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Higher Education Review ProcessSetting Firm Foundations: Financing Australian Higher Educationexecutive summaryThe financing of Australian higher education has engendered strong interest in the great majority of submissions to the Review of Higher Education. While there is a wide variety of positions put in relation to the best way forward there is near unanimity on the need for change. Total Commonwealth funding for higher education in 2002 is $6.4 billion. The majority of this funding is provided through the Education, Science and Training portfolio. In 1992 funding through the porfolio amounted to $4.2 billion. In 2002 the figure is $6.1 billion. Under the Higher Education Contribution Scheme (HECS) arrangements the Government’s subsidy is about 75 per cent of the average course costs once discounts are made for fees paid up-front or early, death write-downs, special remissions and doubtful debt provisions. The subsidy is much larger than this once the interest free arrangements associated with HECS loans are factored in. While under HECS the level of student contribution is transparent, the extent of Government subsidy is not. In 2000 the financial performance of universities was sound. Comparing 1999 to 2000, total revenue increased from $8.8 billion to $9.3 billion, operating surplus increased from $286 million to $321 million and net assets increased from $18.8 billion to $20.0 billion. Despite these results higher education institutions are facing a range of financing pressures. Between 1983 and 1991 operating grant funding per student fell by 10 per cent. Between 1991 and 1998 it rose and has since stayed relatively stable but still some 6 per cent below 1983 levels. The Commonwealth’s indexation arrangements for operating grants since 1995 have been set in the context of enterprise level bargaining on wages and productivity improvements. No provision has yet been made for the next Enterprise Bargaining round beyond continuation of the current yearly Safety Net Adjustment supplementation arrangements. Many submissions to the Review highlighted the lack of flexibility for institutions under current funding arrangements. The current base operating grant approach means that funding is distributed according to a ‘one-size-fits-all’ model. There are no 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 demands and aspirations. Current funding arrangements for over-enrolment are problematic. 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. Access to Commonwealth student loan schemes is restrictive with undergraduate arrangements being different from postgraduates. The overall level of unmet demand for higher education is estimated 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 means that students are unable to, or discouraged from, enrolling in these fee-paying places. In considering the size of the higher education sector, a key question is whether Australia should determine an appropriate level of university participation. Not all who apply for university have at that time the capacity or commitment to succeed. It is entirely appropriate that a significant percentage of school leavers move into vocational education and training as their preferred choice, particularly given the capacity in Australia to access university education later in life. The national benefits of higher education are significant. Its total economic impact annually has been estimated to be $22 billion (BHERT, 2000). The average rate of return to the Government on its investment in higher education has been estimated at about 11 per cent (Borland et al, 2000). However, the greatest national benefits are those more difficult to measure and include the impact of graduates on productivity in the workplace, the impact of research outcomes on productivity and innovation and the social impacts of a more highly educated population. The private benefits are also significant. Studies over the past decade have indicated that average private returns to higher education are between 9 and 15 per cent. Significantly, private returns vary depending on the course of study undertaken. Over their lifetime, a person with a bachelor degree could expect to earn around $622 000 (males) or around $412 000 (females) more than a person who left education at the age of 18 years (Chapman and Salvage, 2001). Many submissions to the Review call for increased public funding to maintain or improve the quality of higher education. However, given the private benefits that accrue to the individual, it can be argued that any increased per capita investment could be funded in part by those who are directly advantaged. Several submissions to the Review argue for a new approach to funding of higher education institutions by directing funding to the students. Arguments for a learning entitlement model are that it maximises student choice and makes transparent the level of Government subsidy. Others argue that public funding should continue to be directed to institutions to avoid market failures that can occur with a demand-driven approach and to provide some certainty for university planners. Many submissions to the Review highlight the need for any future funding model to maximise flexibility for institutions, including:
Fee deregulation is opposed in a number of submissions, primarily because of concerns regarding student access. Others argue that access would be enhanced because increased income from fee deregulation will enable the sector to grow. To optimise outcomes from higher education, access needs to be based on ability, not ability to pay. There is near universal support for income-contingent loan arrangements. There is also near universal support for an extension of arrangements to all students in public institutions irrespective of whether they have a government-funded place. Several submissions also argue for income-contingent loan arrangements to be made available to students in private higher education institutions. To address the issue of affordability of higher education in a deregulated fee environment should it be contemplated, consideration could be given to raising the HECS repayment threshold and increasing loan repayments at higher income levels. Four funding models are presented in the paper based on key issues raised in submissions to the Review. There are other models and variations on the models presented. The intention is not to rule in or rule out any particular model at this stage, but instead to stimulate thoughtful debate. The core models are: Model 1: Discipline-based modelModified status quo with funding provided to universities based on course costs per discipline to allow universities more flexibility adjusting their course profiles and some flexibility in respect of total student load (see model 1 for more details). Model 2: Fee deregulationInstitution-directed funding model with optional fee deregulation. This model includes the key features of Model 1 but allows universities to set the course price above a base rate set by the Government. Those universities choosing not to increase fees for a specified percentage of courses would receive a financial loading from the Government (see model 2 for more details). Model 3: Flat rate learning entitlementsIn this model the Government directs its funding to the student. All students eligible for the entitlement would receive the same level of Government subsidy. Universities would be free to set the course price (see model 3 for more details). Model 4: Variable rate learning entitlementsThis is the same as Model 3 except that the Government can vary the rate of subsidy taking into account course costs, potential earnings and labour market needs (see model 4 for more details). In all models, all students would have access to income contingent loans. Consideration of research financing needs to take account of the considerable publicly funded research that exists outside universities. For both economic and strategic reasons a case can be made for a more nationally consistent approach to publicly-funded research. Questions to be considered include the extent to which the research funds of Government agencies and universities should be opened to mutual merit-based competition and to which research alliances could drive a more collaborative approach to innovation. A submission from the Australian Research Council to the Review calls for a greater proportion of Government research funding to be contestable with some research funding being shifted from block grant funding to programmes run by the Australian Research Council. Several other submissions argue strongly for maintaining the current block grant arrangements. A number of submissions call for a greater emphasis on qualitative measures over quantitative measures in the Department of Education, Science and Training (DEST) performance-based research programmes. In considering the diversification of funding sources for higher education institutions, several submissions highlighted the fact that while income from these sources is of growing and critical importance to universities, it has only limited potential as a substitute for funding of core university activities. The paper points to a range of possibilities for further diversification of funding, including:
The overwhelming number of submissions to this Review of Higher Education comment on the importance of financing arrangements in assuring the future well-being of Australian higher education. Drawing on these submissions this paper canvasses a wide range of issues and options to enable the higher education sector not only to be more responsive to, but also to anticipate more effectively, the many challenges it will face over the next 10 or so years. The paper does not rule in or rule out any particular options. It aims to elicit comment and suggestions. These will inform consideration by the Government of a strategic package of reforms in the context of broader Budget considerations.
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Any comments or
queries should be sent to:
highered@dest.gov.au
Department of Education, Science and Training
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