Financing of university education in Sri Lanka

Higher Education 45: 91–108, 2003.© 2003 Kluwer Academic Publishers. Printed in the Netherlands.

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Financing of university education in Sri Lanka

SUNIL CHANDRASIRIDepartment of Economics, University of Colombo, Colombo 3, Sri LankaE-mail: [email protected]

Abstract. This paper deals with the financing of university education in Sri Lanka, whichhas adopted pro-market policy reforms over the last 22 years. The assessment is based on fivemain criteria: adequacy, efficiency, unit costs, systems and procedures of resource allocationand alternative funding sources. The findings reveal that the universities are faced with an acuteshortage of funds and that existing financial systems and procedures are control oriented ratherthan promoting efficiency and quality enhancement. Moreover, the heavily state dependentuniversity system, particularly in the area of financing, has failed to keep pace with pro-marketpolicy reforms at national level and, hence, continues to operate within a control orientedregulatory framework. In the present era of globalization, universities need to be more marketoriented in terms of management, delivery of services and revenue generation.

Keywords: alternative funding sources, financing, revenue and cost structure, systems andprocedures of resource allocation, unit costs

Introduction

Sri Lanka is a labour surplus small open economy with a population of 19million. It falls into the category of low-income diversified exporters witha per capita income of US$856 per annum at market prices (2000). Theeconomy has undergone significant structural changes since the introductionof open market policies in 1977. Overall, Sri Lanka’s education indicators areimpressive for a low-income country. The adult literacy rate at 90 percent; isthe highest in the region, and gross enrollment rates in primary and secondaryeducation are 105 and 75 percent respectively. In contrast, participation attertiary level is about 3 percent, representing one of the lowest in the region.

The higher education system in Sri Lanka is a three-tier system, whichconsists of: (a) public universities, (b) public advanced technical institutionsand (c) private post secondary institutions. Beginning with a single universityin 1942, the university system in Sri Lanka has now grown to comprise of 12universities operating under the primary legislative enactment, the Univer-sities Act, No. 16 of 1978. At the apex of this system is the UniversityGrants Commission (UGC) which is responsible for planning and coordin-

92 SUNIL CHANDRASIRI

ation of university education, allocation of public funds to higher educationinstitutions (HEIs), maintenance of academic standards and regulation ofadmissions to the HEIs. Accordingly, the university education (UE) systemin Sri Lanka is a state monopoly.

This paper makes an attempt to critically review the financing of UE inSri Lanka. It focuses on adequacy, efficiency, accountability and resourcemobilization. The purpose is to assess the responsiveness of the UE system,which is vital in meeting the challenges of human resource development ina highly globalized economic environment. The paper is organized into fourmain sections: (a) revenue and cost structure of the UE system; (b) analysisof unit costs; (c) financial regulations and procedures; and (d) alternativefunding sources.

The revenue and cost structures of university education (UE)

In 1998, the total government expenditure on Education, Higher Educationand University Education was 3.2, 0.53, and 0.50 percent respectively ofthe GNP.1 The Education share of the total government expenditure was9.38 per cent in 1998. Of the total expenditure on Education 15.74 percentwas on University Education. In real terms, the increase in expenditure onHigher Education was 1.8 times between 1983 and 1997. This is quite lowby the standards of developing countries, particularly in the Asian region.For example in 1985, the commitment of public current spending on highereducation was 9.8 percent of total public current spending in Sri Lanka asagainst 15.3, 18.2, 13.2 and 14.6 percent by India, Pakistan, Thailand andMalaysia respectively (WB 2000). In 1995, these investments stood at 12.2percent for Sri Lanka as against 13.7, 13.2, 19.4 and 16.8 percent for India,Pakistan, Thailand and Malaysia respectively (UNESCO 1998). During theearly periods, education enjoyed a highly favorable budgetary priority andincreasing percentage share of the national budget was allocated to the educa-tion sector. Since the late 1970s however, there has been competing demandfor public funds from other sectors such as agricultural and industrial devel-opment, foreign debt service and national security. For example, the totaldefense expenditure which was between 0.5 and 0.8 percent of GDP inthe early 1980s rose sharply to more than 2.0 percent in 1985 and beyond5 percent in 1995. Since then, the defense expenditure as a proportion to thetotal public expenditure (as well as in absolute terms) reached the secondhighest after the expenditure of Ministry of Finance and Planning. It hasalso exceeded the combined total of social expenditures for the last fiveyears. From these developments it is imperative that alternative sources of

FINANCING OF UNIVERSITY EDUCATION IN SRI LANKA 93

Figure 1. Composition of Expenditure on University Education (%).

funding covering both public and private sector need to be developed at leastto maintain the present status of the higher education sector in Sri Lanka.

