fields. Academic programs are excessively rigid, and do not provide the flexibility needed to respond to rapidly changing labor-market demands. Teaching staffing in fields of high student demand is grossly deficient in quantity and quality, and Romanian capacity for postgraduate education to address this problem is severely underdeveloped. Each of these challenges is briefly described below. I/ The Romania Education Reform Project, approved in 1994, provides US$ 74 million for improvements in the quality of primary and secondary education, and in financing and management of education. 4 10. Mismatch Between Demand and Supply. The recent changes that have taken place in the higher education system have only just begun to correct a fundamental legacy of the Ceaucescu era: excessive training capacity in specializations for which a market economy has little need, and undercapacity of training in fields that are critically needed for the future growth of the market-oriented economy. 11. The composition of public university enrollments has already radically shifted in response to student demand. As shown in Table 2, below, enrollment in engineering programs has declined precipitously, both as a share of total public university enrollment and in absolute numbers. Whereas 65 percent of university students were registered in engineering programs in 1989, this proportion decreased to 31 percent in 1994. On the other hand, enrollments in law, economics, social sciences and humanities have grown sharply; in 1994, they accounted for 54 percent of higher education enrollments. In the 1994 entrance examinations, there were 20 candidates per place in some law faculties, while in many engineering fields admission standards had to be lowered to fill the available places. Due to rigidities in staffing and programs, public expenditures continue to favor fields such as engineering, for which there is declining student and labor-market demand. Table 2. Distribution of Public Higher Education Enrollment by Field of Study, 1989-1994 (percent) Field 89/90 90/91 91/92 92/93 93/94 Engineering 65 59 54 38 31 Agriculture 4 4 4 4 4 Economics 9 10 12 20 20 Law 1 3 4 3 2 Medicine 10 10 10 7 10 Sciences, Social Sciences, Humanities 10 14 16 25 31 Fine Arts 1 1 2 3 2 Total 100 100 100 100 100 (Total Enrollments in thousands) (165) (203) (225) (237) (252) 12. Rigidity of Academic Programs. Prior to 1990, there was very little diversity in the length and structure of undergraduate programs. Programs in science, arts, social science and the humanities were usually of four years' duration, while those in some professional fields such as engineering and medicine were five years. Evening courses required an additional year. Each teaching faculty made its own admissions decisions quite autonomously, and study programs were highly specialized with no provision for elective studies. Transfer from one program to another or from one faculty to another was not possible without starting all over again. The excessive number of hours of compulsory classroom instruction (32 to 38 hours per week) effectively left no time for self-study. 5 Responsibility for organizing most doctoral training was given to government scientific research institutions which operated separately from the universities. 13. More flexible program structures are now being developed in many public universities. Two-to-three-year certificate programs have been established in new fields like library and information sciences. Traditional degree courses, especially in engineering, are being divided into two cycles: a short cycle diploma program of three years, with two additional years of study leading to a degree. Because of labor market uncertainty, students increasingly seek to broaden their academic training and acquire multiple specializations in order to enhance their possibilities for employment in an evolving market economy. At the Polytechnic University of Bucharest, broader areas of specialization (such as electrical and mechanical engineering instead of electro-technical industrial engineering or fine mechanical engineering) are now emphasized; studies are offered in English, German, and French as well as in Romanian; and programs have been established in small business management. In addition, the older public universities are introducing Master's programs of two years duration, including some in new inter- disciplinary specialties such as ecology and environmental sciences. Doctoral programs are also being re-established and are now offered in about 40 public universities, entry to which will soon require the new Master's degree. In re-establishing post-graduate education, it will be important to resist the aspirations of most new public and private higher education institutions to become research universities and to offer doctoral degrees. 14. Much less progress has been made in reforming the organization and methods of instruction. Programs of study are still course based rather than credit based, which limits flexibility. High course requirements discourage elective studies and mobility among fields, faculties, and institutions. Students who wish to broaden their training must still be readmitted to another faculty and start their studies from the first year. In 1994, the number of hours of compulsory instruction per week was reduced from an average of 35 hours to an average of 26 hours. This is a first step towards increased efficiency in the use of staff and facilities, and should encourage innovation in methods of instruction and assessment. 15. Full exploitation of the efficiency and flexibility gains of a credit-hour system and reduced hours of classroom instruction will require other changes as well. Crucial in this regard is the adequate provisioning and operation of university libraries, the availability of other learning resources for both faculty and students, and a form of pedagogy which makes full use of these resources. In the absence of these changes, Romanian students continue to rely on their lecture notes to prepare for course examinations, which are usually given in an oral format. This model of learning and examination provides students and faculty little opportunity or incentive to participate in current developments in their chosen field of studies. Private institutions have been more innovative in these respects, pioneering introduction of the credit-hour system, major and minor program concentrations, and continuous assessment. Nevertheless, their instructional facilities are often inadequate to support these practices adequately. Moreover, their staff are drawn almost entirely from the public universities, and tend to bring with them the pedagogy limitations of the public universities. 16. Shortage of Teaching Staff in Expanding Fields. The shortage of staff, especially in fields of high student demand, is a serious constraint both to improving responsiveness to the labor market and to curriculum modernization. As in most Central and Eastern European countries, the overall student/teacher ratio in Romania is relatively low in comparison to Western Europe or North America, reflecting a labor-intensive pedagogy and the excessive specialization of academic programs. The ratio of students to authorized teaching staff in Romanian public universities (13-to-one) has been constant since 1989, although the actual average ratio of students to teaching staff has since grown to 22-to-one because 6 of a rise in unfilled teaching vacancies in fields with expanding enrollments. This compares to higher education average student/teacher ratios of 6.6 in Hungary, 7.1 in Slovakia, 9.8 in Bulgaria, and 10.7 in Russia. 