From 2012, tertiary education institutions will receive some of their funding based on how well they perform academically this year.
Tertiary Education Minister Steven Joyce says the new funding model will provide incentives for institutions to continually improve the educational performance of their students.
"This means we are moving from a system that funds purely on enrolments to one that funds both on enrolments and results.
"The performance-linked funding model will provide financial incentives for institutions to continually work to improve the educational performance of their students."
Educational performance will be measured using indicators like:
* qualification completion
* successful course completion
* student progression to further study
"The government is concerned that, as a consequence of previous ad-hoc policy changes, there are a large number of tertiary programmes, particularly below degree-level, that have course pass rates as low as 30 percent. Some of these programmes fail to properly equip students for the jobs they seek," says Mr Joyce.
"We will not continue to fund at the same level institutions that rely so heavily on these sorts of courses at the expense of higher-quality institutions that deliver better results for their students and for the taxpayer.
"We need to know that the money we are spending on tertiary education is being well used and is giving young people the skills that employers demand and that will lead to productive, meaningful employment," says Mr Joyce.
"Students also invest their time and money in tertiary education and want to know that they will be supported to complete their qualification.
"Performance linked funding will be introduced right across the sector to give organisations the incentive to improve their educational performance.
"This means that from 2012 onwards, tertiary education organisations that are not performing will run the risk of losing funding.
"This gives organisations the incentive to improve their educational performance, and will help our economy and country grow.
"The proportions of funding linked to performance will be low to start with so everyone has time to adjust, but linking some funding directly to academic performance is on its way," says Mr Joyce.
The details of how each measure is applied for each institution and each type of institution will be worked through by the TEC, the Ministry and the Minister over the next while.