Universities should be allowed to set own fees

PROFESSOR Max Corden, doyen of academic economists in Australia, coined a wonderful phrase some time ago to describe the regulation of higher education in Australia: Moscow on the Molonglo (the river that runs through Canberra). This phrase pretty much summed up the vice-like regulations imposed on Australian universities in relation to the number of students that could be accepted into particular courses and the prices that students could be charged, among other things.

There were high hopes in higher education circles that the election of the Labor government would produce a significant relaxation of these tight controls. How could something be revolutionary -- recall the Education Revolution -- if all the parties were tied down by complex, bureaucratic, one-size-fits-all rules?

There was some reason to hope when the government decided to introduce a demand-driven funding system where all undergraduate students accepted into an accredited higher education course would attract government funding. This system will come into effect from next year, replacing centrally determined quotas.

Having opted for a demand-driven funding system, the obvious next question is: how much will each student attract in terms of government funding for the universities? And given the co-contribution that students make to their course costs, the further question is: will higher education providers be able to set the prices, perhaps within some limits, for the courses the students choose? In other words, will there be a (partial) deregulation of fee-setting?

These questions were addressed in the recently released Higher Education Base Funding Review, chaired by former South Australian education minister Jane Lomax-Smith.

For those hoping for a clean break from Moscow, the report is a major disappointment. It recommends ongoing central control of fee-setting, while proposing a highly inequitable fee schedule that ignores the strength of demand for particular courses and the incomes of the graduates.

Nursing students, for instance, will face steep fee rises, while law students will see their fees decline in real terms. It is hard to see how this could possibly be politically acceptable. But more importantly, the proposal fails the tests of efficiency and equity. The review distinguishes between the private and public benefits of higher education. Those who undertake higher education earn more on average than those who do not; these are the private gains. But there are likely to be some gains above and beyond these private gains, although many of those cited in the review are in fact private benefits, such as higher labour force participation and lower unemployment. Greater social cohesion, less crime and more interest in civic matters are often cited as examples of the public benefits of higher education.

Much is also made in the review of the higher tax revenues associated with larger numbers of graduates. But to suggest that this is a rationale for government funding of higher education is very curious; it is the equivalent of providing future graduates with a large upfront tax rebate to undertake their studies.

The review jumps to the conclusion that the appropriate split between private and public benefits is 40:60. That is, 40 per cent of expenditure on higher education courses is private benefit and 60 per cent public benefit. And this split is assumed to be the same across all courses. A Bachelor of Arts specialising in cultural studies is assumed to generate the same ratio of private to public benefits as a degree in law or one in nursing.

Having decided on the split between private and public benefits, the review then estimates the average costs per student incurred by universities in delivering different courses. These costs are then compared with reimbursement levels and adjustments to funding are proposed. The recommended fee schedule follows the different costs of courses.

Now the astute economics graduate might ask: how is the demand for different courses being taken into account? If left to their own devices, universities would charge a price for each course that would not deter the marginal student as long as costs are recovered. In fact, the Lomax-Smith review ignores the demand for courses (and the correlated incomes of graduates) and opts for a cost-only reflective fee schedule. The effect of this proposal will be to drive students away from high-cost/low-graduate income courses (nursing and science), to low-cost/high-graduate income courses (law and economics) and high-cost/high-graduate income courses (medicine and dentistry).

Not only would this arrangement be a gift to all law and economics students, it could deter universities from providing places in high-cost courses for which demand is weak. In fact, it could be rational for some universities to specialise completely in low-cost/high-demand courses.

For all the faults of the current, rough-and-ready fee schedule, at least it takes into account the fact that some low-cost courses produce high income earning graduates and students should accordingly be charged a higher price.

One of the proposals of the Lomax-Smith review is that universities should be able to nominate flagship course areas that will attract double the funding and double the fees, but be limited to 5 per cent of total student load. There is no doubt that this arrangement will be gamed by the universities for uncertain effect. And is it really fair that some students will be able to study in the flagship areas where "universities will be encouraged to develop excellence in teaching and learning", according to Lomax-Smith, while most miss out? Should universities not encourage excellence in teaching and learning for all?

So has Corden's witty phrase about higher education regulation outlived its uselessness? Sadly, the actual and proposed changes to higher education funding and regulation point to a deep, on-going presence of top-down central planning with all its inefficiencies, unintended consequences and high compliance costs. With the one exception of the invaluable innovation of income-contingent student loans (HECS), there have been few policy measures related to universities of any merit over several decades.

Overseas student income has been used to cross-subsidise the research and overheads of universities, while allowing successive governments to underfund the actual education of domestic students in the context of strict across-the-board regulation of student fees. Freeing up the number of places without freeing up the setting of fees is a recipe for disaster. Higher education policy is as muddleheaded as ever.

The fork in the road that the Australian government should have taken long ago was to create a truly devolved higher education system which granted universities considerable autonomy.

By allowing them to set their own fees, universities would be well placed to meet participation targets for students from lower socio-economic backgrounds by imposing higher fees on the very many students who are currently undercharged, including those who transfer from non-government schools to higher education. And rather than use contrived programs such as flagship courses, universities would really be free to experiment and innovate in order to meet the broad obligations imposed on them by the government.