Demand Driven Funding Review debate: a userís guide
30 April 2014, by Dr Geoff Sharrock
Geoff Sharrock is Program Director at the LH Martin Institute.
The main proposals of the Kemp-Norton Review of Australia’s “demand driven” funding system for higher education, released in mid-April, have been reported and debated fairly widely. At a University of Melbourne recorded seminar on 16 April where Norton discussed the report, even those who disagreed with parts of it welcomed the report as a model of rigour and clarity.
In a speech in London on 28 April, Education Minister Christopher Pyne has indicated strong support for the report’s main proposals: allowing universities to continue to meet student demand for Commonwealth supported course places (CSPs) on an “uncapped” basis; and extending this approach to other providers such as TAFEs and private colleges. He did not go to specifics on this, or on the next logical question, how best to finance an expanded system. But he did signal a move toward a more deregulated, diverse and competitive higher education sector.
Review conclusion: keeping the volume caps off
As we know, the Review argued against re-imposing caps on the number of CSPs a university may offer at the undergraduate (bachelor degree) level. That is, government should continue to fund direct public subsidies for as many bachelor students as eligible institutions are prepared to enrol.
This is not surprising. In July last year, Norton argued for the current system’s continuance when Labor Minister Kim Carr signalled a possible “re-capping” of CSPs. In a Grattan Institute report in August Norton again argued to “Keep the caps off!”. He then reprised this argument after last year’s federal election in September, when new Coalition Minister Christopher Pyne echoed Kim Carr’s concern that the growth in low ATAR entrants might lead to lower quality.
Also unsurprising is the Review’s market oriented philosophy, when we consider that Kemp and Norton are longstanding proponents of a demand driven system. As a Howard government education minister in 1999, Kemp (with Norton his advisor) proposed a system very like what the present Review proposes, with a firm recommendation to deregulate fees as well. At the time the Cabinet submission was leaked and, as Norton recounts in his chapter in last year’s book on the Dawkins reforms, the proposal was killed after Labor and the universities gave it a media thrashing.
The adoption of a demand driven system by the Gillard government a decade later, along with the confirmation that Minister Pyne supports the Review’s direction, amount to a 15 year “rooster-to-feather-duster-to-rooster reversal” for Kemp and Norton’s blueprint.
Review findings: growth, costs and benefits
To set the scene, the Review outlines the extent and cost of enrolment growth since the demand driven system was announced in 2009. Over the years 2009-2013 CSPs grew by 23 per cent, from 469,000 to 577,000 full time equivalent enrolments. This was mainly in public university undergraduate places which grew by 22 per cent, from 444,000 to 541,000. In that time the cost of CSP subsidies rose from $4.1 billion to $6.1 billion, and is expected to reach $7.2 billion by 2016-17. The Review also notes that the government’s carrying cost of accumulated HELP loans (for CSPs and full-fee places, among other things) is rising, to $1.5 billion in 2014-15.
While the Budget cost of the system has grown more than was expected, Kemp and Norton concluded that the benefits of the new system have been manifold and worthwhile:
“In our judgement the public universities have responded well to the greater freedom conferred by the demand driven system in relation to course offerings, modes of delivery and admissions. Access has improved for students from all categories. Greater competition for student enrolments, and the opportunity for greater responsiveness to student demand, has driven innovation and lifted quality. In light of the benefits of the demand driven system, there is no persuasive case for the reintroduction of caps. There is evidence that the greater flexibility and responsiveness resulting from the demand driven system has encouraged a better fit between the skill needs of the wider economy and society and those possessed by university graduates, and should therefore contribute to future improvements in productivity.”
The Review’s terms of reference didn’t set budget limits, or ask Kemp and Norton to find cost savings; but did seek advice on the “fiscal sustainability” of the system. While the Review offers no recommendation on how much public funding higher education should get, it frames its proposals with an eye to improving the system in ways that can be “cost neutral” to the federal Budget. However, after last year’s funding cuts under the previous government, and with a tough May Budget looming under this one, initial responses to the Review’s ideas have been shaped in part by concerns about their funding consequences for universities.