17. However, these overall student/teacher ratios in public higher education conceal the major variation across specializations which has emerged since the start of the transition. The composition of enrollments in higher education has been thoroughly reconfigured by student response to changed economic opportunities. Staffing rigidities in the public universities have led to overstaffing in stagnant fields such as engineering, and serious understaffing in growth fields such as business and accounting. For example, the share of enrollments in economics and business courses in public universities more than doubled between 1989 and 1993 -- going from 9 percent to 20 percent of (rapidly expanding) total enrollments. The public universities have not been able to attract qualified staff in these growth areas because they are not able to offer salaries and other incentives which are competitive with the private sector. As a result of these staffing rigidities, the student/teacher ratio in economics and business courses has grown to more than 50-to-one. Another consequence is that few of the existing teaching staff in these areas benefit from recent training or experience abroad. The staffing situation is the reverse in the specializations of declining popularity. In engineering, for example, the actual student/staff ratio declined from 19.1/1 in 1989 to 11.5/1 in 1993. The drop would have been sharper still if engineering faculties had not lowered admissions standards in an unsuccessful attempt to maintain intake levels. Reducing staff to improve efficiency in specializations with declining enrollments will require a fundamental change in the employment status of staff in public higher education institutions. Currently, these staff are civil servants, and benefit from the job stability which is customary for the civil service. Tenured faculty have further protection against job loss. 18. Most vacant teaching posts in the public universities are in the junior faculty grades. At the Bucharest Academy of Economic Studies, for example, only 30 percent of assistant lecturers posts were filled in 1993, and less than half at the lecturer level. Staff workloads (10 to 12 hours of instruction per week at junior faculty grades and 6 to 8 hours per week for professors), are comparable to or higher than Western European or North American norms. Thus, there is little room for solving the faculty shortage in growing specializations by increasing teaching requirements for existing faculty. To retain existing staff, the public universities are using savings from vacant posts to supplement salaries for highly demanded specializations and are allowing their staff to teach at private institutions. 19. The inability of public universities to attract qualified junior faculty in fields of growing demand narrows the base of the faculty seniority structure. This has several negative consequences. In particular, it deprives students and other faculty of the infusion of new ideas which freshly trained -- especially, foreign-trained -- faculty would bring. Reducing further the number of hours of compulsory classroom instruction for students would improve efficiency in the utilization of scarce staff resources, and would enable public universities to reduce a little the most excessive class sizes or to accommodate a few more students in fields of high demand without increasing staffing or class sizes. It would also increase pressure for programmed staff redundancies in academic units with low student enrollments. But it cannot significantly alleviate the overall staff shortage in high demand fields or the increasing reliance on senior staff whose academic training and experience is often least appropriate for the needs of a market economy. 20. Graduate Training Programs. The present annual output of individuals with doctoral degrees or equivalent qualifications is below 2,000 per year, about one-quarter of whom are newly returned from training abroad. That total is less than a third of the number of new academic positions created in 1994 (6,000). Acceleration of academic restructuring will require large-scale staff retraining, 7 expanding opportunities for foreign study, and development of postgraduate programs -- coupled with measures to increase the attractiveness of academic employment. Retraining of existing staff, particularly in economics and other expanding fields in the social sciences, will require a major effort. Postgraduate, as well as undergraduate training in many social-science disciplines such as sociology and psychology was suspended, or the size of programs considerably reduced, in the 1980s, when the country entered a period of economic and intellectual isolation. Most staff who are now teaching these specialties received their training more than two decades ago, and had no opportunity to keep abreast of developments in their disciplines until 1990. Many staff who are teaching specialties of importance to a market economy, such as business administration and marketing, have no formal training in these fields. Most were trained in the tradition of central economic planning. Likewise, in many rapidly growing interdisciplinary fields such as materials science, informatics, biotechnology and ecology, most staff are being retrained "on the job", given the lack of opportunities to update and broaden their professional expertise. Moreover, new ways of organizing and servicing academic programs require retraining of academic staff in methods of teaching and student assessment. 21. Ouality Improvement and Accreditation. The rapid growth of private higher education and the budgetary deprivation of public higher education underline the need for quality standards in higher education. The Government took an important step in this direction in 1993, when it passed a law on accreditation and academic evaluation. The objective of this law is to promote diversification, foster greater complementarity in the roles of public and private institutions and better inform consumers about institutional choices and program quality. The law sets out general criteria and minimum standards which institutions must satisfy to be accredited as a university. These relate to their forms of governance, organization of programs, teaching staff and instructional resources as well as to the proportion of their budgets used for quality improvements. Institutions that cannot meet the requirements may obtain provisional authorization to function for a probationary period, or seek recognition as another kind of higher education institution with approval to grant certificates. The law also sets out criteria for accreditation of individual programs. All institutions, public and private, and programs established after 1989 are subject to evaluation, including new programs offered by the older universities. 22. Accreditation is being carried out by the semi-autonomous National Council on Accreditation and Academic Evaluation, which has begun with evaluation of nearly 2,000 academic programs, 1,500 of them offered by private institutions. Authorization of programs of public and private institutions is expected to be completed in mid-1995, and accreditation of universities in 1996. Institutions which do not receive accreditation will be allowed to function on a probationary basis, will be designated as another kind of tertiary institution, or will be permitted to function as an unrecognized commercial or non-profit training institution within the limits of the law. Programs submitted by private institutions are being reviewed and authorization has been granted to offer the programs at the degree level in about 25 percent of the applications reviewed. A high proportion of applications for degree programs currently offered by private institutions in technical and professional fields like engineering and medicine are likely to be rejected. The success rate is much higher in economics, law and similar fields with more modest instructional resource requirements. To date, about 50 percent of programs submitted by public institutions have been approved, again mostly for instruction in applied social sciences. National examinations are being prepared to assess the equivalence of programs and to certify the credentials of graduates in professional fields. 