The Tertiary Education Commission has warned institutions they could lose funding for courses with poor results for Māori and Pasifika students.
The commission has told the tertiary sector it will withhold 2019 funding from poorly performing courses until institutions show how they plan to improve their figures.
The move was part of the commission's recently announced goal of eliminating disparities for Māori and Pasifika students within five years.
Tertiary Education Commission deputy chief executive Paora Ammunson said the gaps were long-standing, but they could be closed.
"The disparities are tantalisingly close. The biggest one by a magnitude is level seven and above degree-completion, where the disparity between Māori and Pacific folk and other New Zealanders is roughly around 20 percent," he said.
"The other parity goals in the system are generally speaking magnitude five to 15 percent."
Mr Ammunson said the commission would be asking tertiary institutions to demonstrate how they would close the gaps.
"For this year we're not denying institutions' funding but what we're saying to them is 'here is an area of provision where there are yawning disparities. Before we release that funding to you we want to have a chat with you'," he said.
"We want to see from the tertiary providers that they've got a plan in place to achieve those goals."
However, the commission said if it was not satisfied with an institution's response to poor results it could allocate funding to higher-performing courses at other institutions.
Financial penalties were not part of the commission's 2012 goal of achieving parity for Māori and Pasifika students in polytechnics by 2015 and in universities by this year.
Universities New Zealand chairman Stuart McCutcheon said withholding funding would have little impact because universities were already doing a lot to improve enrolment and pass rates for Māori and Pasifika people.
"The idea that you will solve the problem by ring-fencing money and using it as some kind of a lever seems to be predicated on the notion that the universities aren't doing what they should be doing and I would absolutely reject that notion," Professor McCutcheon said.
He said the commission's goal was commendable but it was unlikely to be achieved within five years because the problem laid with schools rather than universities.
"A lot of the disadvantage that Māori and Pasifika students experience is in the compulsory sector, and I don't say that as a criticism of compulsory education, it's just a reality and until we deal with that we are not going to see the pipeline of Māori and Pacific students prepared for university education in the numbers that we would wish to see."
Māori students' association Te Mana Akonga co-tumuaki Pohoira Hughes-Iopata agreed the five-year goal for parity was "far fetched" but said there was a lot that tertiary institutions could do.
"In terms of being able to enrol, retain, and graduate Māori students, there definitely needs to be a change of delivery from the one-approach-fits-all," she said.
"There could be a lot more support in terms of Māori support services within institutions."
Ms Hughes-Iopata said it was important that the commission was using funding to encourage institutions to change.
"Funding would make a huge difference for institutions because that's money that they're missing out on if they don't find a way to improve," she said.
"That would be definitely be an important tool in encouraging TEOs [tertiary education organisations] to up their game around creating parity."
After reports of institutions missing Māori and Pasifika targets, Prof McCutcheon said Māori and Pasifika students with University Entrance (UE) enrolled in university at about the same rate as non-Māori with the same qualification, and their success rates were getting close to those of other students.
Last year across the eight universities in Universities New Zealand completion rates for Māori and Pasifika students after they reached their second year of study were around 80 to 83 percent compared with about 90 percent for other students.
Prof McCutcheon said 83 percent of students had completed their degree within eight years of starting it, and the figure for Pasifika was around 60 percent and for Māori close to 70 percent.
The bigger problem was the number of Māori and Pasifika students who had the ability but did not get University Entrance qualification because of personal, family and socio-economic circumstances, he said.
A joint report from the Productivity Commission and Auckland University of Technology identified the three factors it said contributed the most to lower levels of bachelor's degree study among Māori and Pasifika.
They were prior performance in school, socio-economic status and parents' educational attainment.
About 3000 more Māori and Pasifika students needed to get UE each year in order to achieve parity with other students, Prof McCutcheon said.