The UE system in Sri Lanka is faced with acute shortages of quality inputssuch as libraries, laboratories, scientific equipment, computers and associatedequipment, science, medical and engineering equipment and materials. In thiscontext, the proposed increase in GDP share for UE system from 0.4 to 0.6percent (by the National Education Commission, NEC) or from 0.4 to 1.0percent (by Presidential Task Force, PTF) are grossly inadequate. Althoughthe economy has grown at a rate of 5 percent per annum in real terms duringthe post liberalization period,2 the share of the budgetary resources to educa-tion did not increase to meet the quality requirements of a highly dynamicand competitive labour market.

Of the total resources allocated to the Higher Education sector, about 75percent goes to University Education and the balance is shared by technicalcolleges under the Ministry of Higher Education and other tertiary educa-tion institutions.3 Within the university sector, government grants accountfor about 95 per cent of the total income and the rest is covered by incomefrom other sources such as interest, rent from properties, sales, fees, hostelrecoveries and miscellaneous income. Government grants cover both capitaland recurrent expenditures of the UE system and the relative size of the latterhas increased significantly since 1986 (Figure 1). This has tended to crowdout capital expenditures, which are vital for long-run quality improvement,


growth and expansion of the sector. With respect to capital expenditure,the main cost components include maintenance of capital assets (42.0%),furniture, library books and periodicals (32.0%) and construction (24.1%).The major components of recurrent expenditure include academic services(62.2%), general administration and staff services (15.4), welfare (9.6%),and maintenance (8.8%). Of these, the first two categories refer to personalemoluments to academic and non-academic staff of the university. These costitems could be treated as fixed costs in view of the protected nature of employ-ment of these categories by the existing labour legislation. In summary,an assessment of income and cost structure of UEs reveal three importantfindings.(a) The low share of capital expenditure relative to recurrent expenditures

in UE means a scarcity of resources for investment in long-term qualityinputs.

(b) The cost structure of Universities is heavily influenced by remunerationto both academic and non-academic staff and, hence, is less responsive tocost control measures.

(c) Universities have been heavily dependent on state funds and have putlittle effort in generating income from non-government sources.

The analysis of unit costs

This section of the study deals with an analysis of unit costs of various degreeprograms offered by 44 faculties4 of the university system. The purpose isto examine cost variations across disciplines and universities and to identifythe key determinants of unit costs. The analysis is based on cost estimatesprepared by the UGC and includes two major components – direct costs,and indirect costs. The former refers to the expenses directly related to theFaculty and the latter covers the expenses incurred by Service Departments(i.e. Maintenance, Establishment, Accounting etc.) which provide supportservices to the faculty. The costs of these support services have been appor-tioned among faculties on the basis of the workload of each faculty. Owingto the fact that the recurrent expenditure increasingly accounts for a greaterpercentage of the total higher education expenditure, the present analysisfocuses on recurrent expenditure.

Figure 2 presents an analysis of unit costs relating different degreeprograms. The cost per undergraduate programme appears to vary withina range of Rs. 24,970 to Rs. 125,129 per year.5 In relative terms, degreeprograms on Management, Law, Education, and Arts are less expensive asagainst degree programmes on Dental Science and Agriculture. The unit cost


Figure 2. Annual Cost of Undergraduate Studies – by Faculty, 1997.

per undergraduate is in the medium range for Engineering, Veterinary Medi-cine and Medicine with the estimated cost figures of Rs. 72,873, Rs. 75,673and Rs. 83,771 per year respectively. The unit costs for undergraduateprogrammes were also analyzed by taking into account the normal dura-tion of the study programme and the effect of drop-out and repeat students(Figure 3). The findings reveal that degree programmes in Management ranksat the lowest end (Rs. 99,160) while Agriculture records the highest costper graduate (Rs. 500,516). The high cost of the latter could be due to theexpenditure on maintenance of farms, which account for 10 to 20 per centof the unit cost. Degree programmes on Law (Rs. 99,872) Arts (Rs. 123,018)and Education (Rs. 150,832) are also low compared with high cost disciplinessuch as Dental (Rs. 431,872), Medicine (Rs. 418,855) and Veterinary Medi-cine (Rs. 302,688). Degree programmes in Science (Rs. 273,575) lie in themedium range.

