problem is that performance criteria tend to become increasingly invisible on campuses below the level of vice presidents, because of the failure to extend performance funding and reporting to internal academic units.

**Finland** has prioritized consultation in the contract negotiation phase through an intensive budget dialogue involving lower management levels and regular reporting between universities and the Ministry of Education during the contract period.

Prior to performance contract negotiations, universities send in proposals including an activity and a finance plan for a three-year period. This launches a process of consultation where the Ministry of Education and universities identify targets and evaluation criteria. Ministry officials and university staff, _inter alia_ , interact in unofficial seminars and meetings in order to take account of institutional and disciplinary views and ensure transparency and predictability in the negotiation process (Hölttä and Rekilä 2003).

The Finnish performance contracts include both general goals for the tertiary education system such as quality, impact of education and total number of offered degrees as well as specific goals for the individual institution.

## **Box 12. Finnish performance contracting**

<mark>Finnish performance contracts are made up of three parts: core funding, performance funding and funding for specific initiatives. Deliverables for all three types of funding are agreed in the contract. The core funding remains stable during the tree-year contract period, whereas performance funding (approximately 3-5 percent of operational expenditure) is tied to results on a number of agreed indicators. Examples of indicators include:</mark>

- <mark>Funding for research from external sources</mark>

- <mark>Assessed learning achievement</mark>

- <mark>Provision of adult education</mark>

- <mark>Graduation time</mark>

- <mark>Participation in international cooperation</mark>

<mark>To calculate the amount of performance funding, target figures are multiplied by a field-specific cost factor, which is also agreed for the three-year contract period.</mark> _Source: Hölttä and Rekilä 2003_ Funding based on performance contracts gives wide room for political maneuverability and prioritization of high profile government policy. While this impairs institutional planning beyond the contract period, it caters for political necessities and ensures system endurance. Performance contracts offer a significant degree of flexibility to take account of idiosyncratic characteristics and needs when tertiary institutions are few and differences between them are large. If the tertiary education landscape is fairly homogenous and composed of a high number of providers, contracts may not be efficient.

A notable feature of performance contracts is the high demand they place on the capacity of supervisory authorities to engage in an evidence-based dialogue with institutions. Without a strong counterpart, information asymmetries may lead to under-performance, as institutions are able to press for undemanding targets. Hence, if sufficient steering capacity at the central level does not exist, funding tied to a fixed set of system-wide criteria is likely to be more effective than contracts in driving institutional improvement.

# **4. REWARDING INSTITUTIONS BASED ON PERFORMANCE**

In addition to agreeing on the criteria that will be used to assess institutional performance, a need exists to decide how and what proportion of resources will be tied to results. In considering how institutions should be rewarded or penalized based on their performance,

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