Proposals to improve the current system
Beyond system maintenance the Review’s main proposals, summarised by Gwilym Croucher and other commentators in The Conversation, include an extension of the demand driven system to fund “uncapped” publicly subsidised CSPs in three areas, beyond bachelor degrees in public universities. These are postgraduate coursework degrees; sub-bachelor diploma level qualifications; and “non-university higher education providers” (NUHEPs) such as TAFEs and private colleges.
Kemp and Norton present all three proposals as the unfinished business of the 2008 Bradley Review which recommended the demand-driven system introduced by the Gillard government. Bradley’s Recommendation 29 proposed that demand-driven subsidies would:
“apply initially to undergraduate courses but then be extended to postgraduate coursework level courses subject to further work on the balance of public and private benefits at that level… [and] apply initially only to public universities…but would be extended to other approved providers when new regulatory arrangements are in place.”
In the postgraduate area the Review proposes to fund CSPs on a demand driven basis for a limited range of postgraduate coursework programs. This would address in part a mixed bag of market anomalies, raised in many submissions to the Review.
At present, domestic students in similar courses may be full-fee or subsidised depending on which university they attend. Some courses with funding approval for a set number of postgraduate CSPs also enrol full-fee domestic students, who may pay $10,000 more per year than their peers. Some universities have funding approval to offer CSPs in nearly all their postgraduate coursework programs. Others rely mainly on full-fee postgraduate places, even when offering similar programs to those of a local competitor university with approval for CSPs.
In postgraduate courses the Review proposes uncapped CSPs only for specific fields such as nursing and allied health, which combine community benefit and modest graduate earnings, and which face labour market shortages. But not for fields such as business or law, where full-fee demand is strong and pricing often sits well above CSP rates. This proposal would remedy some market distortions without adding greatly to Budget costs via mass migration from full-fee places to CSPs.
The Review finds that commencing bachelor-degree students with ATARs below 50 have high and persistent attrition rates, and that of those who entered during 2005 to 2007, only half with ATARs below 60 had completed the degree after six years. This is doubly undesirable: a waste of public money on CSP subsidies, and wasted effort by students if they exit with a HELP debt, but no degree. The Review also finds that sub-bachelor courses offer lower risk diploma-level study which offers safer pathways into degrees for under-prepared students.
The Australian Technology Network submission to the Review, among others, called for increased or uncapped CSPs at the sub-bachelor level. It highlighted the problem that CSPs for sub-bachelor programs are capped in public universities and (unlike postgraduate places) universities may not offer them on a full-fee basis. This means universities can’t readily adjust how many sub-bachelor students they take in, the way they can at the bachelor level with CSPs, or at the postgraduate level with full-fee places. In his commentary in January on what the Review might propose, Tim Pitman observed that among the Review submissions
“27 universities…recommend the DDS be expanded to include sub-bachelor courses.”
A further problem is that TAFEs and private providers offering sub-bachelor pathway programs do so mainly on a full-fee basis, and often with entry prices higher than for a bachelor degree CSP. As the Review puts it:
“The combined effect of excluding sub-bachelor courses and NUHEPs from the demand driven system is that disadvantaged students pursuing this option have to enrol on a full-fee basis. Low socio-economic status students make up 14 per cent of full-fee domestic undergraduate enrolments, compared to 17 per cent of CSP enrolments.