A comparison of unit costs across universities in producing graduates inArts, Science, and Management Studies reveal that the Open University of SriLanka (OUSL) records the lowest cost in producing both Arts (Rs. 87,832)and Science (Rs. 121,416) graduates. This could be attributed to teachingmethods and other communication technologies adopted by the OUSL inthe delivery of its services. Among conventional universities, the cost perArts graduate varies from Rs. 109,205 in Kelaniya University to Rs. 226,394in Jaffna University. In addition, Colombo, Sri Jayewardenapura (SJP), and


Figure 3. Estimated Production Cost of a Graduate – 1997.

Ruhuna universities are also low cost producers of Arts degree programmes.In producing science graduates, University of Kelaniya records the lowestcost (Rs. 195,407) while the SJP (Rs. 257,220) and Eastern University ofSri Lanka (EUSL) (Rs. 628,518) produce the median and highest cost pergraduate respectively. In the area of Management Studies, SJP (Rs. 88,000)records the lowest cost per graduate while Kelaniya (Rs. 123,256) and EUSL(Rs. 167,092) records the medium and highest unit costs respectively. Amongconventional universities, Colombo, SJP and Kelaniya appear to be low costperformers in respect of Arts, Management and Science.

Having discussed the variations in unit costs across disciplines and univer-sities, I will attempt to identify the key determinants of unit costs. Thedata set refers to 1997 and covers the entire segment of public universities.In terms of major academic disciplines, it represents 44 faculties whichoffer various study programmes in Arts, Commerce and Management, Law,Science, Engineering, Medicine, Veterinary Medicine, Dental Sciences andAgriculture. In terms of time, it covers the operational activities of publicuniversities in 1997. As stated earlier, unit cost is defined as average recurrentcost per student. The total recurrent expenditure consists of four major costitems: (a) general administration and staff services; (b) academic services; (c)welfare services; and, (d) maintenance services. Most of these items could betreated as joint costs as all students irrespective of discipline jointly benefitfrom these services. It is in fact difficult to allocate the expenditure on these


services by faculty and discipline. The best that can be done is to apportionthem to all students within a university.

As argued in the theory of the firm, average total costs are likely to fallas output increases due to the influence of scale economies. In the case ofuniversities, cost per student will fall as enrolment increases. This is becausesome of the services in the university can be utilized more efficiently withlarge student numbers.

In line with the above arguments and based on previous empirical work6

we propose to examine the determinants of unit costs of various degreeprogrammes offered by public universities. We hypothesize an inverse rela-tionship between the several unit cost dependent variables and five explan-atory variables: (a) enrolments; (b) junior/senior staff ratio; (c) non-academicstaff/academic staff ratio; (d) student/teacher ratio and, (e) discipline specificcost factors. These variables refer to key factor services shared by the studentpopulation in a university and efficient use of such services result in costreductions in terms of final output. The linearized relationship of thesevariables in the model formula is summarized below.

Log UCUG = a0 CNST + a1 logENSZ + a2 logJSSR + a3 logNASR +

a4 logSTR + a5 DSD + u

Where

UCUG = Cost per undergraduate per yearUCDP = Cost per degree programmeCNST = Constant termENSZ = Enrolment sizeJSSR = Junior/senior staff ratioNASR = Non academic staff/academic staff ratioSTR = Student/teacher ratioDSD = Discipline specific dummy; Arts based subjects = 1;

other subjects = 0u = Random error term

The determinants of unit costs have been examined both in terms of costper undergraduate per year (UCUG) and cost per student (UCDP). The resultsof the analysis are summarized in Table 1. As expected, the coefficients ofenrolment size (ENSZ), junior/senior staff ratio (JSSR), student/teacher ratio(STR) and discipline specific dummy variable (DSD) are negative and statis-tically significant in both equations. This implies gains in scale economiesin the use of indivisible factor services of the UE system. For example, thecoefficients of STR and JSSR suggest the existence of economies in theuse of human resources. Similarly, the negative coefficient of ENSZ reveals


Table 1. Determinants of unit costs

Unit Cost CNST ENSZ JSSR NASR STR DSD R̄2

UCDP 5.14 –0.094 –0.137 +0.604 –0.268 –0.656 0.697

(16.81) (1.50) (2.03) (2.80) (2.65) (5.05)

UCUG 5.14 –0.094 –0.137 +0.604 –0.269 –0.434 0.648

(16.81) (1.50) (2.02) (2.80) (2.65) –(3.26)

Bracketed figures are t-values.

potential scale benefits associated with an increase in student intake. Thecoefficient of DSD captures the lower cost associated with library basedstudy programmes as against laboratory based study programmes. Amongthe variables with negative coefficients, DSD and STR appear to be themost important variables in controlling unit costs of undergraduate studyprogrammes. This could be attributed to the high student/teacher ratios ofarts based study programmes (more than 20:1) as against low student/teacherratios in science based programmes (6:1).

