input factors and disregard results, such as graduation rates, learning outcomes and the contribution of university research to society (Fielding 1999).

Performance management rests on the assumption that effective government cannot be achieved within a classic bureaucratic framework of tight regulatory control of sources and methods of production. The relationship between the government and public tertiary education institutions can be described within the context of the principal-agent model. The providers of higher education have more information about education processes than the government. The government (the principal) therefore delegates part of the decisionauthority to the institutions (the agents). However, the information asymmetries between the government and the institutions can create agency problems: institutions can exploit their information advantages to pursue other goals. These agency problems typically arise when funding is based on inputs or on historical patterns. As the government cannot observe the effort of university staff, the system may preserve inefficiencies and ineffective programs.

A way to overcome such agency problems is to redesign funding systems, so that incentives of the principal and the agents converge. This is the essence behind the idea of results-based funding. Governments should be tight on setting goals for tertiary institutions and assessing results and provide flexibility on the methods used to achieve these ends. Thus, decision makers would assume a ‘stimulative and facilitative’ role centered on incentive-inducedchange rather than control and prescribe actions at the decentralized level (Windham and Peng 1997).

# **Building systems for results-based funding**

Higher education systems are of high complexity and cater to multiple objectives. Hence, building a funding system without perverse incentives or unintended consequences requires careful consideration of design options. Perfection is unlikely to be ensured in the design phase and progress is often based on trial and error during implementation.

The impact of incentive driven institutional change is contingent on the tailoring of components to fit national and systemic characteristics. Even when an administrative culture has become obsolete or dysfunctional it remains necessary to understand its institutional roots to secure durable improvements. Equally important, administrative capacity limitations and other institutional constraints must be taken into account when designing funding systems (Schiavo-Campo 1999).

Kusek and Rist (2002) propose adjusting the complexity and ambition of a results-based funding system based on a ‘readiness assessment’. Performing such an assessment gives reforming agencies an understanding of what institutional capacity they do or do not have and what resource can be drawn upon to initiative reform. A ‘readiness assessment’ can also help to clarify where within a government reforms might begin, under the auspices of who and what demand exists for the use of collected information.

# **Information systems**

As governments begin to address the challenges of results-based funding, they face the need to document performance with valid and reliable information. Allocating resources based on institutional performance presupposes credible and timely national and institutional statistics on a wide range of indicators. Without a good information system no basis exists for evaluating institutional performance. When reliable data are lacking, the priority must be to build a data and monitoring capability before considering the introduction of results-based funding (Schiavo-Campo 1999).

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