Is not-for-profit higher education more profitable than for-profit higher education?

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.

11 Responses to “Is not-for-profit higher education more profitable than for-profit higher education?

  • 1
    Sanjeev Sabhlok
    June 19th, 2011 20:21

    Some cheaper ways to expand higher education. This will happen, I believe, regardless of attempts by monopoly providers to protect their patch. Indeed, those Australian universities that create a solid business model based on these basic ideas can cap into huge markets abroad, e.g. in India.

  • 2
    conrad
    June 19th, 2011 20:44

    If Navitas is running the courses I think they’re running (I should find out if it is them who are really doing all this shoddy first year and “university entrace” teaching), I’m not sure that they are a good comparison for anything apart from the dodgey visa-entry courses that the government has been trying to close down. The same argument holds true for many of the big US universities. Sure, they charge oodles, but the quality of the education is often amazing compared to places like Aus that do it on the cheap, but via your argument, those big US universities must be profiting even more. Given this, I think you need to equate for the quality of education before making comparisons.

  • 3
    Robin Hanson
    June 19th, 2011 23:33

    It seems we subsidize college at the demand end, and then tax on the supply side. Any idea whether the net effect is a subsidy or a tax?

  • 4
    Andrew Norton
    June 20th, 2011 04:55

    Conrad – The curriculum is the same. The contact hours appear greater (4 hours a week per subject, I think it is usually 3 for a public uni commerce course). The campus is the same. We don’t have any real info on class sizes in either public or private, but Navitas claim that that theirs are smaller. That leaves the only supply-side variable as quality of teaching staff. The most important variable however is the quality of the student before they arrive, and Navitas is clearly targeting students who could not gain direct entry. So it is possible that Navitas’s value add is higher than the public unis, but people still perceive their graduates as ‘worse’ in absolute terms.

    But for my basic point of analysis here, the cost of delivery, I dont think the quality of student matters much – other than that all other things being equal it would increase costs if the quality is lower.

  • 5
    Andrew Norton
    June 20th, 2011 05:00

    Robin – Navitas would be a rare higher education provider that pays more in tax than its students receive in subsidies (as most of it students are internationals who are not eligible for them).

    Sanjeev – If lectures are what unis are really selling. There have always been much cheaper ways of conveying the knowledge (just read the textbook, for example). But despite the cheaper alternatives, the traditional model remains very popular, and unis able to charge increasing rents.

  • 6
    James
    June 20th, 2011 08:37

    Thanks for the article Andrew, an interesting read.

    Conrad, the contact hours are greater and our classees are smaller hence providing the increased teaching support our students need.

    The Aus government was targeting dodgy vocational education providers who supplied cooking and hairdressing courses for PR status, not quality, stable higher education providers like Navitas.

    Our teaching staff are university partner approved and more often than not teachers who work at the partner university and who want to earn some more income by teaching the same subject for us.

    In terms of graduate outcomes our extensive graduate surcveys indicate that our students perform as well as, and sometimes even better, than direct entry students.

    Anyone wanting to learn more about the quality of Navitas colleges should have a read of any one of the seven AUQA reports we have had done in the last 9 months. They speak for themselves.

  • 7
    conrad
    June 20th, 2011 12:15

    “Anyone wanting to learn more about the quality of Navitas”
    .
    First of all I’m not sure it is Navitas that is providing the poor quality courses (as noted). I’m also under the impression there are two types of courses offered — ones is basically subcontracted like OUA works, and the other is essentially independent (Kaplan has both of these). I’m simply saying that there are providers out there that are basically taking students that either have no ability or they are not being taught to the standard needed in many university courses despite the claims. This leads to these students almost inevitably failing or doing poorly, and there seems to be ever increasing numbers of them. As far as I can tell this is entirely exploitative. My belief is that if you take these students under these claims, you should be obliged to provide a service that gets them to that level. Simply saying:”They were poor to start with” does not satisfy what I think are reasonable requirements. As for pointing to AUQA stuff and saying: “this shows the quality is fine”, you may as well point to the Easter Bunny and ask his opinion — all AUQA shows is that you can create a paper trail (most governing society’s audits are far better and harder to get through). You could spend 6 weeks teaching a course on the Tellietubbies and still satisfy AUQA requirements. No doubt if you did the students would be happy too.

  • 8
    ken n
    June 21st, 2011 14:46

    Interesting. If there is cross-subsidisation from undergraduate courses to graduate courses and research (I think that is what is being suggested) there should be an opportunity for some organisation to charge lower fees for undergraduates.
    I suppose some would say that a university gets its ranking and brand from research so an undergrad only institution would have difficulty attracting students.
    Anyone care to comment on this?
    Something I have wondered – I suspect a motivation behind many academics in seeking research grants is to be able to drop undergraduate teaching. This would partly explain the proliferation of “centre” “institutes” and other non teaching bodies.
    Does anyone have any idea what percentage of academics do no undergraduate teaching?

  • 9
    conrad
    June 21st, 2011 23:50

    “Something I have wondered – I suspect a motivation behind many academics in seeking research grants is to be able to drop undergraduate teaching.”
    .
    The main motivation is that it’s the main way people get promoted and the main way people stay competitive if they want to change jobs. If you don’t get money then you won’t get promoted as fast (or at all). Everything else is secondary (e.g., doing good science or good teaching).

  • 10
    Yaz
    June 27th, 2011 11:23

    “It again raises the issue of whether we should be looking for cheaper ways to expand the higher education system”

    Should we be looking for ways to expand the higher education system AT ALL?

    Do we know WHY we want more people going to University? Are there more jobs that need those skills, or just simply not enough jobs? Is this all about the mining industry, and not about long-term need?

    I understand that almost 100% of Taiwanese students go to University, with no blindingly obvious benefits to that society (I am happy to be corrected on this point).

  • 11
    Andrew Norton » Blog Archive » Why do public universities use feeder colleges?
    July 1st, 2011 05:53

    […] 4) This is a way of by-passing the prohibition on full-fee undergraduates, and so is profitable for the universities – whether they offer the courses themselves or pick up royalties from a private provider. […]