There is little doubt that at the end of the 20th century, the relationship between governments and institutions of higher education is undergoing fundamental change. States and universities are struggling hard to redefine their relationship with each other and to strike a new bargain, replacing the systems and models that were largely put into place in the 1960s and the 1970s. Interestingly, this is true for both university systems that have traditionally been dominated by the state (continental Europe, Africa) and systems that have relied on more autonomous institutions (United States and United Kingdom).

The causes of this upheaval, of course, are fairly clear. The development of higher education to a mass system comprising up to 50 per cent of a nation's young people has decreased the marginal (though not the absolute) utility of higher education and has placed a further burden on already strained national coffers. Public faith in the performance of higher education has declined. Sometimes this change in attitude may have been justified by low institutional performance but, more often than not, it simply reflects the growth of higher education and a generally tight fiscal situation. Unfortunately, while it is easy to sketch the origins of the current quest to reform state-university relationships, the answers are much less obvious.

Dennis Jones, president of the National Center for Higher Education Management Systems (NCHEMS) in Boulder, Colorado, sees four possible models for state-university relationships - the state agency model; the state-controlled university; the state-assisted university; and the autonomous institution.

In the first model, universities are seen as agencies of the state or parts of the bureaucracy. Programmes and activities, as well as funding needs are determined by the state. Budgets are very detailed and itemised, and the emphasis of institutional control is on the execution of prescribed activities and procedures. All revenues and expenditures are handled by the state.

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The state-controlled institution has some room to implement some of its own programmes and generate some supplementary revenue. Yet, the basic operating procedures are the same as in the state agency model: the state largely determines the institution's activities, provides a detailed and itemised budget and controls its procedures, The state-assisted institution represents a qualitative shift in the scope and objectives of state control. The state provides core funding through block grants, keeping higher education a public responsibility. The amount of such grants can, for example, be determined by a performance-related formula based on performance or output indicators. Institutions handle their own finances and management. State control focuses on output or outcome, not on execution and procedure.

Autonomous institutions bear full responsibility for their own existence in a competitive education and research market. The state may purchase certain outputs from institutions through competitive mechanisms. For example, the state may provide a certain fixed amount of financing for each of 5,000 students in physics, and various institutions may bid on this contract. Likewise, institutions may be able to bid for research projects.

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Traditionally, most of continental Europe has operated either according to the state-agency model or has maintained a high degree of state control. England and Australia were examples of state-assisted systems. In the US state-assisted and autonomous institutions coexisted in the form of state universities/colleges on the one hand and private universities/colleges on the other hand. In today's environment, developments are moving in rather different directions, depending on the particular system and country in question.

There is consensus that the state-agency model has outlived its usefulness and that institutions should have some autonomy, but there is consensus on little else. In Germany's state-dominated higher education system, some elements of institutional autonomy are slowly being introduced but, at least as far as teaching is concerned, Germany is still very much a state-controlled system. The same is true of France. In the Netherlands and Denmark, state-assisted institutions have become the guiding model. In the UK, which has operated according to this model for a considerable time, forces are pulling in two directions.

On the one hand, there is the tendency to give institutions ever more autonomy (and thus fiscal responsibility for their own future), but, at the same time, state control is increasing, for example through the attempt to introduce national curricula.

In the US, finally, due to financial shortages, state universities have to become ever more entrepreneurial, while "private" institutions benefit from numerous sources of government support and are being subjected to an increasing number of government interventions.

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What is the appropriate form of university governance as we approach the 21st century? Obviously, the answer depends at least in part on the specific national system under discussion. But there are certain principles that [should] apply across the board. First, it is necessary to have a fairly high degree of institutional autonomy to manage resources wisely and efficiently and to handle the increasingly diverse demands on higher education.

Then, institutions should have the ability to manage their own finances and to develop entrepreneurial approaches to income generation. The state should not bail out of its responsibility for higher education and should provide certain financial assistance. In most industrialised nations, the social systems have a distributional bias favouring the older generations (health, social insurance). Higher education, by contrast, represents an investment in the future.

Finally, it is advisable to base financing on a system of performance indicators and ongoing evaluation of institutions. In this way, the government can have a certain amount of control over output and outcomes without interfering in processes and procedures.

The application of these principles does not solve all problems. Performance- or formula-based funding have their own pitfalls. Autonomous institutions will find ways to maximise funding according to the distribution criteria prescribed in a certain formula without necessarily maximising performance. The attempt to counter these tendencies can lead to ever more complex financing regimes. Governments may also be tempted to regulate specifics by adding a variety of political goals to their formulas, as is happening in some US states.

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Finally, there is the ever-present temptation for governments to put in place detailed regulations in parallel to a liberal financing regime, thus unmaking most of the original intentions. There are some signs that this is happening in England. In the 21st century, institutions must remain (or become) largely autonomous. The continental European model of heavy state control has outlived its usefulness. Yet governments must continue to provide support, walking a delicate path between necessary quality control and counterproductive interference. If a new partnership between governments and institutions can be forged, the beleaguered higher education sector can regain much of its social relevance and can be transformed into a powerful engine contributing much to the solution of the next century's problems.

Max Otte is an international higher education consultant on finance, governance, management and quality assurance.

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