The non-academic/academic staff ratio (NASR) is an indicator of staffmix. Its coefficient is positive and significant in both equations and we recog-nize this as the most important finding of our statistical analysis. This meansa ten percent increase in non-academic staff may increase the unit cost ofundergraduate programmes by 6 percent. Even after contracting out someof the peripheral activities such as janitorial and security services there hasbeen a disproportionate increase in non-academic cadres of universities overthe recent past. What has happened is to breakup the same set of activitiesinto a large number of categories to provide space for increasing numberof administrative and clerical positions (Lakshman 1997). The quality andcommitment of non-academic cadres have deteriorated significantly as theyare least affected by modern management techniques and continue to functionin a protected segment of the labour market. For example, half of availablevacancies for promotion are reserved for internal staff and they are heavilyprotected by university sector trade unions.

Financial regulations and procedures

In the light of the analysis given above, it is important to examine the existingfinancial regulations and procedures affecting the operational activities of theuniversities. The operational activities of the universities are regulated by aplethora of rules and regulations specified by the Universities Act No. 16 of1978, Finance Act, No. 38 of 1971 and various other circulars issued by the


Central Treasury and the UGC. These rules and regulations are rigid, outdatedand control oriented. For example, Section 99 of University Act, No. 16 of1978 states that “each Higher Educational Institution shall have a fund to becalled the “University Fund”, into which shall be paid –

(a) Fees to be paid to the Higher Educational Institution in accordance withthe provisions of any appropriate Instrument;

(b) Income from education(c) Moneys provided by parliament and disbursed by the commission as

Grants in aid of Higher Educational Institutions and(d) All other moneys belonging to the Higher Educational Institutions from

whatsoever source derived.”

This type of centralized accounting systems do not encourage efficiencyoriented performance monitoring both in terms of revenue generation andutilization of funds. The Public Finance Circular No. 380 issued by theCentral Treasury in January 2000, further confirms the control oriented natureof the central government in dealing with financial matters of the universities.This circular imposes various constraints on revenue-generating activities ofthe universities through training, research and consultancy services. It appearsthat policymakers and regulatory authorities dealing with higher education inSri Lanka still live in a control oriented policy regime in spite of 22 years ofexperience in open market economic policies and various reform programmesfor higher education suggested by the high powered committees (NEC, PTF).

In this context it is important to examine the method of resource allocationamong public universities. The central government allocates a block grant tothe UGC on an annual basis to be distributed among its higher educationalinstitutions. These allocations are based on historical facts rather than widely-accepted funding methods, which are based on normative criteria such as‘inputs’, ‘outputs’, and ‘quality’. The historical method simply implies useof the preceding year’s expenditure as the basis for allocating funds withsome upward adjustments for inflation, promotion, increments for salariesand newly approved projects and programmes. This method has no rationalbasis and promotes inefficiency as it encourages a relatively bigger share ofthe grant to universities with the highest levels of expenditure in the past,irrespective of their efficiency levels.

The existing resource allocation mechanism is highly centralized. Itimposes controls without proper consideration of long-term sustainability. Itinhibits diversification. The entire resource allocation procedure is inflexible,fails to provide incentives for efficient operation and makes it difficult toadjust the distribution of financial resources to changing circumstances.

This type of financial system is very similar to that of a government depart-ment. It offers excessive power to the Bursar and discourages innovation and


an outward orientation of universities in teaching, research, and consultancyactivities. More specifically, in the area of finance both power and responsi-bility lies with financial and administrative authorities (i.e. Vice Chancellor,Registrar and Bursar) whilst other key players operate without much power,authority or responsibility. For example, Dean, Head of a Department orSenior Professor has no power to hire a research assistant, even on temporarybasis. With respect to purchases the Head and the Dean could approve apayment only up to Rs. 7,500 and Rs. 10,000 respectively. Any purchaseor payment over and above Rs. 10,000 has to be approved by the Regis-trar (Rs. 50,000), Vice Chancellor (VC) (Rs. 100,000) or the Tender Board(over Rs. 100,000). Such procedures cause enormous delays and discouragedevelopment oriented initiatives at the Faculty and Department level.