23. The initiatives which Romania has taken to develop an objective and professional accreditation process are expected to make an important contribution to raising quality standards throughout the higher education system. But accreditation must be implemented with great care; there is in all accreditation systems a risk that the process of accreditation can be and used to stifle needed 8 development of new programs and new institutions. Maintaining the integrity of the accreditation process requires constant attention to the professionalism of the individuals selected to oversee the process and the objectivity and to the appropriateness of the accreditation criteria which are adopted. Developing and implementing an accreditation process which promotes rather than hinders the development of a dynamic, high quality higher education system will require the participation of individuals with many skills. This should not be limited to specialists from the academic community; it also needs to include professionals with up-to-date experience in real-life applications of the respective disciplines and specializations, and experts on accreditation programs in other countries. IV. Key Issues in Financing of Public Higher Education and Academic Research 24. Although there has been striking progress in Romania's system of financing higher education and academic research since the start of the transition, more needs to be done. Under the former system, higher education was centrally financed and centrally directed. Enrollments were oriented to the needs of a planned economy. Student demand did not play a role in the evolution of higher education. Specializations which made a direct contribution to physical output goals -- notably, science and engineering -- were emphasized; programs in humanities and social sciences were neglected or eliminated entirely. The financing of higher education programs was not subject to performance considerations other than meeting enrollment targets. Higher education institutions also carried out contract research for ministries and public enterprises under a system of mandated allocation which provided little incentive for professional excellence or relevance, and amounted to disguised public subsidies. 25. The transition has fundamentally transformed the setting in which higher education institutions operate. Freedom of student choice and increased autonomy of individual institutions have lifted enrollment constraints. Budgetary transfers of all kinds have been sharply reduced; cost recovery through student fees and other charges has increased. Centrally mandated research subsidies have come to an end. At the same time, marked earnings differentials in the labor market are rewarding skills which are required by the evolving market economy and are in relatively short supply. As a result of these changes, higher education enrollments have surged, and the composition of specializations has been completely reconfigured by student demand. Much of the increase in student demand has been accommodated by spontaneous and very dynamic expansion of private, self-financed programs of higher education, particularly in the growing specializations. Public higher education institutions have responded to this situation by using staff and facilities more intensively and efficiently in a number of areas, and by introducing cost recovery through student fees and charges for other services. To address the potential adverse equity effects of increased student fees, the Government has provided some needs-based scholarships. 26. These developments are generally very positive, in that they have introduced an initial measure of flexibility and accountability into a higher education system which was formerly very rigid and lacked performance incentives. The development of private higher education also provides a healthy element of competition for public higher education institutions, and relieves some of the enrollment pressure upon the public system. 27. But a great deal more flexibility and accountability are needed, and can be achieved through further reforms of the financing system. For students, increasing even further the diversity of higher education programs would offer an unprecedented richness of choice among higher education 9 programs to respond to evolving labor demands. At the same time, a requirement that all students pay for higher education in relation to the duration and cost of programs would encourage students to weigh carefully the choice among programs, and would help prevent excessive growth in enrollments which could further degrade educational quality. For institutions of higher education, the necessity to compete for enrollments and rely upon cost recovery through student fees and other charges would encourage higher education institutions to be more responsive to market needs, and would provide an ongoing incentive to use resources as efficiently as possible. 28. The initial steps taken in these directions to change Romanian higher education financing since the start of the transition constitute an impressive start in reshaping higher education to meet the needs of a market economy. But this early progress needs to be extended and consolidated. One particular area in which further progress is needed involves cost recovery in public higher education through student fees. Although cost recovery is already relatively high by comparison with many other countries, it needs to be broadened -- most student fees are now paid by foreign students -- and further differentiated to reflect actual program costs. These changes are needed in order to finance actions to improve education quality, to improve the efficiency of choices among alternative programs, and to appropriately restrain future enrollment growth. 29. At the same time, there needs to be increased attention to the quality of higher education programs. Public programs of higher education have suffered through budget neglect since the start of the transition; these programs need more resources -- generated in part from cost recovery -- in order to raise educational quality towards OECD standards. Although the growth of self-financed private higher education is, in principle, a good thing, it brings with it the risk of deteriorating standards. To minimize this risk -- and to provide appropriate standards for public programs as well -- there needs to be better information for students about higher education options. This should be based upon an effective process of accreditation to certify the quality of both public and private programs of higher education. The recently launched accreditation process is beginning to provide this information. The information from the accreditation process will also provide a basis for higher education institutions to recognize credits from other institutions of equivalent standards, thereby supporting improved student mobility. 30. The following paragraphs discuss four important issues of higher education finance: a) the need to redress the quality declines brought about by sharply declining resources for public higher education, b) the need to improve cost recovery, particularly through student fees, c) the excessive channelling of public funds for higher education into public higher education institutions, and d) the need for a new process of public resource allocation in higher education in order to make higher education institutions more efficient and more responsive to the demands of students and the needs of the labor market. 