Labor’s full-fee phase-out policy shambles, and what to do about it

My criticisms of Labor’s policy of abolishing full-fee undergraduate places at public universities had a good run in The Australian‘s Higher Education Supplement this morning. Amazingly, even though Labor has being saying for 10 years that they will abolish these places, they cannot give basic details about how it will be done. A bit like the Americans invading Iraq, it seems like they have little idea about how they will run the country once they have won the war.

What we have so far is that these places will be phased out beginning in 2009, and that the universities will be compensated to the tune of $300 to $400 million. But as I pointed out to the HES, from a public policy perspective the most important issue is not the compensation (though more on that below), it is what happens to the student places created by the full-fee policy.

According to DEST, in 2006 there were 13,762 full-fee domestic undergraduate students at Australian public universities (the number of effective full-time places would be lower, but they have not published that number yet). That’s about 2.5% of all domestic undergraduate students. Are we supposed to remove 2.5% of the system’s undergraduate capacity? Shrinking the number of places in disciplines with graduate undersupply – there are many full-fee students in medicine, dentistry and veterinary science – doesn’t sound very sensible, and is hardly consistent with Labor’s rhetoric about skills shortages.

Perhaps the ‘compensation’ isn’t really ‘compensation’, it is just money to pay for Commonwealth-supported places (CSPs) instead, as the full-fee students complete their courses sometime in the future. But the HES couldn’t get a straight answer:

Yesterday the HES put a series of questions to Mr Smith’s office, including what would happen to the extra places underwritten by full fees, but his spokesman said it was premature to answer.

‘Premature’ after a ten year policy pregnancy! Stillborn seems closer to it.

But if the money is ‘compensation’ for the financial losses of universities, how should it be calculated? For a start, it is not clear that universities would incur significant losses to begin with. It makes no difference, from a financial perspective, whether full-fee students are Australian or international. So ‘compensating’ universities for the loss of full-fee Australian places would, if they replaced them with overseas students, give them a windfall gain for doing something Labor thinks they should never have done in the first place.

If compensation is to encourage universities to keep domestic students, how much should Labor pay? Universities would hope for the difference between the CSP rate and the full-fee rate, but that means a substantial difference in the ‘compensation’ paid per university, as the level of full-fees varies a lot. If the policy aim is to maintain student numbers, then why not put the places out to tender, so that they go to cheaper universities? Or perhaps that would reveal that the base funding rate is too low, so overall it is cheaper to chuck cash at the Group of Eight than to pay everyone a viable rate? But if there is going to be an ad hoc compensation deal, for how long should it continue? After all, if Labor is letting the existing full-fee places phase out, the compensation would be for places the universities may never have been able to fill on a full-fee basis anyway.

There are several roads Labor could travel down with this full-fee phase-out and compensation policy, but there is a policy shambles waiting for them at the end of every one.

The only way out is for Labor to do what the Coalition never could – deal with the two underlying problems that made the full-fee places a second-best option replacing a third-best option. These problems are the quota system, which restricts the supply of places in high-demand courses, and the pricing system (ie the Commonwealth contribution plus the student contribution), which puts revenue per student below costs per student.

While I think price deregulation is necessary, Labor could go a long way if it set Commonwealth contributions at rates matching real costs. It seems that ‘economic conservatism’ is standing in the way of this idea. But Labor already has its $300-$400 million ‘compensation’ package that would be far better spent on fixing the price system than whatever they are currently planning to do with it. And I am sure my local member, soon-to-be Finance Minister Lindsay Tanner, has lots of silly government programmes that could be cut to raise the necessary extra money.

18 thoughts on “Labor’s full-fee phase-out policy shambles, and what to do about it

  1. I think the point you raise is a good one Andrew. Strangely it seems that university reform has been completely backgrounded in this campaign by both major parties.

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  2. I suspect Labor will do nothing. Just as they will not abolish AWAs, just rename them. I may be wrong but they don’t seem enthusiastic about it in the first place. With AWA, they to an extent maneuvered themselves into a corner. If they win, then it was worth it. With full fees, no one will remember, so they quietly drop this (with some pretext)

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  3. I noticed the OS student scare campagain managed to hit the beginning of that article (perhaps someone might point out that some groups — like those learning anything to do with mathematics — are often better than the Australian students one day, rather than always see it as a negative). The paragraph also makes no logical sense. If the places are replaced with OS students, given that most of them stay, obviously its neutral in terms of the skills crisis (possibly positive actually, as I’ll assume they have higher graduation rates in fields like engineering than the local born, they have language skills Australians generally don’t have, and they often have a harder work ethic).

    However, I think that logic is misguided — It doesn’t make sense that universities will switch places switching to overseas students if they lose the revenue — it might be true of some courses, but it seems to me that most universities are willing to accept as many OS students in as many courses as possible. The only way they could accept more would be to drop the standard of those entering. Thus Labor’s policy is a dead set revenue loser.

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  4. Conrad – There are real capacity constraints in health-related fields, both because the capital costs can be high and because of a shortage of clinical training places.