Universities lag behind modern business practices in financial manage-ment. Despite experts in the teaching of budgeting, accounting, planning,project appraisal, performance monitoring and corporate strategy, universitiesin Sri Lanka tend to lack the sophistication in their resource management.For example, its budgetary system is based on line items rather than onperformance or incentive-based criteria. Management information systemsdo not exist and, hence, no performance monitoring and evaluation is carriedout. It is worth noting that while the entire economy is moving towards openmarket practices, the university system continues to function within a controloriented regulatory framework.

Accountability is one of the most important aspects affecting the financesand management of higher education. In Sri Lanka, universities are account-able to the UGC for the proper utilization of funds allocated to them. Theaudited accounts and annual reports of the universities must be submitted tothe UGC every year and then, the UGC submits these reports to the Cabinetand to Parliament. At Parliament level, the Committee on Public enterprises(COPE), is assigned the task of scrutinizing these accounts and reports andraising any quarries with the universities. Given the long delays in finalizingannual reports and audited accounts, it is doubtful whether the existing proce-dures ensure accountability and the efficient use of public funds. It requirestarget-oriented performance monitoring and enhanced autonomy.

As noted above, alternative mechanisms of allocating public funds amonghigher education institutions include normative criteria such as measurableoutputs and input costs. The former refers to output-based measures suchas degrees awarded in particular fields, average time for degree comple-tion and staff research output. Applications of such measures can reducestudent failure and repetition. This may result in reductions in student wastageand improvement in the overall efficiency of the higher education system.


However, one of the defects of this funding system is that it emphasizes thenumber of graduates rather than its quality.

Input based funding mechanisms refer to formulae that combine enroll-ment size and unit costs and use coefficients or weights to provide incentivesfor internal distribution of resources. The most commonly-used formulaconsists of the number of students enrolled in different fields of study,levels of education, socio economic levels and academic quality of students.The purpose is to capture the differential costs faced by different studyprogrammes and thereby arrive at more realistic criteria for allocating fundsamong faculties/departments. In developing such formula however, due atten-tion need to be paid to adding value to initially weaker students even at highercosts.

Funding allocations are dominated by cost considerations rather thanoutput based measures. More specifically, there is a need for fundingformulae based on unit costs plus efficiency and quality oriented criteria.Unit costs cannot of course, be treated as the only criteria for allocatingfunds. For example, emoluments for academic staff have to be based onactual salaries and wages rather than unit costs. Provision of extra fundsto faculties/departments could be based upon unit costs plus efficiency andquality based criteria such as enrolment size, research output and relativecosts of teaching subject groups.7 A recent report submitted to the UGChas suggested a formulae for recurrent funding based on student load (90percent) and volume of research (10 percent) at department/faculty level(Nandy 2000). Further, each department should be given freedom to usethe internally generated resources on approved items for the improvementof quality of education without much restriction.

As argued earlier, there is a need to shift the basis of resource alloca-tion from an historical basis to an efficiency-oriented normative criterionsystem. This would be an important step towards reducing cost inequal-ities across departments offering similar course programmes, in addition toensuing enhancement of quality. The allocation of capital grants needs to bejustified on the strength of efficiency and quality enhancement in the long run.The implementation of the proposed system, however, involves the buildingup of detailed and updated databases at both the UGC and the university level.

This will require institutions to collect, report and use new types of infor-mation. At present, the information collected by the supervising authoritiessuch as UGC, Ministry of Higher Education and Information TechnologyDevelopment (MHEITD) and the Department of National Planning (NPD)is of poor quality especially from performance monitoring point of view.At university level, except the standard accounting data maintained by theBursar, the coverage of activity specific input-output data relating to various


study programmes is limited. Attempts to improve efficiency, quality andfinancial diversification require data on average cost per student, completionrates, staff-student ratios, external income generation and university-industrylinkages. This is time consuming and costly. In addition to new invest-ments in computerizing, it might also require training and development ofmanpower at various levels of university administration. The potential bene-fits of such investments, however, are likely to be much higher in terms ofoverall performance improvement of the UE system.8

Alternative funding sources

Given the growing economic problems at the national level,9 supplementationof governmental with non-governmental revenue sources seems sensible wayforward. This broadly includes five different sources of revenue generation:(a) government; (b) students and their parents; (c) industries/services; (d)alumni and other philanthropists; and, (e) international sources. The contribu-tions from these five sources would normally include direct and indirect (i.e.financial assistance and subsidies) institutional contributions, tuition fees,student loans, productive activities and donations. International experiencevaries from country to country with respect to the use of these strategies.

