Lawrence Cram argues that Australian universities use large surpluses from undergraduate teaching to support research. A similar argument was made in the US last week, in a Cato paper by Vance Fried (really). Fried thinks that the real costs per American undergraduate are between $5,000 and $9,000 a year, quite similar to Cram’s estimate for Australia. He thinks that not-for-profit unis in the US are more profitable than the for-profits, presumably as the former can use their brands to charge higher fees.
Australia’s largest for-profit higher education provider, the Navitas group, is a listed company so their annual report provides some insight into their operations. Indeed, it provides more interesting material than university annual reports. About 30% of Navitas’s revenue from its university programs divisions is earnings before interest, tax, depreciation and amortisation (EBIDTA). For a commerce course in 2010 they charged international students about $18,000 a year, and local students $15,400. Presuming similar margins this implies per student underlying costs of between $10,800 and $12,600 per student.
However, they are also paying hefty royalties to universities – typically, Navitas feeder colleges are located on university campuses, and teach the same subjects as the first-year courses at that university, though with smaller classes. The annual report says they paid $131 million to university and consortia partners in 2010, 23% of their total revenues. I’m not sure how much this represents genuine costs for the university (does Navitas pay for the buildings?) and how much of it is essentially a rent they can extract by offering articulation for Navitas graduates.
The figure below copied from the annual report shows for an established campus EBIDTA can approach 50%, and that they are spending more on royalties to the university than they are on teaching. It suggests that with economies of scale, and subtracting Navitas profits and uni royalties, costs are at the levels Cram suggests or below.
So what does this say about university profits? An analysis of average fees for university business courses found that for international students they were just under $19,000 a year in 2010, but $25,000+ in some unis. I’m sure unis employ more senior and expensive staff than Navitas, run campuses rather than rent buildings, spend more on administration, and have a range of student services that Navitas does not.
But given that some are charging $10,000 a year more than Navitas, we may have the same situation that Fried argues exists in the US, with not-for-profits generating larger surpluses than for-profits.
Of course from within the universities, it doesn’t feel like they are flush with super-profits. They operate, as Fried suggests, according to Bowen’s law: ”colleges raise all the money they can, and spend all the money they can raise”. This means that they have very high cost structures, and money always seems tight.
It again raises the issue of whether we should be looking for cheaper ways to expand the higher education system.