For these reasons the Review proposes an extension of uncapped CSPs to the sub-bachelor level, roughly estimated to cost the Budget $250 million a year in CSP subsidies. Meanwhile Review submissions from private non-university providers called for sub-bachelor CSPs to be open to NUHEPs. Among universities, the Group of Eight universities submission also argued for this, at lower public subsidy rates:
“Wider use of the capacity of non-university suppliers, initially to provide sub-Bachelor qualifications at lower per-student unit costs for general taxpayers, would produce more cost-effective outcomes…The Government could make a pool of CSPs in sub-Bachelor places available to non-university providers. Non-university providers can offer a place at around 75% of the cost of a university place, as they do not carry research overheads.”
CSPs for non-university and private providers
The Review’s most controversial proposal is to fund demand driven CSPs not just within the public university sector but beyond it, for bachelor degrees. Private universities such as Bond and Torrens, and NUHEPs such as TAFEs and private for-profit colleges, can enrol domestic undergraduates only on a full-fee basis (with minor exceptions). These students have access to FEE-HELP loans, for which they pay a loan fee of 25 per cent (unlike postgraduate FEE-HELP loans). Compared with university undergraduates in CSPs they miss two benefits: the direct public subsidy that covers part of the course cost, and access to a HECS-HELP loan with no loan fee, to cover the remainder.
A theme of submissions to the Review from TAFEs such as TAFE Directors Australia, TAFE NSW and Holmesglen, and from for-profit colleges such as Kaplan and Navitas, was that their lack of open access to CSPs disadvantaged their students financially, nudged marginal students into higher risk university courses, and left NUHEPs competing for students on less than neutral terms.
The Review argues that all CSP (HECS-HELP) loans and full-fee (FEE-HELP) loans should apply the same loan fees, and summarises its position on competitive neutrality as follows:
“The uncapping of student places has given public universities a competitive advantage in relation to other higher education institutions which do not have access to Commonwealth supported places and are reliant on full-fees. At a cost, it would be possible to extend the benefits of competition more widely by including private providers in the demand driven system. While some private providers would probably choose to stay out of the system, continuing to charge full-fees for their courses, others are likely to enter.”
Cut price CSPs
The Review also recalls that the 2011 Higher Education Base Funding Review proposed that NUHEPs could offer CSPs funded at lower rates – up to 10 per cent - than for universities due to their teaching-only focus. Some NUHEPs, the Review notes, would accept this; and it was supported in the TAFE Directors Australia submission and the Holmesglen TAFE submission. As noted, the Group of Eight submission also suggests lower subsidy CSPs for NUHEPs, initially in sub-bachelor courses.
Kemp and Norton don’t reach a firm view on the question of lower-funded CSPS. The background is that many NUHEPs currently charge (price-unregulated) full-fee rates that earn them more than the total income per place available to universities using (price-regulated) CSPs. Business models may differ to the extent that opting in to CSPs is too hard. Bond University for example charges fees well above the combined value of CSP fees and subsidies. In its Review submission Bond argued for access to public subsidies, but since the Review’s release has indicated that it won’t opt in to demand driven CSPs on the terms the Review proposes.
Opting in and out of CSPs for different courses
The Review’s “clear and consistent rules” stance also means that a private provider could not offer uncapped and subsidised undergraduate CSPs in some fields while charging unregulated full-fee rates in others. The Review submission from the Australian Council for Private Education and Training sought this option, if there were no access to price-deregulated CSPs:
“All higher education institutions should be given control over what fees they charge their students. If this is not done, they should be able to opt in or out of the federal funding system on a course-by-course basis.”
Provider flexibility to opt in or out of CSPs/ full-fee places to finance different types of course is also sought in the Group of Eight submission (which recalls this proposal from the Bradley Review); and in the Innovative Research Universities submission. However the Review does not recommend this option for public universities or for NUHEPs.