The use of tuition fees as a strategy to shift costs from the governmentto students/parents has been in place in many developed and less developedcountries. In Sri Lanka however, public feeling against charging for universityeducation is strong, in spite of its experience in market oriented policies overthe past two decades. However, about 10 private institutions (for profit) andanother 16 professional institutions (non-profit) offering study programmes attertiary level are charging fees. In addition, the Open University charges forits courses and public universities charge for all post-graduate level coursesand external courses at graduate level. Evidence also shows that every year atleast 2,500 students go abroad for higher education by paying full educationalexpenses in foreign currency. The crucial issue is whether to ignore thesemarket responses and continue with the present system of university educa-tion which is heavily under funded and absorbs only 2 percent of students inthe relevant age cohort.10

Existing survey evidence on household expenditure in Sri Lanka clearlyindicate willingness to pay for high quality education particularly at tertiarylevel. Work by Athurupana (1999) reveal that the demand for educationquality is greater among wealthy households, families with better educatedparents and those with fathers in higher level of occupations. Moreover,research evidence on earnings functions and rates of return to educationalso indicate higher private rates of return enjoyed by both male (14.25)


and female (16.65%) graduates in Sri Lanka (Athurupana 1997). On relativeterms these rates are much higher than its counterparts in South Asia.

The above findings lend evidence in support of cost-sharing mechanismsto generate additional funds required for the higher education sector in SriLanka. At international level, more and more developing countries have beenshifting costs from the tax payer to parents and students in the form of tuitionfees. Some of the widely cited examples include Viet Nam, Chile, Jordanand Republic of Korea where the share of income from student fees accountfor 22, 36, 40 and 46 percent of recurrent expenditure respectively.11 Whatis needed in the context of Sri Lanka is a well planned public awarenesscampaign on efficiency and equity effects of cost sharing in public highereducation. For example, the composition of university entrants shows that atleast 25 percent of them are from upper middle and high income segment ofthe population and the students from these families are in a position to sharethe private costs of university education. In fact, the top 20 percent of incomereceivers in Sri Lanka account for 53 percent of total national income12 and,hence, the introduction of cost-sharing mechanisms would be a positive steptowards expanding university education by reallocating subsidies granted towealthy socio-economic groups to the poorest.

A student loan scheme is another strategy by which costs could be shiftedto users while maintaining accessibility and equity. On equity grounds,cost-sharing cannot be implemented without a functioning student loanprogramme to make funds available to all students who wish to borrow fortheir education. Many countries have used this approach and the experienceso far with respect to developed and developing countries has been disap-pointing (WB 1994). Similar to many other developing countries, studentloan scheme in Sri Lanka had to abandon due to low recovery ratio andhigh administrative costs (Hewagama 1978). As a result, outright grantswere recognized as a cheaper substitute to a loan scheme. At present,about 93 percent of the university students receive financial assistance eitherthrough Mahapola scholarships or governmental bursaries. Given the seriouseconomic problems faced at national level, it is very unlikely that the govern-ment will be able to continue with this type of unselective subsidies in thefuture. Despite the poor performance of many systems, the positive exper-ience of countries like Columbia and the Dominican Republic show thatit is possible to design and administer financially sustainable loan schemesif effective collection mechanisms, appropriate interest rates, and incomecontingent schemes are made operational (Jonstan et al. 1998).

Another option for diversifying the financial base of the universities ismobilization of donations and endowments from alumni and private industry.These contributions, generally gifts to the universities, include funding for the


construction of new facilities, the endowment of professorial chairs, dona-tions of scientific equipment, books and art and provision of scholarshipsor subsidized loans for needy students. This kind of philanthropy needsto be promoted among individuals or corporations who make donations orendowments to higher education through tax incentives. Tax credits mayalso be given to companies or individuals who pay tuition fees. Among lessdeveloped countries, India offers generous tax concessions on philanthropiccontributions. In addition, Chile and Peru also provide further evidence ontax incentives functing as a powerful boost for higher education (WB 2000).It should be noted however, that the total income from such contributionsremains modest in relation to total university expenditures.

International cooperation is one of the most important non-governmentfunding sources. The establishment of trust funds with initial support fromexternal aid and lending community and undertaking research and teachingactivities in joint collaboration with foreign universities are widely usedstrategies in this regard. Sri Lankan experience in this regard, particularlythe initiatives by some faculties/departments, appear to be very satisfactoryin improving the quality of their output. However, this cannot be treatedas a system-wide initiative as it is limited only to a few faculties of wellestablished universities.

Entrepreneurial orientation at tertiary institutions, especially at universitylevel, seems to be another potential avenue for non-governmental funding.While it has its own share of problems, it has several benefits. It promotesthe development of a market-oriented institutional culture and helps to estab-lish co-operative links with the industry which might become involved incurriculum development, job placements, part time teaching and trainingopportunities for students. These enhance the quality of higher education andmonetary inflow. It reduces heavy dependency on the state for funding andoffers the formula for institutional development that places autonomy on aself-defined basis.

