Higher Education Review Process

Setting Firm Foundations: Financing Australian Higher Education

4. the need for change

• a. lack of flexibility 

• b. marginal funding 

• c. access to loans 

• d. unmet demand 

• e. red tape 

It is clear that fundamental change is required to the current funding and regulatory framework of Australia’s universities …… Universities face a complex demand system that is best met through reasonable levels of flexibility to allocate funds in meeting emerging demands.
(Australian Vice-Chancellors’ Committee, Submission 22, p3)

a. lack of flexibility

73   One of the major criticisms of current arrangements, in an environment where revenue diversification is being encouraged, is that universities have only limited control over their greatest source of income, undergraduate students. Around 97 per cent (DEST 2002b) of domestic undergraduate students in Australia’s public universities hold Commonwealth funded places and currently universities are unable to set or vary the contribution rates for these students. 

74   The current base operating grant approach means that funding is distributed according to a ‘one-size-fits-all’ model. Lack of flexibility in the model means that universities receive the same amount for students in particular disciplines regardless of the number of students studying in that discipline, where they are studying and their mode of study. This can be problematic as university cost structures vary considerably because of location, historical advantage, the size and scale of operations and the types of services that are offered. Base operating grant funding is also input based, with educational and management performance having virtually no impact on the level of funding that institutions receive. Universities are not rewarded for high progression and completion rates or particular learning outcomes nor are they rewarded for teaching particular disciplines that may be of local or national significance.

75   The limited flexibility in the funding model does not provide any real incentives for institutions to diversify or specialise their course offerings or engage with their local communities to ensure that they are being responsive to student and community needs. Rigidities in university staffing structures also impede the shift of resources required to make the necessary changes to address changing community, student and staff needs and aspirations. 

76   There are also rigidities in shifting student load between institutions. Currently the distribution of subsidised places and associated funding between institutions is determined centrally by the Commonwealth, generally following consultation with the States and Territories and with institutions. Places and funds are rarely transferred between institutions once allocated. Consequently, the main changes occur following Commonwealth Budget decisions to fund a varied number of total places. Criteria for these adjustments are published and ministerial decisions on changes to funding and place allocations are published annually along with other funding decisions.

77   Many submissions to this Review highlighted lack of flexibility as the fundamental problem with current public funding arrangements. Some examples of responses are:

Current rigidities in Commonwealth funding of student places are hampering the development of a more dynamic, diverse and genuinely competitive national higher education sector.
(The University of Adelaide, Submission 135, p2)

The educational profiles process gives each university a quota of Commonwealth-subsidised student places, and also determines the distribution of places between undergraduate and postgraduate courses, and between disciplines. The constraints put on universities by this ‘Educational Profiles’ basis of funding and regulatory control have the negative effects of creating unmet demand, limiting student choice and imposing an unimaginative uniformity on the national higher education system.
(The University of Melbourne, Submission 287, p4)

The current review represents an important chance to move right away from the rigid, centrally-planned allocation of places that is a major constraint in the current system.
(Swinburne University of Technology, Submission 194, p7)

78   Several submissions refer specifically to problems associated with the Relative Funding Model. For example:

The Relative Funding Model (RFM) does not permit annual or even periodic changes to funding to take account of the evolution of an institution’s course profile. As a result, it penalises institutions that choose to introduce high cost courses in response to genuine need.
(Charles Sturt University, Submission 235, p3)

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b. marginal funding

79   Since 1998 the Government has funded institutions at a marginal rate for undergraduate ‘over-enrolments’. These are student places delivered on a HECS-liable basis which exceed the target number previously agreed with the Commonwealth. The funding rate is the minimum discounted HECS rate, currently $2 699. 

80   The intention of this measure was to compensate those institutions that could deliver quality education at less than the average funding rate, notably by using spare marginal capacity, and to recognise the genuine difficulty institutions have in hitting their targets precisely each year.

81   Since the measure was introduced over-enrolment has continued to increase. The average percentage undergraduate over-enrolment has increased from 3.25 per cent in 1996 to 8.34 per cent in 2001. The average level conceals very low levels in some cases and levels as high as 30 per cent in others. 

82   Some universities accept over-enrolments to address unmet demand while others are driven by financial pressures to access short-term revenues. However, in the long term heavy reliance on marginal funding can exacerbate rather than alleviate these pressures:

In recent years, sizeable expansion of the tertiary sector has been achieved through over-enrolment by universities for which the Government provides only marginal funding. The level and appropriateness of such funding needs to be considered in the context of efficiency gains within individual institutions. If such expansion has been at the expense of teaching and/or research quality, this needs to be measured against the additional output in determining its worth as a strategy for enhancing Australia’s knowledge capital.
(Murdoch University, Submission 166, p3)

83   The high level of marginal funding places in some institutions suggests that quality may be an issue.

84   Several submissions have argued for a different approach whereby universities are given greater flexibility in setting student load targets, obviating the need for marginal funding. This issue is taken up later in this paper.

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c. access to loans

Current higher education funding policies are complex and marked by a number of anomalies. For example:

• There are complex, inequitable and anomalous charging and loan arrangements across different categories of students.

• In particular some Australian students can defer their fees and repay on an income contingent basis while others, even in the same course, cannot.

(Group of Eight, Submission 181, p6)

85   Access to Commonwealth student loan schemes is restrictive. Students at public institutions holding a Commonwealth-funded place in an approved award course can access HECS. However, Australian students at these institutions who are enrolled on a full fee-paying basis can only access a student loan (through PELS) to cover their tuition fees if they are enrolled for a postgraduate coursework award. Students studying through Open Universities Australia have access to student loans (through the Open Learning Deferred Payment Scheme). Students at a small number of private institutions can access HECS and/or PELS. Students at other private institutions are not eligible for any Commonwealth funded loans scheme.

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d. unmet demand

86   The overall level of unmet demand for higher education is estimated by the Australian Vice-Chancellors’ Committee (AVCC) to be between 10 600 and 17 450 (AVCC, 2002a). Australia’s public universities are currently unable to meet all this demand through Commonwealth funded places. Although private institutions and public universities, through full fee-paying places, may be able to reduce the level of unmet demand, the restrictions on access to student loans mean that students are unable to, or discouraged from, enrolling in these fee-paying places.

87   Unmet demand is identified as a major concern in several submissions. For example:

Unmet demand is a national problem, but it is most pressing in Victoria in both relative and absolute terms.
(Victorian Department of Education and Training, Submission 267, p4)

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e. red tape

88   Commonwealth funding for higher education through the Education, Science and Training portfolio, excluding programmes of the Australian Research Council, is provided under 22 separate programmes (DEST 2002c). The accountability in relation to each of these programmes is significant and reporting requirements impose significant compliance costs. At the same time, because there are inadequate market signals to determine the performance of universities, aspects of university operations need to be monitored to maintain the credibility of the public funding arrangements. There is general agreement, however, that the reporting requirements of universities need to be streamlined and that the resulting savings should be re-invested in education. Significant reduction in regulatory intervention, to which the Government is committed, will require the development of agreed measures of educational outcomes that can replace the present heavy emphasis on inputs reporting and process monitoring. This issue will be examined in more detail in the issues paper on governance and management in universities.

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This page was last updated on Monday, 04 August 2008

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