31. Inadequate Financial Resources for Higher Education. Romania currently spends a smaller share of GDP on education, and particularly on higher education, than OECD countries and many other countries in Eastern Europe. As shown in Table 3, below, total education expenditures account for about 3.4 percent of GDP in Romania, versus 6.7 percent in Hungary, 4.5 percent in Spain, and an average of 6.4 percent in the OECD. Higher education expenditures in Romania account for about 0.5 percent of GDP in Romania, versus 1.0 percent in Hungary, 1.1 percent in Turkey, 1.0 percent in Spain, and an average of 1.9 percent in the OECD. Romania is also well below the OECD countries and other transition countries in terms of public support which it provides to education -- again, to higher education in particular. Public expenditures on education in Romania account for 3.3 percent of GDP, versus 5.5 percent in Poland, 6.2 percent in Bulgaria, Slovakia, and Hungary, 4.5 percent in Spain, and an average of 5.2 percent in the OECD countries. Public expenditures in higher education in Romania comprise just 10 0.4 percent of GDP, versus 0.9 percent in Poland, Hungary, and Slovakia, 0.8 percent in Spain, and an average of 1.2 percent in the OECD countries. Table 3: Total Expenditures and Public Expenditures on Education and Higher Education as a Percentage of GDP in Selected Countries Tt Education, All Levels Higher Education Public Total Public Total Romania 3.3 3.4 0.4 0.5 Bulgaria 6.2 NA 1.3 NA Slovakia 6.2 NA 0.9 NA Poland 5.2 NA 0.9 NA Hungary 6.2 6.7 0.9 1.0 Croatia 3.6 NA 0.8 NA Albania 4.2 NA 0.8 NA Turkey 4.0 NA 1.0 1.1 Spain 4.5 5.6 0.8 1.0 Ireland 5.5 5.9 1.2 1.4 OECD Average 5.2 6.4 1.2 1.9 United States 5.5 7.0 1.4 2.0 Source: UNESCO, OECD, and World Bank estimates (Circa 1993) 32. Expenditures on higher education in Romania are also very low when expressed as expenditures per student. The public budget now provides just US$ 309 per student per year' in higher education, or 25.2 percent of per-capita GDP. This proportion is well below the level of expenditures in most other transition countries -- for example, 52.8 percent in Slovakia, 43.2 percent in Poland, 102.8 percent in Albania, and 108.9 percent in Hungary -- and just half of the OECD average level of public support for higher education (50.5 percent of GDP per capita). It is also less than half the share in the United States (53.6 percent) -- which is generally seen as a minimalist model for public support of higher education. 33. The low level of expenditures for higher education in Romania in part reflects the serious drop in public expenditures since the start of the transition. While enrollments in public institutions of higher education have increased at an average rate of 9 percent per year since the start of the transition, 2/ I.e.,70 percent of average per-student resources of US$ 442. 11 overall funding for both teaching and research functions has declined sharply. Consequently, financial resources for public institutions of higher education are no longer minimally adequate, and the quality of public higher education has suffered in all areas. As shown in Table 4, below, the total financial resources of public universities, measured in 1995 Lei, were 39 percent less in 1994/95 than in 1989/90. Expressed in per-student terms, the decline was even more serious. Total real financial resources per student3 declined by over 60 percent since the start of the transition -- from 1,880 thousand Lei (or US$ 1,113) in 1989/90 to 746 thousand Lei (or US$ 442) in 1994/95. Table 4: Financial Resources for Public Higher Education by Source, 1988/89 - 1994/95 Total Total Resources Per Percentage Year Resources Resources Student Financed Percentage (billions of (billions of (thousands of from State Self Financed current Lei) 1995 Lei)' 1995 Lei) Budget 1988/89 2.2 232.6 1,459 66 34 1989/90 3.3 309.3 1,880 86 14 1990/91 10.4 335.1 1,652 95 5 1991/92 29.4 303.1 1,345 96 4 1992/93 87.1 288.1 1,218 90 10 1993/94 151.7 204.8 814 83 17 1994/95 190.4 190.4 746 70 30 34. The effect of the underfunding of higher education is that most facilities are overcrowded, poorly maintained, and lack the materials and equipment required for effective learning. Libraries, which play a vital role in the modernization of pedagogy and the development of more flexible programs, have suffered particularly from budgetary neglect. There is an acute shortage of funding for university libraries to cover stock acquisition, automation, refurbishment and training. 35. Whether expressed in terms of total or per-student expenditures, or as a share of GDP, Romania is contributing far less to higher education than the OECD countries and many transition countries. Eventually Romania should consider raising the share of total resources - including budgetary resources -- which it devotes to higher education. However, the current tight limits on public expenditures which are needed to ensure macro stability and release resources for private-sector growth, as well as the priority which must be accorded to basic education, make increases in support for higher education a medium-term prospect. 3/ Current Lei expenditures, deflated by the GDP deflator. 4/ Current lei converted to 1995 lei through use of GDP deflator. 12 36. Public Financing for Private Provision There is scope for accelerating the growth of higher education enrollments in Romania by encouraging an even larger role for the private sector -- particularly in specializations with low unit costs and high private returns. In these areas, private provision will tend to be more efficient, offering greater flexibility in programs and inputs (particularly, in terms of incentives for teaching staff), and more direct incentives for efficient performance. To the extent that public financing of education in these areas is justified, financing of private provision will tend to be more efficient than financing of public provision. 37. Improved Cost Recovery. Cost recovery from students contributes significantly to the financing of public higher education. Student fees finance 23 percent of the costs of public higher education -- a high percentage by international standards, and much higher than Eastern and Western European countries. But cost recovery in higher education needs to be further increased in order to permit expanded coverage and improved quality of higher education within the available budgetary resources. Particularly important in this regard is cost recovery through student fees. Student fees offer the greatest potential for resource mobilization. More fundamentally, student fees provide a strong incentive for students to choose responsibly whether to pursue higher education and to consider which programs of studies are most worthwhile in terms of employment prospects. Cost recovery through student fees also provides a powerful incentive for higher education providers to be efficient, and responsive to market needs. 38. The imposition of student fees in Romania is limited by the provision in the 1990 Constitution that the Government is to provide "free public higher education ... according to the law". The Government has constructively interpreted the provision to allow charging fees for regular courses taken by non-Romanian students, and for subsidiary activities for Romanian students, including: a) admissions examinations, b) re-examinations, c) repeated courses, d) elective and part-time studies, e) postgraduate studies, and f) board and accommodation. Foreign students, who comprise just 5 percent of full-time public university enrollments, and some of whom obtain fee waivers, account for 70 percent of all student fee income (and so finance 16 percent of total public higher education expenditures).' In addition to the fees paid by foreign students, some Romanian students until recently also paid fees for required courses. In 1993, the Ministry of Education allowed the public universities to collect fees from students admitted beyond the enrollment quotas6 negotiated by the Ministry of Finance and the Ministry of Education. Tuition for these students, set by the Ministry of Education, ranges from $70 to $360 per term. There is thus considerable inequity in treatment of students: Romanian students admitted under quotas, hence with higher entrance examination scores, pay for incidental charges but not for regular courses; students admitted above quota enrollments (hence, with lower entrance examination scores), pay tuition which covers a significant proportion of their program costs, as well as for housing and subsistence. The Romanian student fee component of institutional self financing will decrease in 1995 as a result of a legal opinion which requires public universities to suspend tuition charges to Romanian students pending passage of an organic law on education to legitimate such fees. 39. There is strong evidence of capacity and willingness to pay for higher education. This is apparent not only in the fees paid by extra-quota Romanian students in public universities, but -- more 5/ Foreign students are a profit center for Romanian universities, generating far more income than it costs to educate them. In 1994, foreign student fees for tuition, accommodation and subsistence, ranged from $5,201 to $10,615. Most fee-paying foreign students pay the lower level, but even this represents more than ten times the average cost per student. 