In December 2017, the Commonwealth froze maximum Commonwealth Grant scheme funding for bachelor-degree places for the next two years. In subsequent years, the maximum payment will increase in line with growth in the 18-64 year old population, conditional on universities meeting performance indicators.

Just before the 2017 announcement, I outlined its legal basis. It used university funding agreements to set the maximum amount, with the method chosen because it did not need parliamentary approval.

At least initially, performance funding will be administered via the funding agreements, which include a standard statement that should the university meet its performance targets it will be advised of a new maximum funding amount.

A drawback of this method of allocating performance funding is that there is no performance fund. The underlying demand driven funding system is still operating, and under section 33-5(5) of the Higher Education Support Act 2003 universities receive the lesser of their demand driven funding amount (bachelor-degree full-time equivalent student places times the relevant Commonwealth contribution) and their maximum funding amount.

All the Commonwealth is doing is promising universities it will pay a little more of what they would have been entitled to anyway under demand driven funding.

A consequence of this link to demand driven funding is that universities with falling enrolments could end up with funding entitlements that are below their 2017 levels. In these cases, they would receive no performance funding even if they achieved all their performance targets.

Student demand has been weak since, and on my calculations there are five universities with lower demand-driven based income in 2019 than they had in 2017. A couple are earning only slightly less than in 2017, and with indexed 2020 funding rates might get some additional performance-based funding if their enrolments hold or improve. But the others are at high risk of getting no additional funds, regardless of performance.

On the recommendations of the Wellings review on allocating performance funding, its legal basis would likely need to change (although 2020 is locked in by the funding agreements). This is because the review proposed that performance funding accumulate to a maximum of 7.5 per cent of the maximum grant amount (to provide more of a financial incentive).

This accumulation cannot be done through the funding agreements due to section 30-27(3)(a) of HESA. Once a new maximum basic grant is set the government cannot set a lower amount, and so success in performance funding for one year would carry through into higher maximum funding in future years.

What is likely to happen instead is that the legal basis of performance funding would shift to section 33-1(1)(v) of HESA, which is a direct power to make payments based on performance. This frees performance funding from any necessary direct legal link to other funding amounts, although the previous maximum grant could still be used.

Section 33-1(1)(v) requires that the performance funding amount is determined under the Commonwealth Grant Scheme Guidelines (the old performance funding rules are still there; some tidying up is required). The guidelines are legislative instruments, which means that unlike the funding agreements they are subject to parliamentary scrutiny. Either house of parliament can disallow a legislative instrument.

I don’t think disallowance is likely, but a small move back towards a system based on legal rules rather than ministerial whim is in itself welcome. At the moment, performance funding beyond 2020 is a promise with no legal basis that could be abolished with a media statement.

But the downside of the section 33-1(1)(v) mechanism is that the funding agreement maximum amounts will become even more frozen in the past.