Students will pay more for research – they already are.

This is an edited transcript of a presentation to the Australia Needs a Brighter Future conference on 13 March 2015 — a few days before Deregulation Mark II was voted down.  It is based on my submission for The Australia Institute to the non-government Senate committee inquiry into the Bill. The committee report is a good read and it lays out a way forward, starting with a review into alternatives to full deregulation and a rerun of the 2011 Base Funding Review.

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Presentation to A Brighter Future for Australia Forum

13 march

How did the government and vice chancellors get their deregulation pitch so wrong? It’s as though they’ve tried to sell a new product by letting the customer become anxious about its price, instead of explaining how good it is.

After ten months of controversy about how high fees will go, we’ve had remarkably little attention to a more fundamental question.  When fees go up, what will students be paying for?

Surely this deserves greater focus, from critics and proponents alike? Surely the vice chancellors should be explaining how much of the fee increases will actually be spent on teaching students. Either they’ve missed one of their strongest arguments, or they are trying to avoid explaining what deregulation is actually for.

Deregulation is not just about students splitting the bill “50:50 with the taxpayer”– as the government still insists, and still no one believes. It’s about getting students to boost university cash flows. Why?

Universities have been bringing in bigger surpluses: 8 per cent in 2013, up from 4 per cent in 2002. Per-student funding is stable, notwithstanding threats of cuts. Universities have voluntarily enrolled more students under the demand driven system. Yet we hear about cost-cutting, over-stressed staff and very large courses. This should have meant fees have fallen, but they haven’t. Why?

Look to the incentives. Universities face very strong incentives to use student revenue to pay for research. Concerns about this have now been voiced by Brian Schmidt, Stephen Parker, Bruce Chapman, ex Kim Carr advisor John Byron, even Ian Young.

As late as October 2013, Ian Young was asking “is it appropriate for students to pay for research?” Less than a year later he argued deregulation would make our universities “brilliant” in global rankings. Whatever the wisdom of the rankings obsession, why should students pay for it? Rankings are overwhelmingly based on research.

The reality is students have already been paying more for research– universities ‘profiting’ from students, as Andrew Norton has put it.

This is clear from ABS and government data.

  • Research was 41 per cent of university spending in 2012, up from 31 per cent in 2002.
  • This was during a period of increased surpluses and increased student enrollments.
  • While direct research funding increased, there was much faster growth in research funded out of ‘general university funds’, including student revenue. The cross-subsidy amounted to 16 per cent of all university spending in 2012, up from 9 per cent in 2002.
  • In 2012, across the sector, revenue for or from students delivered more than $2.8 billion towards research. That is, 1 in 6 student dollars went towards research, equivalent to three quarters of research cross-subsidy.
  • This assumes no investment or donation income went to teaching, and assumes universities did nothing other than teach and research. The real amount is surely higher.

International and domestic full-fee paying students provide the biggest profits.  Victoria’s Auditor General says international students pay double what they cost. Deregulation would encourage universities to treat domestic undergraduates in a similar way.

But domestic undergraduates are already a source of research funding. The Base Funding Review claimed that 6 per cent of per-student funding– grants and fees—went towards research on average in 2010. They said it would be reasonable up to 10 per cent.

This seems modest, but even this is a cross-subsidy of around one billion a year. That is how much fees would be reduced or teaching spending increased, if universities prioritised teaching over research. What’s more, the study is out of date. Since the demand driven system, unis have packed out lectures and tutes, as new students bring the same revenue but have low marginal costs. So the cross-subsidy will have increased.

Of course averages mask variation between institutions and courses. University of Adelaide Vice Chancellor Warren Bebbington recently warned: “no-one should think that the current system is fair; some students pay as much as 400% of the cost of their education, others as little as 8%”.Yet this claim, while astonishing, is not an argument for deregulation. If what Bebbington describes is true and is as he says unfair, it would surely be even less fair to shift even more of the costs of research onto student debt.

Chapman and Schmidt have called this unreasonable and unfair. It seems the public agrees. In a national survey held before the 2014-15 Budget, The Australia Institute asked whether people agreed that uni fees should not increase beyond what it cost to teach students. 3 in 4 agreed and only 1 in 20 disagreed.  That was despite an ambivalent response at the time about deregulation—since hardened into broad opposition.

So if students should pay for research, the public needs to hear the argument. If the argument is that students should be happy to pay for research simply because they may earn more as a result of their degrees, surely we should do this fairly. Higher income graduates should pay more, rather than pay off their loans quicker, while lower income graduates pay less. This is like paying dividends, public returns for public investment in human capital.

But if deregulation advocates want to stay with the current pretext that fees are sensibly linked to teaching costs, they need to up their game to explain why deregulation is fair. We need more disclosure of how student revenue is and will be spent, and we need safeguards. If that is too hard, we should not run the deregulation experiment.

The government says the ACCC should stop “unfair” fees or “gouging”. But there’s no mention in the Bill. Indeed, the ACCC lost 7 per cent of its staff last year. Really the ACCC will just monitor fees – to watch them rise. As an ex ACCC commissioner says, this is a “waste of time”.

To play any real role in limiting profiteering, a regulator would need new powers to intervene on fees. Alternatively, constraints could become part of funding compacts. But any such arrangement would also need much greater disclosure of university finances.

We also need to address the perverse incentives. In particular, research is not fully funded: every new dollar of project funding leaves the university looking for more money elsewhere in the budget. This makes little sense. Increasing research funding, or at the very least re-organising existing funding, would limit this perverse incentive.

But more fundamentally, we need to challenge the dominant narratives about a well-functioning sector. We need to challenge the obsession with research rankings. And we need to put much greater focus on educational quality. That’s the only way to have a real debate about what funding reform is for.

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