6/ The setting of admission quotas was suspended as of the 1994/95 academic year. 13 fundamentally -- by the vigorous growth of fully self-financing private higher education during the past five years. Fees in private higher education institutions range from about $200 to $500 per year. Fees at the more expensive private institutions are thus comparable to average unit costs in public higher education (US$ 442 per year), and roughly 40 percent of GDP per capita. Moreover, many of the students admitted free to public universities take private tutoring courses to pass the entrance examinations to the elite public universities. These courses often cost as much as a full year of tuition in a private university. 40. Budget Allocation Process. The current process for allocating public budget resources to higher education contributes to widespread inefficiency of resource use, as reflected in widely varying unit costs across higher education institutions for the same programs. Excessive unit costs in particular institutions and in particular programs of studies need to be reduced. Continued financing of programs with high unit costs at historical levels of support would perpetuate both the high unit costs and the inefficient teaching practices which cause them. 41. In addition to the problem of providing inadequate incentives for efficient performance, the budget process for higher education suffers from other deficiencies. The process for allocating capital budgets for new construction and major equipment for public institutions of higher education relies largely upon personal persuasion and subjective judgements. Core budget support from the recurrent budget is allocated to public higher education institutions according to coefficients which determine allocations for detailed expenditure items, many based on the physical size of the institution. Once these budget allocations are determined, institutions have very little discretion to reallocate funds to other uses. In determining an institution's core budget allocation, the Ministry of Finance and the Ministry of Education take into account estimates of cost recovery from student fees and other sources. Projected resources from cost recovery are subtracted from an institution's core budget entitlement under the scheme. (A common response by institutions is to attempt to keep internally generated income from fees, charges, contract research and other sources off-budget -- i.e., in a separate account.) 42. These are several serious problems with this method of allocating public resources for higher education: a) because it rewards physical size and other institutional characteristics more than current enrollments, it directs too many resources to institutions and programs with declining enrollments, and deprives growing institutions and programs of the resources which they need; b) because budget coefficients are institution-and-expenditure-specific, it perpetuates inefficiencies in instruction and deprives institutions of the discretion which they need to improve the quality and efficiency of their programs; c) it provides no incentives to raise educational quality; and e) it discourages institutions from raising their own revenues through cost recovery. V. Government's Reform Strateuy 43. After extensive consultation with Parliament, university rectors and the academic community, the Government developed, and approved in November, 1994, a strategy for comprehensive reform of the higher education system which addresses the issues described above.7 The strategy comprises a broad range of policy reforms to: a) stimulate development of a more differentiated higher 7/ See "Higher Education Reform in Romania, A Study" Ministry of Education and Consultative Group for Higher Education and Research, 1994. 14 education system in order to increase students' choices and respond to the needs of a fundamentally altered labor market, as well as to accommodate further enrollment growth at lower public cost, b) train the academics needed to revitalize the higher education system, c) mobilize private resources to expand access and improve quality, while better targeting public subsidies to increase equity, and d) establish positive incentives for public and private higher education institutions to improve their efficiency, to restructure their academic programs, and better respond to changing student demand. 44. Implementation of these policy reforms, which will intensify in the 1995/96 academic year following passage of an organic law on education, will fundamentally change the role of the state vis-a-vis higher education institutions, and the management of the institutions themselves. Indirect mechanisms to steer future development of the higher education system with incentives will replace hierarchial state control. Many present state functions will be appropriately decentralized and higher education institutions will gain more financial autonomy to complement the academic freedom they now enjoy. At the same time, accountability for efficiency and performance will be strengthened through new processes of budget financing and quality control. Greater responsibilities for allocating resources will, in turn, profoundly change how higher education institutions are managed, shifting the locus of responsibility from individual academic units to university level administrative authorities. These policies are briefly described in the following paragraphs. 45. Creating a More Differentiated Higher Education System Through Accreditation and Reform of the Structure of Academic Employment. A more differentiated higher education system is key to accommodating future growth at an affordable cost, and also to increasing student choices and the responsiveness of institutions to the emerging needs of a market economy. The Government's strategy envisages development of a higher education system in which institutions will have well defined but diverse missions, which vary in the length, level and quality of the academic programs they offer, the scope of their curricula, the composition of their student body, and their involvement in advanced training and research. The strategy explicitly and correctly rejects financing the aspirations of all public and private higher education institutions to become research universities. 46. A higher education sector stratified into three tiers is planned. Postsecondary vocational institutions will form the base of the higher education system. These will be gradually transformed into community colleges, supported by local governments, offering a wide range of two-to-three-year certificate programs according to student demand and local needs. Colleges and specialized schools, and universities, both public and private, will constitute the second and third tiers of the system, respectively. Colleges and specialized schools will offer certificate programs like community colleges, but either in more general or very specialized professional fields such as social sciences and accounting. Universities will continue to offer bachelor's degrees. To articulate the various tiers of the system while preventing "academic drift" (spontaneous upgrading of institutions), entry to some degree programs will be open to graduates of certificate programs according to the admissions requirements established by the universities and monitored through the accreditation process. A small number of universities selected on the basis of their capacity to offer postgraduate and, especially, doctoral studies will constitute the apex of the higher education system. 