Is the review of the Nelson reforms pointless?

Can a review that rules out the only possible solutions to the problems it identifies do any good? That’s the question we face with the first phase of a review of the Nelson reforms announced by the government yesterday.

This part of the review is of the ‘funding clusters’, the dozen discipline groupings that determine how much universities receive for each student place they provide. The total is a combination of the Commonwealth contribution and the student contribution.

Even within the inherent constraints of a centrally planned system this is a mess. The amounts for each cluster have their origins in the ‘relative funding model’ used in the early 1990s to equalise funding between the universities and the old Colleges of Advanced Education (now known as ‘Dawkins universities’) when the distinctions between them were abolished. This was not a costing exercise; it was an examination of historical expenditure. Each discipline was to receive a multiple of a base amount. For example, law places received the base amount, and medicine places 2.7 times that.

Though intended as a one-off exercise, Nelson brought the RFM back for 2005. The major change was that he would allow universities to charge students a 25% premium on the student component of the funding, ie HECS as it was then. This had the effect of altering the relativities a little. For example, because the student component of total law place funding was high, a 25% increase on that translated into a 20% overall funding increase. Across in medicine, which is still mostly government funded, it worked out at only a 7% increase.

Further complicating matters, from a decision of the Keating government in 1995 to index university grants at less than inflation universities took a real cut in per place income every year until 2005, when a three year 2.5% per annum conditional increase took effect. That ends next year, after which universities will return to real annual cuts per place.

Every funding decision for the last 15 years has had one thing in common: no account was taken of actual costs. In one of their many tactical failings, universities have never published estimates of actual costs, but it is indicative of the poor quality of higher education policymaking that we do not have this information at any but the most general level.

What we can say is that universities have survived by enrolling full-fee paying students. By mixing loss-making Commonwealth-supported students with profit-making full-fee students, universities have achieved average per student revenue sufficient to keep themselves solvent.

Structurally, however, this system has major problems. It leaves universities very exposed to downturns in the international student market. It makes Australian students relatively unattractive, to the point where universities are increasingly reluctant to accept new places being offered by the Commonwealth. In disciplines where there is limited scope for either or both of cross-subsidy from fee-paying students or economies of scale, cuts are often necessary. The recent discussion about the decline in Australian literature subjects is probably at least partly explained by this. More seriously, disciplines like maths and some of the basic sciences are reporting similar problems, as are all the key health courses.

From the Commonwealth’s perspective, even though they are spending more than $3 billion a year subsidising coursework they have no capacity to fix any of these problems. At the same time, they are spending significant sums subsidising courses like law and commerce that could manage in the market without government support apart from FEE-HELP loans.

The trouble with the review is that while it recognises that some disciplines are struggling, it rules out any significant overall increase in government funding or an increase in student contribution amounts. It’s impossible to fix the aggregate disparity between costs and revenue without changes to one or both of government and student contributions. It would be sensible to move Commonwealth money away from law and commerce, but only if students can be charged more. Otherwise funding crises are just being shuffled between faculties.

In itself, this review’s terms of reference rule out real solutions. It’s only likely value is in opening up the whole issue of funding, and perhaps that will help make sensible outcomes more attractive in a sector where, as I have had to explain to many bemused people over the years, the fact that something is absurd has never been regarded as a valid objection to it.

The initial signs on that are surprisingly encouraging. Even an old-school public funding Vice-Chancellor like the University of Western Sydney’s Jan Reid was reported today as saying:

“The major problem for us is that we produce a large proportion of the states’ nurses and teachers …. and the absolute cap on HECS for those disciplines is creating unsustainable pressures.”

If we are going to have a viable higher education system more price flexibility is an essential component. The Vice-Chancellors are working it out, even if Kevin Rudd is yet to grasp the point.