As noted earlier, the entrepreneurial potential of Sri Lankan universitiesis seriously constrained by various administrative and financial regulations.Moreover, the university system is traditional and inward-looking in theirapproach to promoting entrepreneurial activities. As a result, the univer-sity system has failed to get the full benefit from the ever-growing marketfor consultancy, research and training activities under an open economypolicy regime. This is despite the high level of competency by universitystaff which cannot be tapped by private consultancy firms. If this cannot bepromoted through existing administrative frameworks, such activities need tobe promoted through a separate unit equipped with all infrastructure facilities.It should be noted however, entrepreneurial activities within the univer-


sity system need to be promoted with caution and without compromisingacademic responsibility and integrity.

In terms of an overall assessment, the marginal benefits of revenueobtained through fees and other revenue generating activities can be high,especially in a country like Sri Lanka where government subsidies are largelyabsorbed by personal emoluments. If the incremental resources generatedby institutions are used to purchase pedagogical materials such as textbooksand laboratory supplies, or to fund professional growth activities, then theseadditional resources could have a perceptible impact on education qualityirrespective of its relative magnitude in the total revenue profile.

Summary and conclusions

The primary objective of this study has been to examine the issues relatingto financing of higher education in Sri Lanka, paying particular attention toits adequacy, efficiency, and fund raising activities. In a highly competitivemarket environment the demand for high quality higher education continuesto increase and it requires additional funding support in addition to reforms infinancing and management. The budgetary allocations for higher education inSri Lanka is inadequate in comparison with its counterparts in the developingworld and the growth in education expenditure in real terms over the lastfifteen years has been marginal. As a result, universities experience acuteshortages of quality inputs necessary for the enhancement of quality.

As noted in the study, the proportional allocation of funds for capitalexpenditure has been very low. It reveals the lack of commitment for longterm investment for quality enhancement of universities. With respect tocosts, it was noted that the cost structure is rather fixed due to the domin-ance of few cost items and hence, the application of cost and budgetarycontrol measures appear to be less effective. From the point of view ofefficiency however, the existing system seems to be sub-optimal in view ofunder utilized capacities of indivisible factor services. At present, allocationof resources among faculties and departments is based on historical factorsrather than efficiency oriented normative criteria.

The analysis relating to the income structure of University educationreveals a heavy dependency on public funds and less initiative in diversifyingincome from non-government sources despite the experience of a pro-marketpolicy regime which has been in existence since 1977. Considering thegrowing economic problems at national level and under funded character ofthe UE system, every effort should be made to take the full advantage ofnon-government revenue sources such as user fees, entrepreneurial activitiesand institutional contributions. In a highly competitive economic environ-


ment, Sri Lanka should aim at a much higher level of investment at tertiarylevel while taking any necessary policy measures to reduce inefficienciesand to promote entrepreneurial culture within the university system withoutsacrificing academic quality, responsibility and integrity.

Acknowledgement

This paper is based on a detailed research study titled “Higher educa-tion Planning in Sri Lanka” funded by the Asian Development Bank. Theauthor is grateful to Josephine Hykin, Dunn Hykin, Earnesto A Fraco andthree anonymous referees for useful comments on earlier draft. The usualdisclaimer applies.

Notes

1. Even if we add private sector investments it is very unlikely that these figures will changesignificantly.

2. By the mid 1970s the Sri Lankan economy had become one of the most inward orientedand regulated economies with stringent trade and exchange controls and pervasive stateinterventions in all areas of economic activity. The rate of economic growth in the 1970swas 3.07 percent in real terms. In view of the dismal economic outcome of the controloriented policy regime, the new government which came to power in July 1977 introducedsharp policy changes and embarked on an extensive economic liberalization process. Thepolicy reforms introduced in June 1989 as a part of structural adjustment programme ofthe Bretton Woods institutions further strengthened this process. The continuation of pro-market and pro-private sector economic policies could be seen even after a change ofgovernment in 1994. In spite of various macroeconomic problems, political turmoil anda debilitating civil war, the rate of economic growth during the post liberalization period(1977–1998) has been 5 percent per annum in real terms.

3. This refers to wide range of institutions engaged in Aesthetic studies, IndigenousMedicine, Computer Science etc.

4. In the present analysis, the cost estimates at faculty level includes salaries and wagesto academic and non-academic staff and cost of services such as electricity, telephone,stationary etc.