47. In order to support development of a more differentiated higher education system, the Government proposes to change the structure of academic employment in the public system by: a) introducing a distinction between contract and tenured academic employment, the former applying mainly to young staff who have not completed their doctoral degrees, and b) by designing a two-track scheme for promotion, one for teacher/researchers and the other for teachers. Research would no longer be expected of all teaching staff. Academic ranks would be reformed accordingly. Qualifications for 15 promotion would differ for the teacher/researcher and teacher streams. Promotion from one rank to another would not depend on time served at a lower rank, but upon performance in relation to designated functions. 48. Revitalizing the Academic Community. The shortage of appropriately trained staff is a critical constraint to quality improvement, and to greater responsiveness by the public and private higher education systems to changing student and labor-market demand. For these reasons, the Government's reform strategy gives high priority to two important measures to revitalize the academic community: selective expansion of postgraduate degree programs, and establishment of a competitive funding mechanism to support postdoctoral training and staff research. Guidelines for the development of Master's programs were issued by the National Council on Accreditation and Academic Evaluation in 1994. Enrollment in 92 programs has already reached about 4,500 students. Completion of a Master's degree will become a prerequisite for doctoral studies, which will increasingly be done on a full-time basis.' To support expansion of postgraduate education, the Government established a University Research Council in early 1995, with a budget of about US$ 3 million for pilot fellowship and research grants programs. Grants are awarded on a competitive basis, according to professional criteria applied by Romanian and foreign experts. Priority is given to proposals financing postgraduate research training and especially to those involving collaboration with foreign scholars. The grant program has been vigorously received; nearly two thousand applications were submitted in the recently completed first research grant competition. 49. Reforming the Budget Allocation Process. The Government's strategy for higher education financing is to fundamentally change the process of allocating public funds for higher education such that public funding provides strong incentives to improve the efficiency, responsiveness, and quality of higher education. It will do so by financing investments in both public and private higher education institutions. In the process, higher education institutions are to become more autonomous and accountable, and the private sector is to be encouraged to play a larger role in providing quality higher education. The basic principles of the new allocation process are the following: a. Core budget funding is to be awarded to public institutions of higher education according to performance and efficiency norms which encourage institutions to expand enrollments in specializations in greatest demand, and to do so efficiently. The level and distribution of enrollments are to be the predominant elements in determining core budgets. Total core budget financing is to be deliberately set low enough that no institution could survive on core budget financing alone. All public higher education institutions will thus need to mobilize additional resources through cost recovery and competitive grant funding. b. The portion of the recurrent budget formerly allocated centrally to public higher education institutions for facilities rehabilitation and equipment is to be expanded and transformed to a system of competitive grants which will support new initiatives to improve program quality and to develop new teaching capacity in areas of growing demand. To encourage quality improvements and program diversification throughout the higher education system, these grants will be provided to both public and private accredited institutions of higher education. 8/ Only 336 full-time students were enrolled in doctoral programs in 1994/95. 16 c. The process for allocating capital budgets for new construction and major equipment for public institutions of higher education, formerly ad hoc and opaque, is to be transformed to a transparent process in which institutions' proposed long-term development plans are reviewed against explicit development criteria. d. Whereas most scholarships had been provided purely on the basis of merit, they are in the future to be targeted to academically qualified poor students in order to concentrate limited student financial assistance where it is needed most. Scholarships to needy students for living expenses - typically, the largest component of scholarships -- are to be paid in cash directly to the students rather than to institutions in order to encourage greater efficiency in the provision of student services. 50. To manage the development of higher education through incentives rather than direct control, the Government established a Higher Education Financing Council in early 1995. The Council will administer three inter-related programs of support: a) core budget funding, to be distributed to public higher education institutions under an objective and transparent normative financing formula which encourages responsiveness to changing market demand and provides an ongoing incentive for efficiency improvements, b) a Strategic Development Fund (described below), which will finance new initiatives to improve the quality and relevance of public and private higher education programs, and c) needs-based grants for tuition and living expenses for students in accredited public universities. 51. A program of competitively awarded grants for new educational initiatives would replace the former central allocations from the recurrent budget for rehabilitation and equipment. Under this program, accredited public and private higher education institutions would be eligible to compete for grants to support new initiatives to improve program quality and to develop new teaching capacity in areas of growing market demand. Monies from this Strategic Development Fund are to be provided in the form of multi-year grants, subject to periodic review, to meet the capital or incremental recurrent costs of approved initiatives. Requests for strategic development awards will be reviewed by the discipline-specific panels of the National Council for Accreditation and Academic Evaluation. The same panels will monitor the performance of approved programs. The Government has just established this Strategic Development Fund and has allocated to it 25 percent of the public budget for higher education - - a significant increase from the infrastructure and capital allocations which it replaces. (These had averaged about 15 percent of the public budget for higher education.) The increase in allocations to this Fund is intended to begin to accommodate the special needs arising from recent enrollment increases and changes in the composition of enrollments. Continued support for these new initiatives beyond the period of developmental support would come either from a reallocation of existing institutional core budget support, from self financing, or from core budget support. 52. Finally, the Government's strategy calls for establishing a more level playing field for public and private institutions. To reduce the cost of future growth in the system, the Government projects a more rapid increase in enrollments in accredited private universities than in the public sector. The quality of private higher education programs will be subject to the same accreditation process as public programs. In order to ensure that accredited private universities can compete more effectively on the basis of quality, the Government's reform strategy will offer these institutions access to strategic development fund awards by the Higher Education Financing Council under the same conditions and criteria as public institutions. 