Cash control would ensure unis' survival

THE failure to allow universities to set their student fees will have serious consequences.

MAX Corden has a great term for the regulation of higher education in Australia: "Moscow on the Molonglo" (the Molonglo is the river that flows through Canberra). For many years, the central planners in Canberra have imposed all sorts of rules and directives on universities.

These have included the number of students, the courses the students can take, penalties for over-enrolment and penalties for under-enrolment. There was a time when Canberra banned airconditioning in university buildings. And, of course, the reporting requirements have grown like Topsy over the years, to the point that university administrators have become increasingly bogged down reporting back to Canberra.

Following the Bradley report on higher education, released in 2008, a series of changes are about to come into effect. In fact, many universities have begun to respond to the deregulation of student numbers that will be implemented in 2012, by boosting their current number of students.

But Corden need not worry his phrase will have only historical value: central planning is alive and well in Australian higher education, particularly in relation to the regulation of student fees.

The Bradley report was always a curious mix of deregulation (funding students rather than institutions) and more control over universities. The establishment of targets - for the proportion of the population with higher education qualifications, for instance - sits uneasily with a system based on the private decision-making of potential students.

The notion that all qualified students should be entitled to a place at a university begs the question of what is qualified. Given the low entry scores that allow students at present to undertake various courses, it is not apparent that permitting even more students to gain entry to university can be achieved without further degrading the quality of higher education.

Having said that, there has clearly been excess demand for particular courses, as opposed to unmet demand overall. Allowing universities to expand popular courses without being constrained by the central planners is a step forward.

The core weakness of what is being proposed is the failure to deregulate student fees at the same time as freeing up the quantity side of the equation. Moreover, the timing of this failure to synchronise policies is extremely unfortunate as universities are being adversely affected by the downturn in the number of overseas students. Also, the student-staff ratios, on the face of it, look disturbingly high.

There are several reasons why universities should be allowed to charge higher fees to students. For one thing, research clearly shows the returns to higher education are essentially private (in the form of higher earnings and employment rates), rather than social. In a survey of returns to investment in higher education in Europe, George Psacharopoulos finds that the private returns exceed the social returns by an average of 2.3 percentage points.

Second, the public funding of the teaching component of higher education essentially involves a redistribution from the poor to the rich, given the socio-economic background of the student body. Indeed, many parents find it is a cheap round when their children complete secondary schooling at a high-fee non-government school and progress to university.

Of course, there is a case for ensuring students from poor socio-economic backgrounds can afford to participate in higher education. The HECS scheme is well suited to this role by providing income-contingent, zero real interest rate loans to students. Student fees are only repayable when graduates earn a minimum income level, with the outstanding balance inflated by movements in the CPI. In this way, up-front fees do not deter participation of students based on their parents' or their own financial circumstances.

So what then is the federal government's objection to allowing universities to set their own fees, perhaps with some upper bound? The Cameron-Clegg government in Britain has recently moved in this direction by permitting British universities to charge undergraduates fees of up to pound stg. 7000 ($11,400) annually.

By contrast, the Rudd-Gillard government has moved in the opposite direction, by banning full fee-paying domestic students and refusing to budge on deregulating fees. The Group of Eight, representing Australia's oldest and research-intensive universities, has clearly decided it has had enough and has split from the other universities on this issue.

If the thinking is it is somehow unfair to allow different universities to charge different fees for the same course, it is worth thinking through the implications of refusing to budge on this issue. The Go8 universities will have little choice but to expand their enrolments. This in turn will take student numbers away from the less desirable universities, including the regional ones.

Any significant fall-off in student numbers, both domestic and overseas, at these universities is likely to cause financial distress, leading to belt-tightening, staff cuts and possibly insolvency. At this point, the federal government will almost certainly need to bail out these failing institutions.

The alternative is to provide all universities with the flexibility to set their own student fees. In all likelihood, the Go8 universities would increase their fees above the present regulated levels and, in some instances at least, actually restrict their student intakes. Active measures to encourage students from poorer backgrounds would be part of their mix. Other universities would find it easier to compete on their own terms and ensure their survival.

Judith Sloan is a professor at the Melbourne Institute of Applied Economic and Social Research, University of Melbourne.