Called the Unified Funding System, it will significantly increase the incentive to provide work-based training by increasing per-trainee subsidies by 40 to 90 per cent.
That would bring industry training funding rates much closer to the per-student rates for certificate and diploma courses, which would fall 15 to 20 per cent, with bigger decreases for extramural or online courses.
The system is also expected to ensure the long-term financial viability of polytechnics, which are now subsidiaries of the national polytechnic and workplace training organisation, Te Pukenga.
Te Pukenga said it needed more detail before it could comment on the new system.
However, a Cabinet paper said it would result in significant shifts of funding between Te Pukenga's subsidiary polytechnics.
It would also increase funding to wananga, slightly decrease funding to universities, and significantly decrease per-student funding for private institutions.
Tertiary Education Union president Tina Smith said she was not convinced the new system would ensure the viability of small polytechnics, even though that had been a goal of the changes.
"This system is going to cut money to providers and is essentially robbing Peter to pay Paul," she said.
"With provider-based funding being cut down to 84 per cent we risk losing institutions in some areas and that's just not good enough."
Extra funding would accompany the changes, but it would not be enough because the sector had lost a lot of income in the past 10 years, Smith said.
The chair of Independent Tertiary Education New Zealand, Craig Musson, said it was not yet clear how the changes would affect private institutions.
However, he said he was disappointed most of the funding would still be based on the number of students enrolled, rather than on the actual cost of the course.
"We hoped this was going to be the panacea for change, but it could be that some providers are worse off, some will be maybe no better off, and there might be a smaller percentage that are far better off," he said.
The changes could lower education quality, Musson said.
"Some of it is going to be incentive-based and as soon as you put in incentive-based systems, if people's funding is based on those education outcomes it can have a negative effect."
A Cabinet paper said the new system would divide funding into three components: about 84 per cent would be based on student enrolments, 8 per cent on student characteristics, and about 8 per cent reserved as a strategic fund.
The exact rate paid per student for the largest component, known as Delivery, would vary according to subject and mode of study - whether on-campus, at work or online.
The second component, Learner, would pay institutions $1100 to $1300 for every student who was disabled or who did not have at least a level three certificate qualification. They would also get $137 for Māori and Pacific students, or $329 if they were studying for a level 7 diploma.
Some of the learner component would be allocated only if institutions reached performance measures such as particular pass rates.
The third component, called the Strategic Component, would be used to meet regional skill needs and to pay for the development and maintenance of qualifications.