53. Improving Cost Recovery and Targeting Student Support . The Government's strategy provides for mixed financing for public higher education, with baseline funding provided by the state to 17 ensure quality and equity. Tuition and other student fees would continue to be the principal source of self financing. The objective is, appropriately, to gradually increase cost recovery from Romanian students, while returning to the overall share of self financing (30 percent of recurrent costs) attained in 1994. Fee levels are to vary by institution, faculty and field to reflect differential costs -- generally increasing with level of study. Additional resources are to be mobilized from new sources of self financing. For example, employers are to be encouraged to sponsor training for their employees, and higher education institutions are to be encouraged to organize income-generating activities and to mobilize philanthropic contributions. 54. To address the adverse equity effects of expanded cost recovery, the Government proposes to target student support better and to provide that support to students rather than to institutions. At present, student scholarships are provided mainly on the basis of merit; they do not take account of students' financial need or program costs, and support for accommodation and subsistence is provided directly to public higher education institutions. The Government proposes several fundamental changes in this system: a) most scholarships are to be awarded on the basis of students' financial need; b) merit- based scholarships, which do not take into account financial need, are to be sharply reduced in number (to comprise just 2 to 3 percent of all scholarships); c) scholarships to needy students for living expenses are to be paid in cash directly to the students rather than to institutions in order to encourage greater efficiency in the provision of student services; and d) tuition scholarships are to vary in amount with the cost of the student's actual program. The Government also proposes to eventually establish an income- contingent student loan scheme for students in public and private universities. VI. Recommendations 55. The Government's higher education reform strategy is an ambitious and appropriate initiative for reshaping Romania's higher education system to meet the needs of the evolving market economy. The initial actions taken by the Government to implement its reform strategy indicate the Government's commitment to the reform and provide a sound basis for the remaining reform actions. To achieve the full benefits of the Government's strategy, it will be important to carry reform actions further in a number of key areas. This section summarizes the actions needed to do so. Recommendations are presented first for issues of organization and structure of higher education, then for issues of financing for higher education and academic research. Recommendations relating to budget allocation procedures are presented in greatest detail because they involve the most complex choices, and because their implementation is still at a relatively early stage. 56. Further Diversification of Higher Education Programs. Further and continuing diversification of higher education programs is necessary to respond to the skill needs of the evolving market economy. This process of diversification should be guided and driven by the needs of the labor market, as expressed through student demand. But if student demand is to motivate appropriate diversification of higher education, it needs to be based on accurate information on program content and quality. Accreditation and development of the credit-hour system are important instruments for ensuring that this happens. Further diversification of higher education programs will also require flexibility on the side of providers. This, in turn, will require more -- and more efficiently used -- financial resources, and more teaching staff with the appropriate qualifications. Key instruments for increasing financial resources and the efficiency of use of financial resources are increased budget allocations and increased cost recovery in public higher education, and new budget allocation mechanisms which support the expansion of private higher education and provide stronger incentives to use resources efficiently and 18 responsively. Changing the employment status of faculty, implementing accreditation, and expanding post-graduate education are important instruments for increasing the availability of qualified teaching staff. 57. Accreditation. Implementation of the accreditation law has revealed the need for more flexible standards, particularly relating to staffing levels and the mix of teachers of different qualifications. The Government should introduce amendments to the law to reflect lessons learned from the first round of evaluations. The accreditation process established in the universities needs to be maintained, and extended in coverage to include accreditation of post-secondary vocational institutions and certificate programs. Over time, the accreditation process should also develop an auditing capacity to support ongoing quality -assessment in higher education institutions, and should reconcile Romanian assessment standards and practices with emerging European conventions on accreditation and equivalence of degrees -- especially, in professional fields. The accreditation process needs to be implemented with particular care to ensure that it supports the diversification of education programs. Appointments to the National Council on Accreditation and Academic Evaluation should provide for suitable representation from private-sector professionals and education administrators. In implementing the Romanian accreditation system, the Council should draw upon technical experts with experience in accreditation systems in the OECD countries. 58. Development of the Credit-Hour System. The progress made in reducing mandatory course hours needs to be taken further, and accompanied by other changes. Of particular importance is the introduction of a credit-hour system, with mutual recognition of credits across faculties and institutions, shared programs of studies, and provision for transfer from one program to another without loss of credits. Other policies also need to be pursued to obtain the desired flexibility of course offerings, including accreditation of academic programs and the more adequate provisioning and operation of university libraries as a repository of diverse and up-to-date learning resources for both students and faculty. 59. New Employment Status for Academic Staff. Salaries paid to academic staff should be more differentiated to reflect differences in: a) qualifications, b) market demand for the skill, and c) performance as judged through an annual performance review process. Implementing this policy will require a modification of the conditions governing the employment of academic staff. In the short term, the draft teachers' statute should be amended to: a) de-link salaries from years of experience, b) provide institutional autonomy in establishing staffing levels, salaries and awarding merit pay, and c) liberalize restrictions on the re-classification, assignment and termination of academic and non-academic staff. In the medium term, the Government should enact legislation to accord a separate legal status to the academic staff of public higher education institutions or, preferably, to remove them from the civil service altogether. 60. Expanded Post-Graduate Education. Post-graduate education, including opportunities for training abroad, needs to be judiciously expanded in order to provide the skills which are in critically short supply as a result of the recent changes in composition of enrollments, and to upgrade current faculty. The instinctive desire of higher education institutions to develop post-graduate programs needs to be tightly controlled in the interest of internal efficiency (cost) and external efficiency (need). Selection and supervision of the appropriate public and private institutions with the capacity to offer quality post-graduate programs is a critically important function of the accreditation process. 