The current university funding agreements change the nature of performance funding. Previously performance funding was configured as a reward scheme, providing additional funds in exchange for meeting performance-related criteria. Now it is a penalty scheme, deducting money from teaching grants if universities don’t meet performance criteria. The performance benchmarks are assumed to align with the pre-Job-ready Graduates performance funding policy, but this has not been publicly confirmed.

This post explores whether a performance deduction from teaching grants is legally permissible under the Higher Education Support Act 2003. It is clearly not the kind of performance incentive envisaged by HESA 2003, and there are grounds for thinking that a court might find that it is partially or entirely invalid.

The maximum basic grant amount and the performance penalty

The most important grant provision in HESA 2003 is the maximum basic grant amount (MBGA) for higher education courses. This establishes the maximum amount the government will pay from the Commonwealth Grant Scheme (CGS) for Commonwealth supported student places in coursework courses, other than demand driven enrolments for regional and remote bachelor-degree Indigenous students and medical courses. The total value of this grant for 2021 is about $6.8 billion.

Under HESA 2003 each university is to be paid the lesser of the higher education courses MBGA, as set out in their funding agreement, or the total Commonwealth contribution value (relevant discipline funding rates * full-time equivalent students) of student places delivered. Any enrolments above the cap are funded at the student contribution rate only.

The funding agreements include total MBGA amounts for the next three years. The example below is from Macquarie University’s funding agreement, but all agreements have the same or similar formats.

The consequence of the performance penalty would be a lower maximum payment for higher education courses. If a university had enrolled students that would otherwise have been funded under the Table 1a amount it would instead receive student contributions only. The government would keep the CGS funding.

Can there be two MBGAs for higher education courses?

This performance penalty arrangement seems to create two MBGAs – the total listed in Table 1a for each year and a second MBGA which is the Table 1a amount minus the performance penalty for that year (‘base’ MBGA is not a legal concept, it is ongoing funding while the other categories are new or temporary).

But in describing what the funding agreements contain section 30-27(1)(a) of HESA 2003 refers to, with emphasis added, ‘an amount as the maximum basic grant amount for higher education courses’. Not one or more amounts depending on what conditions the Department adds, an amount singular.

HESA 2003 sets out the conditions for paying for higher education courses under section 33-5(2), the lesser of the MBGA and the Commonwealth contribution value of the student places delivered. So which MBGA does it refer to?

Under section 33-1(1) the total grant amount is the sum of the amount worked out under 33-5(2)+ demand driven Indigenous places + designated medical places + medical loading + transition loading + performance funding. Performance funding is a distinct amount of money, not a sub-section of the separately-mentioned funding for student places.

An overall reading of the funding agreement provisions – one MBGA, under-enrolment the only specified ground for not paying the full MBGA, and separate performance funding – counts against this performance penalty scheme being authorised by HESA 2003.

The minimum maximum basic grant amount

Even if a court upheld the general principle of a performance penalty MBGA reduction there is another legal problem in the funding floor provision inserted into HESA 2003 for higher education courses. This creates a minimum maximum basic grant amount.

The concept of a minimum maximum requires some background. Under the demand driven system universities could enrol unlimited numbers of bachelor degree students and receive Commonwealth contributions for all of them. The default position was no maximum grant amount. But the then version of HESA 2003 allowed the government, via funding agreements, to create a maximum, commonly called a ‘cap’. It did so in December 2017, effectively ending the demand driven system.

In an important protection for universities, under the then HESA 2003 the cap for the next year had to be at least what the university was paid the previous year. This is why the cap was commonly described as a ‘funding freeze’.

In a draft of the Job-ready Graduates bill, which was circulated prior to it going to Parliament, an equivalent protection of future funding was absent. The minister could, with a new funding agreement, cut a university’s maximum higher education courses grant by any amount with no provision for legal challenge or parliamentary review. I argued at the time that this level of discretion is bad for university planning and gives the minister too much power.

After protests from universities the legislated version of Job-ready Graduates included more funding certainty. From 2025 the maximum basic grant amount for higher education courses must be at least what it was the year before. Unless the government legislates a larger reduction a funding freeze ensures a gradual rather than dramatic decline in the real value of grants.

The complications of combining minimum funding with cuts

The years before 2025 are complicated for a funding floor, as Job-ready Graduates reduces CGS spending. On my funding agreement calculations, 30 of the 37 public universities will have a lower ‘base’ maximum grant amount in 2022 than 2021.

So instead of using the not-less-than-the-year-before formula, section 30-27(2) of HESA 2003 provides for the Commonwealth Grant Scheme Guidelines to set a funding floor MBGA for higher education courses that takes account of these cuts.

The current CGS Guidelines set the minimum MBGA for the years 2021 to 2023, to align with the current funding agreement period.

The interaction of performance funding and the minimum maximum MBGA

The MBGA adjustments to ‘remove the performance-based funding amount’ take some universities below the minimum MBGA specified in the CGS Guidelines. The number is four in 2021 but increases to 23 in 2022 (ie more than half) and 28 in 2023. This is because performance penalties increase over time, averaging 1.2 per cent in 2021 and rising to 3.5 per cent in 2023.

Can performance penalties reduce MBGAs below the legal minimum?

In other elements of the funding agreements the Department has found ways to bypass the intent of the law. In the CGS Guidelines they look to be trying something similar. Just above the list of minimum MBGAs, at section 21, the Guidelines read:

The maximum basic grant amount for higher education courses specified in a Table A provider’s funding agreement must not be less than the following amounts specified for each provider for the relevant grant year:

So in the funding agreements they specify the MBGA at the required level (table 1a in Macquarie’s agreement) but then add another provision setting out the circumstances in which they don’t have to pay all of it (clause 2 in Macquarie’s agreement).

But the wording of HESA 2003 itself, in section 30-27(2), does not support such an arrangement. It reads:

If a funding agreement for a *Table A provider is in respect of 2021, 2022 and 2023, the maximum basic grant amount for the provider for each of those years for *higher education courses must not be less than the amount specified in the Commonwealth Grant Scheme Guidelines for the purposes of this subsection for the provider for each of those years for those courses.

On my reading of 30-27(2) the actual MBGA, however defined, cannot be less than what is specified in the CGS Guidelines. The whole point of putting the MBGAs in the CGS Guidelines was to avoid the government using the funding agreements to reduce university grants. Under section 15AB of the Acts Interpretation Act 1901 a court would take account of the stated intent of section 30-27(2) in interpreting the limits it imposes. The Job-ready Graduates bill explanatory memorandum specifically refers to provider requests for a ‘funding floor’.

As there is a clear legal hierarchy here – HESA 2003, the CGS Guidelines, the funding agreements – the performance funding penalty, which has no legal authority other than whatever comes from the funding agreements, is invalid to the extent of its inconsistency with the MBGAs listed in the CGS Guidelines.

The 2020 version of performance funding was soft, with arrangements to give universities most of their allocation anyway even if they were ‘under-performing’. It may be the case that the Department would not seek to impose the full penalty. But if they did legal action would have a good chance of stopping them.