Early reactions on NUHEP subsidies
Early responses from within the public university sector to the prospect of funding uncapped CSPs for NUHEPs range from support by policy commentators such as Conor King and Matt Brett to more allergic reactions. Of the latter the most notable have been a press release from Universities Australia chief executive Belinda Robinson which called the proposal a “huge gamble” that “without proper controls…could pose a substantial risk to the reputation of the entire sector, with devastating consequences”. Meanwhile Australian Catholic University vice-chancellor Greg Craven, also speaking for Universities Australia on ABC radio, called it “an extraordinarily high-risk strategy” and likened it to “throwing a handful of hungry goannas into the Melbourne Cup”. Both Robinson and Craven have elaborated their views on this issue in better detail in The Australian.
Meanwhile public universities are split on this question. University of Adelaide vice-chancellor Warren Bebbington has rejected early criticisms of the Review’s proposal, as too “self-interested”. La Trobe University vice-chancellor John Dewar agrees, arguing that “demonising” the proposal “will only create an image of universities as a bunch of grumpy old monopolists protecting their turf”.
Matt Brett provides a lucid summation of how Australia’s NUHEP sector currently relates to its university sector, and the main policy issues raised by the Review proposal.
Who moved my Vegemite?
Behind these concerns about subsidies for NUHEPs is the prospect of “Vegemite” funding policies spreading public subsidies ever more thinly. This concern is not surprising, for two reasons. The cost to the Budget of existing demand driven subsidy growth has been substantial – more than estimated when the policy was introduced – and last year the previous government announced higher education funding cuts to shore up its Budget.
Meanwhile in 2012 a “radical Vegemite” proposal appeared in the Grattan Institute report, Graduate Winners, a response to the 2011 Base Funding Review. In Graduate Winners Andrew Norton argued that, given strong private incentives to gain a degree, subsidies for undergraduate CSPs could be cut dramatically, with higher student charges offsetting the loss of revenue to universities, while HELP loans preserved access and equity for students. The main benefit sought by Graduate Winners was to lower the cost of higher education to the Budget, with a side benefit of “greater competitive neutrality” between university CSPs and NUHEP full-fee places.
The present Review does not explicitly seek to lower the net cost of higher education to the Budget. But in proposing uncapped CSPs for NUHEPs, it steps further toward promoting “Vegemite scarcity” among universities: on a “Budget neutral” basis the NUHEPs proposal would spread public money not just more thinly, but more widely.
Quality and regulation
Vegemite entitlements aside, many commentators within and beyond the university sector see risks with the NUHEPs proposal, and most concur that to work it would require strong regulation. In the Review, Kemp and Norton argue that the regulatory machinery needed to ensure quality in a more open system of public and private providers is now in place, paving the way for CSPs in NUHEPs, as envisaged by the Bradley Review:
“TEQSA has removed any systemic quality concerns surrounding the non-university higher education sector. Providers must comply with strict rules to operate at all, and in most cases TEQSA approves their courses individually.”
On this question the Review has been endorsed by Denise Bradley herself, who in an interview with The Australian was clearly bemused by the suggestion that private providers are not to be trusted:
“Some of the biggest owners of private providers are universities themselves…Every university either owns a registered training organisation or works in a formal relationship with one.”
For Kemp and Norton, as for Bradley before them, the reality is that while public universities continue to dominate our higher education sector, with over 90 per cent of the domestic student market, they do so in mixed economy conditions. Just how mixed that economy now is, and how skewed some of the policy settings look to providers which are not public universities, is lucidly explained in the Review submission from Kaplan Australia.
Financing dilemmas: taking the price caps off?
Several submissions to the Review, but not all, sought more scope for providers to charge higher fees to limit the cost to the Budget. For example, to finance more CSPs in an extended demand driven system, the Australian Technology Network submission indicated support for a 10 per cent increase in student contributions via HELP loans, but not complete fee deregulation.
The Review makes no firm recommendations on how best to finance the existing demand-driven funding system, or its extension into other types of courses and providers. Nor does it examine in any detail how students, institutions and public spending might fare in a more market-based system, where course fees were less regulated, and domestic students faced a wider range of entry prices and HELP debts.