61. Increased Budget Resources. After demonstrating substantial gains from using budget resources more efficiently and mobilizing resources from non-budgetary sources, Romania's higher 19 education system should receive growing support from the state budget. An increase in public support of a more efficient and more responsive higher education system is appropriate in view of the social benefits of higher education and the need to ensure access for poor students as overall enrollments and cost recovery continue to increase. Increased public support for higher education does not and should not compromise the budgetary needs of primary and secondary education. Compulsory education should continue to be the highest priority within the education sector. 62. Increased Cost Recovery. Increased cost recovery from students is essential and will require legislative reforms. Romania's 1990 constitution obliges the Government to provide "free public education.. .according to the law." An appropriate legal basis for introduction of tuition needs to be provided in the education organic law -- a draft of which is pending adoption by Parliament. According to the current draft law, public higher education institutions are required to collect tuition and other fees from foreign students and may charge Romanian students fees for the subsidiary activities described in paragraph 36. Excluded by implication are tuition fees for the student's major program of studies. The present draft education organic law should be revised to allow these fees, and to allow individual institutions discretion in setting fee levels. Failing that, fee levels for the categories of services for which fees are authorized should be raised such that fees for Romanian students in public higher education recover a significant share of recurrent costs. The goal should be to raise cost recovery from Romanian students from the current level of 7 percent of average unit costs of higher education to 15 to 20 percent of average unit costs. Although this would be a significant increase in cost recovery from Romanian students, it should not constitute an undue hardship for most students. In any case, scholarships will be available to truly needy students to defray the cost of tuition and living expenses. To improve the incentive for collection and to improve institutional autonomy, public higher education institutions should be allowed to keep the authorized student fees and other charges which they collect. In order not to penalize institutions for better cost recovery, an institution's self-financing should not be offset by reduced budget allocations. 63. In raising cost recovery through student fees, there is a need for continuing attention to maintaining access to higher education for poor students. The Government's proposal to means test most student scholarships is an appropriate measure, but student scholarships should also be made available on a matching basis to students in private higher education institutions in order to encourage enrollment diversity and the full articulation of public and private institutions into a high-quality national higher education system. Actual means testing of student support may prove problematic because of the relatively equitable pattern of income distribution prior to the transition and the growing importance since then of income from poorly documented sources. Institutions should give serious consideration to self- targeting mechanisms of student support such as work-study schemes to reach the most needy students. Insofar as student loans are concerned, the Government has already surveyed the commercial banks to determine their interest in such a scheme. At the present time, the banks have little interest in operating a student loan scheme without a significant state subsidy. Introduction of a student loan scheme should be deferred until a financial market has developed and willing commercial banking institutions have emerged. 64. Improved Budget Allocation Procedures. To ensure that the necessary demand-led restructuring occurs, the procedures for allocating public finance to higher education should contain incentives which encourage responsiveness to student choices. The Higher Education Financing Council plans to develop a formula based on enrollments and unit costs as a basis for distributing funding to support institutional core budgets. While the formula initially will need to take into account historic institutional unit costs to provide the budgetary stability necessary for undertaking needed reforms , it should provide strong incentives to improve efficiency, expand enrollments, and diversify course 20 offerings. To do this, the core budget financing formula should be based predominantly on enrollments and unit costs. Although current institutional unit costs might be applied the first year, they should be replaced by system-wide unit costs within three years. For the future, the goal should be to maintain core budget support at about 50 percent of public expenditures on higher education, with the Strategic Development Fund and targeted student support each comprising about 25 percent. 65. The core budget funding formula should be simple and the incentives explicit. To improve internal efficiency, funding should be limited to the normal length of study: four or five years. In compensating institutions for additional enrollments, the formula should provide clear incentives for reducing average costs. Changes in the number of full-time equivalent students should generate differential funding to reflect potential marginal costs. Incentives should be established to contain and redistribute enrollment growth. Enrollment changes should be indexed at a variable rate so that small institutions have an incentive to grow (by receiving more funding for each new student), while large institutions should obtain little marginal benefit from expanding their enrollment. To improve the efficiency of higher education programs, it is important that mature institutions have an explicit incentive to move toward average unit costs by diversifying their curricula and delivering their programs more efficiently, while new, too-small institutions grow to a critical size through amalgamation and/or by expanding low-cost programs for which there is increasing student demand. Large institutions in the capital region, particularly large, high-unit-cost engineering institutions, should be encouraged to redistribute enrollment and reform their programs. 66. Core budget funding should be provided to higher education institutions in the form of block grants, as stipulated in the reform strategy and in the draft education organic law. Implementation of the Government's financing reforms will require increasing the financial autonomy of public higher education institutions. Higher education institutions should be allowed to raise, retain and use at their own discretion the resources which they raise through self financing. Revenues generated from student fees and other self-financing activities should not affect the size of core budget support or other financing from the state budget. At the same time, institutions should become more accountable for how they use resources, and for the quality of their programs and performance of their graduates through auditing carried out by the funding and accreditation councils. 67. To encourage the development of a high-quality private higher education system accessible to Romanian students regardless of their income, student scholarships for poor students should be made available to qualified students in accredited private higher education programs as well as to students in public programs. CATALOGUERS/FILE CONFIDENTIAL Report No: 14878 RO Type: SR