5. US$1 = Rs. 64.59 (1998).6. For details see Babalola (1998) and references cited therein.7. This refers to significant cost differentials between subject groups offered at under-

graduate level. For example in the UK, the Higher Education Funding Council hasidentified four major subject groups according to the use of laboratory, workshop andother facilities: i.e. (a) clinical subjects, (b) high cost laboratory based subjects, (c) lowcost laboratory based subjects and (d) class room based subjects.

8. For country specific experience in designing a comprehensive MIS system see Woodhall(1997) and references cited therein.

9. This refers to wide range of economic problems such as high inflation, low invest-ments, high debt-service ratio, erosion of international competitiveness in tradable sectors,


widening fiscal deficits, escalation of defense expenditure, low economic growth, deteri-orating balance of payments and high rate of unemployment among the educatedyouth.

10. For example, in 1996, out of a total of 141,000 students who sat for GCE A/L, 71,846became eligible for university entry. Of these, only 27,000 were allowed to apply andonly 11,462 were finally accepted by the universities.

11. For more details see Jonston et al. (1998), Wooodhall (1997) and WB (1994).12. As reported by the Consumer Finances and Socio Economic Survey, Sri Lanka

(1996/1997), the proportion of income accruing to the bottom 40 percent of incomereceivers is 13 percent while the middle 40 percent and top 20 percent shared 34 and53 percent of the total income respectively.

References

Aturupana, H. (1999). ‘Econometric analysis and planing in the social sectors: an applicationto education in Sri Lanka’, in Fernandez, A.L. and Cooray, N.S. (ed.), Quantitative Toolsin Economic Planning: Applications and Issues in Asia. Nagoya, Japan: United NationsCenter for Regional Development (UNCRD) Research Report Series No. 30, pp. 163–190.

Aturupana, H. (1997). Earnings Functions and Rates of Return to Education in Sri Lanka.Working Paper No. 9701, Department of Economics, University of Colombo.

Bablolo, J.L. (1998). ‘Cost and financing of university education in Nigeria’, HigherEducation 36, 43–66.

Central Bank of Sri Lanka. (1999). Report on Consumer Finances and Socio EconomicSurvey: Sri Lanka, 1996/1997. Colombo.

Coombs, P.H. and Hallala, J. (1987). Cost Analysis in Education: A Total for Policy andPlanning. Washington, DC: The World Bank.

Fernando, M.R. (1993). Financing of Education. Colombo 3: Sri Lanka Economic Associ-ation.

Hewagama, L.D. (1978). A Study on the University Loan Scheme. Colombo, Sri Lanka:Peoples Bank.

Indrarathne, A.D.V. de S. (1992). Economics of Higher Education in Sri Lanka. Navarang:ISBN 81-7013-098-0.

Johstone, D.B., Arora, A. and Experton, W. (1998). ‘The financing and management ofhigher education: a status report on worldwide reforms’, Presented at the UNESCO WorldConference on Higher Education. Paris, October 5–9.

Lakshman, W.D. (1997). University Education in Sri Lanka: Some Problems and RequiredChanges. Daily News, June 10, 1997.

Mingat, A. and Tan, J. (1988). Analytical Tools for Sector Work in Education. Baltimore andLondon: The John Hopkins University Press.

Nandy, S. (2000). A New Method for the Allocation of Funds to the Universities and Institu-tions of Higher Education in Sri Lanka. Colombo, Sri Lanka: A report submitted to theUniversity Grants Commission.

Neave, G. and van Vught, F.A. (1994). Government and Higher Education RelationshipsAcross Three Continents: The Winds of Change. Oxford: Pergamon Press for the Inter-national Association of Universities.

Salmi, J. and Verspoor, A. (1994). Revitalizing Higher Education. Oxford: Pergamon Pressfor the International Association of Universities.


Tilak, J.B.G. (1992). ‘Student loans in financing higher education in India’, Higher Education23(4), 389–404.

United Nations Educational, Scientific and Cultural Organization (UNESCO). (1998). Statis-tical Year Book. Paris.

Woodhall, M. (1997). The Reform of Higher Education Finance in Developing Countries:Some Implication and Issues. Washington, DC: World Bank.

World Bank (WB). (2000). Higher Education in Developing Countries: Peril and Promise.Washington, DC.

World Bank (WB). (1994). Higher Education: The Lessons of Experience. Washington, DC.Ziderman, A. and Albrecht, D. (1995). Financing Universities in Developing Countries.

London and Washington, DC: Falmer Press.

Documents

Financing of university education in Sri Lanka