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  5. Yes I realize that’s true for a smallish number of fields (we have to deal with it where I work and its a real merry-go-round — the number of applicants for our clinical places is over 10 times the number of places). But even so, I’m not sure how the balance of fully-funded Australian students vs. fully funded OS students makes any difference to things like the skills crisis even for these fields, unless OS students are leaving Australia significantly more often than Australian-born students when they graduate. Having more OS students working in Australia is probably not bad thing, since they speak more languages probably, work harder, and probably have cross-cultural experience the average Australian doesn’t (they can therefore effectively service a greater amount of people in the community). Thus if they stay in Australia at similar rates, it should help the skills crisis.

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  6. I would think that the universities would incur significant losses. Presumably, if they could increase their intakes of (full-fee) O/S students, they would have done so already. They are not taking domestic full-fee students now out of charity or ideology, are they? One way to check could be to see if the numbers of O/S students fell after the reforms that allowed domestic full-fee students. If not, then increasing O/S numbers would require a drop in applicant quality or reduced O/S fees or a mixture of both.

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  7. Total declared revenue for full-fee domestic undergrads was $112 million in 2006 (though that does look suspiciously low). But given there are costs in enrolling students, the costs of not having them must be some lower sum.

    Full-fee O/S students never drop in the aggregate; we would need course-level data that is not published to see if a trade-off was being made.

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  8. Why are we carrying on about compensation for Unis? The bottom line is that, according to the ALP, 13,762 Australians are at Uni when they shouldn’t be. The ALP should be compensating these people and others like them who aspire to go to Uni and are prepared to pay to do so.

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  9. Yeah, I suppose “drop” was my shorthand for “drop compared to what would have happened”, which of course we cannot be certain of even if we had course-level data. But Andrew, I think in the past you have talked about universities not behaving in a rational profit-maximising manner (ie voluntarily refraining from earning revenues in excess of costs), so you may be right regardless.
    Sinclair, I agree there is loss surplus on both sides of the market, so both sides could claim a right to compensation if the places were not replaced.

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  10. If ever there was a non-core issue for Labor, this has to be it. Expect a report in about twelve months and the current system to continue, with plenty of other issues to distract the attention of everyone but the indefatigable Norton. The only problem I can see with continuing full-fee education is if a “Dr Death”-style scandal were to recur an it was found that the doctor concerned was a full-fee-paying graduate. Apart from that, full-fee students walk among us; no full-fee students hang from mock-Gothic towers, the issue changes no more votes than funding private primary/secondary education.

    Strangely it seems that university reform has been completely backgrounded in this campaign by both major parties.

    Was there a time when it was foregrounded? Must have missed that. I don’t remember John Dawkins going to a election promising to up-end higher education.

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  11. Andrew, I think in previous campaigns (2001,2004), Labor in particular have placed more focus and emphasis on what they would do in relation to university funding if elected than during this election campaign.

    Even at the last election the question of VSU was a relatively visible policy talking point.

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  12. Guy – Yes, they had far more than now in both 2001 and 2004. While I haven’t kept records, I’d be surprised if there has been any election in the last generation in which Labor has offered less than it has this time for higher education- rather surprising given the expectations raised by the ‘education revolution’ rhetoric.

    They have offered more detail on the full-fee places today; my (negative) comments about it will with a bit of luck be in The Age tomorrow.

    Essentially, there is no compensation, just new Commonwealth-supported places, but no guarantee that we won’t loses place in crucial disciplines.

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  13. Andrew

    While I agree wholeheartly with you about the need for price deregulation, I’m curious about the notion of ‘Commonwealth contributions at rates matching real costs’.
    The Commonwealth doesn’t know what the real costs are. Only the Universities know this and they have a strong incentive to say they are as high as they can get away with.
    If the government was to pay the real cost, the government would need to be running the unis and be responsible for paying the bills and making the decisions about what to spend the money on.
    If the govt doesn’t run the Unis, then they can’t pay the ‘real cost’. They simply pay the Unis what they believe to be a reasonable price for the teaching the unis provide. The unis will then make spending decisions based on the income they expect to recieve. If the Unis can provide the teaching the govt requires at a cheaper cost than what the govt is paying, the unis make a profit. If not, they make a loss and will try to get out of having to provide that sort of teaching.
    Thinking about it in this way suggest to me that paying the ‘real cost’ is impossible. Just get rid of the price controls so students can pay the unis to provide them with the training they want. But I don’t think you would disagree with doing that 🙂

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  14. Johno – I agree with this. It was a suggestion made in the world of second-best options, in which we have a fairly standard bargain-basement education offered across all public universities.

    The best they can do in this situation is try to determine historical expenditure patterns, which Access Economics did earlier this year with a limited sample of unis and found that per student spending in some disciplines exceeds revenue from Commonwealth-supported students.

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  15. Actually, I doubt the universities even know what the real cost per student in a particular course is a lot of the time. The best it breaks down to is what the costs are for a department. However, this doesn’t tell you what the costs are per student if you want to have “student costs” and “other costs”. The basic problem is you have staff that have multiple roles often using shared resources. You therefore have all sorts of weird things happeing like on-costs for some grants and not others and so on. Some roles are also in grey areas. If your department does marketing for the day as part of a faculty wide thing (even if you happen to have enough students), who should this cost be attributed too, for example?

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  16. Conrad – I agree that there are major conceptual difficulties in allocating costs, and most universities historically haven’t even tried – they just know that costs are rising more quickly than revenue. But understanding costs is vital to running a business properly, and some unis (including Melbourne) are trying to get a clearer understanding of course costs in academic and general staff time, building costs etc.

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