Firm answers to these kinds of questions were seen as beyond the Review’s scope. However it does outline some policy suggestions for containing the ongoing costs to the Budget of an extended demand driven system as it evolves. These are lucidly summarised in Gavin Moodie’s commentary in The Conversation, which relates them to other reports and articles.
The Review suggests a loan fee for HELP loans (of say 10 per cent), not paid to the provider but added to the student’s HELP debt, which students would repay at the same rate as before, but for longer. It also suggests reducing the direct public subsidy rates for CSPs and raising the student contribution rates by the same amount, to maintain stable total funding rates from a provider point of view. Apart from that it suggests ways to reduce the Budget’s carrying cost of accumulated HELP debt by seeking repayment from overseas students and deceased estates. The HELP debt suggestions are elaborated in Norton’s recent Grattan Institute report on Doubtful Debt.
Since the Review was released, Kemp and Norton have called for wider debate on the question of “combining demand-driven places with more flexibility on student fees” leading to a sector where a wider range of providers could charge a wider range of course prices beyond the current maximum, supported by HELP loans. Some leaders from Group of Eight universities such as University of Melbourne vice-chancellor Glyn Davis argue for this as the only way forward, given the political reality of Budget spending priorities and further possible funding cuts:
“The dilemma for the university is distressing but straightforward: do we accept a fall in quality as the public subsidy diminishes yet again, or seek flexibility to match the student contribution to the real cost of delivering tertiary education and address inadequacies in the current system? This question is bigger than fee levels, since it goes to a status quo already riddled with inequitable distribution of available public funding.”
A politically courageous case for highly deregulated fees has been made by ANU vice-chancellor Ian Young:
“True price competition…at the undergraduate level exists only for international students, where Australian institutions do compete internationally on both quality and price…We believe real domestic competition could be achieved with only one cap: limiting the absolute maximum income an institution could receive for a domestic student (Commonwealth plus student contribution) to the international fee for the same course.”
Geoffrey Garrett, dean of the UNSW Australian School of Business takes a similar view. He suggests reducing direct subsidies and deregulating fees as a way of lifting public funding for research:
“One way to free up government money to fully fund research would be to reduce direct government support for teaching — by deregulating the fees our students pay. This would be a double win. The cost of teaching born by government would be reduced. But the revenues available to universities to improve teaching would increase. The focus here should be on degrees that have large private benefits…we charge Australian students nothing like the market price for our undergraduate business degrees… a little more than $12,000 a year …Of this, students pay about $10,000…[with] about $2000 [per CSP per year]… paid by government. At the same time, our international students pay more than $30,000 [per year] to sit in the same classes…Deregulation of fees would allow us to charge closer to the market price. Any adverse impact on access would be mitigated by the Higher Education Contribution Scheme.”
Queensland University of Technology vice-chancellor Peter Coaldrake urges caution on deregulating fees, noting that “one…lesson from the US is that unconstrained university fees will rise, fast, and once that genie is out of the bottle it is hard to put it back.”
As reported in The Conversation and discussed by Norton, there is no consensus view among universities on these questions. The Review submission from the University of Western Sydney, for example, put it this way:
“The Review of the demand-driven system should not be used as an opportunity to introduce “fee flexibility”. The Australian Government contribution to higher education funding is currently 32% below the OECD average for public investment in tertiary education and current student contributions are high. A fee flexibility system will undermine efforts to make access to higher education available to all with talent regardless of their backgrounds. Evidence shows that despite the HECS and Fee-Help systems, potential students in regions such as Greater Western Sydney are deterred by high fees.”
Even with HELP support, any significant fee hikes will be of real concern to many students. The prospect of lower subsidies, fee deregulation and "privatisation" has been denounced by Opposition spokesman for higher education Kim Carr.
In sum, these are very complex debates about the design dilemmas, policy trade-offs and funding issues we face in Australian higher education. While the May budget looms, it is clear that the evolution of the sector has a long way to go.