Ontario's government has taken its boldest step yet to compel universities and colleges to make hard choices about how they spend their resources, circulating a draft policy designed to stretch limited provincial dollars by narrowing some schools' missions.

The draft framework for greater "differentiation" between schools was sent to higher-education leaders for feedback on Tuesday, marked "Confidential" but obtained by The Globe and Mail. After spending a decade investing in massive enrolment growth, the government is trying to climb out of a record deficit, and the paper argues that, without change, "Over time the sustainability of postsecondary education may be at risk."

The paper sets the province and its schools on course for tricky negotiations, which could kick off before 2013 ends and drive some difficult shifts in priorities. Universities are ultimately free to set their own course, but where the province disagrees with a school's direction, it can steer behaviour with levers such as funding, allocating extra student spaces and approvals for new programs.

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"There are times when we may not need two institutions, in particular in the same region, offering the same course when one could accommodate the need," said Brad Duguid, Minister of Training, Colleges and Universities, in an interview. "If we can find those niches and if we can find those roles, I'm not anticipating this to be a win-or-lose situation."

The aim is to boost schools' quality and competitiveness, but the impetus is clearly financial. "With institution inflation ranging from 5 - 8 per cent annually, and operating grants increasing by 1.1 per cent on average, existing cost structures are under pressure," the draft framework says.

The document is couched in careful language, noting that driving differentiation "will require a careful balancing act between government stewardship and institutional leadership." After years of discussions spurred by Mr. Duguid's two predecessors, that interplay will come to a head in the negotiation of individual mandate agreements for each school, led by veteran public servant Paul Genest. A firm framework is expected in late October, giving universities until November to adjust their plans before talks begin.

The negotiations give schools a window to "really seek support" for their priorities, said Max Blouw, president of Wilfrid Laurier University and chair of the Council of Ontario Universities.

But some schools are wary of the accuracy of metrics that will be used to gauge a given university's strength and progress across eight areas.

The draft paper proposes using student satisfaction surveys and data on co-op placements to evaluate teaching and learning, for example, or student employment statistics and private-sector partnerships to measure job creation and innovation.

"Of course there are concerns," Dr. Blouw said, cautioning against any strategy that might pigeonhole some schools such that "your history becomes your destiny."

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Other provinces such as Alberta and British Columbia divide their higher education system into categories, delineating research-intensive and teaching-focused universities. But Ontario's approach aims to be more organic, leaving a school's place in the system to be defined at the negotiating table.

Laurentian University in Sudbury has already chosen to focus in nine areas, from mining innovation to northern children's health. But president Dominic Giroux knows that will mean other, less successful corners of his smaller institution are unlikely to see new graduate spaces or research chairs.

"There may be tradeoffs," Mr. Giroux said. "There's always going to be university autonomy, so the government's lever is the funding lever. At the end of the day, each university needs to make its choices."