Knowing the value, but not the cost

The Coalition Government may have dropped its plans to deregulate university fees, but the question over how much government and students should pay for a degree remains a live issue in this year’s Federal Election.

The problem is, no one has a firm idea of what a quality degree should cost anyway.

In its election budget, the Government put off any policy decisions on higher education until after a post-election consultation. However it made it clear the sector needs to be “financially sustainable and affordable”, noting that under the current system of uncapped subsidised bachelor degree places, spending on higher education since 2009 has grown at over twice the rate of GDP growth.

Labor has committed to providing ongoing growth in government per student funding under its “student funding guarantee” that it says will remove the need for higher student fees. But the sector remains wary of the potential for funding cuts in the future, as happened in the Abbott and Gillard governments.

Ever since the Abbott Government proposed to deregulate university fees to make up for funding cuts in the 2014 Budget, there has been intense debate on how much students should pay. Raising student fees to make up for the government’s budget cuts, whether by lifting the current cap on fees or removing it altogether and deregulating fees, sparked arguments over fairness that went nowhere – no one could say what fair was.

In the end the community had no confidence that students would get value for the extra fee they would have to pay and the government itself faced a potential blow out in bad HECS debts on the back of expected fee hikes. The Senate cross benchers simply said no.

But what if there was an agreed cost on delivering a degree? It could provide a transparent baseline on which to base decisions on funding, and who pays. Funding wouldn’t be based simply on what funding was available but on what it objectively takes to deliver a quality a degree.

Here the case for a resources benchmark is discussed by University of Melbourne Vice-Chancellor Professor Glyn Davis, LH Martin Institute director, Professor Leo Goedegebuure, Nous Group Principal Robert Griew, and Mitchell Institute tertiary education expert Professor Peter Noonan.

Cost is a baseline for decisions

University of Melbourne Vice-Chancellor Professor Glyn Davis argues a “resourcing benchmark” is critical to a policy debate on university funding. Current funding, he argues, is based on an impenetrable system of subsidy levels that vary significantly between disciplines.

For example, on average the government provides 58 per cent of the cost of an undergraduate degree and students take out HECS loans to pay for the difference. But in law and economics the government contribution is just 16 per cent of total costs, but rises to around 70 per cent for nursing and medicine.

“The lack of a clear and settled formula for the cost of quality education undertaken in a strong scholarly environment makes it difficult for students, universities and governments to judge what is reasonable,” says Professor Davis. “Through enhanced understanding of the cost of delivering quality education, broad agreement can be reached about a reasonable benchmark of total per student resourcing for each area of study at all course levels, according to an agreed level of quality.

“Adoption of a resourcing benchmark would allow the commencement of an informed conversation about policy and funding measures – including setting the Commonwealth and student contributions, and a reasonable growth path for a sustainable total per student quantum of resources – to put the teaching system on a sustainable resourcing path into the future.”

Professor Davis argues such transparency would put fresh scrutiny on universities, allowing them the opportunity to demonstrate value for money and providing the government with ammunition for holding universities to account for their costs.

“A resourcing benchmark exercise undertaken collaboratively by universities and governments would establish whether there are genuine cost differences between modes of delivery, types of education, the course level, the scale of operation and the characteristics of the educational and scholarly environment,” Professor Davis says.

The university management and governance expert

Higher education management expert Professor Leo Goedegebuure, director of the University of Melbourne’s LH Martin Institute, said he would welcome a “resource benchmark” as a long overdue opportunity to make costs at universities more transparent.

But more than that, he believes that scrutiny on costs is likely to highlight ongoing inefficiencies in the sector and pressure universities to reassess how they operate to reduce costs. According to Goedegebuure:

To say that the current funding model has outlived its usefulness would be an understatement.

He warns that rather than simply benchmarking costs, the tougher task is to determine what a quality higher education should cost, or else a benchmarking exercise will simply reflect existing inefficiencies.

“The risk is that a benchmarking exercise will entrench ingrained inefficiencies stemming from the inexorable growth of administrative staff and the increased specialisation and research orientation of academic staff, both of which drive up costs very significantly,” says Professor Goedegebuure.

“So whilst benchmarking might help in teasing out current costs of education, they inevitably inflate these costs because of internal inefficiencies.”

The problem of course it that we don’t know what the minimum cost is of delivering a quality higher education. And that, says Goedegebuure, is a problem the sector needs to confront if it is to secure political support for long term sustained funding.

“We all know that we can make education as expensive as we like, adding all sorts of bells and whistles, including teaching very small classes. But we know very little about the minimum costs it takes to teach a quality course with good student outcomes – decent subject knowledge, good analytical skills, teamwork and communication skills, a bit of creativity and entrepreneurship, and a solid moral compass,” he says.

“This is highly problematic as it leaves the sector vulnerable to political vagaries,” Professor Goedegebuure says.

“Undertaking inter-institutional benchmarking is a good thing, because it is a first step at becoming a bit more transparent. But it only is a first step.

“We need to get very serious indeed about the cost side of our industry and the ultimate value for money proposition that we put to both policy makers and the public.”

The Senior education bureaucrat

Robert Griew, former associate secretary at the Department of Education, says the biggest hurdle for setting a resources benchmark would be persuading government to accept it.

He warns that government will be wary of what could amount to relinquishing control over funding on a serious budget program like higher education. He said the process of setting a benchmark would likely have to involve a third party body or group that would assess the evidence and decide a benchmark price. That would effectively lock in the government on a funding level that it would have to ensure was met through a combination of its own funding and funding from students.

“Government will be reluctant to hand over to third party prices setters,” says Mr Griew, who is now a Principal at consultants Nous Group, and a fellow at the University of Melbourne’s Centre for the Study of Higher Education.

“In the context of budget settings, where there is never enough money for all the competing demands placed on government from health to defence, it would be naïve to think government would welcome the funding pressure from such a benchmark.”

He says that in government there is an inevitable compromise between setting standards for a product or service and the cost of meeting those standards. For example, he notes that in setting standards in Australian agriculture the government needs to balance the need to ensure the safety and high reputation of Australian produce, with the potential cost of those standards making Australian exports uncompetitive. Higher education, he says, is ultimately no different. According to Mr Griew:

There is an inherent tension between standard settings and rational policy making.

Mr Griew also warns that the process of setting a benchmark price for higher education isn’t simple because the product itself is so diverse, and outcomes are partly dependent on the commitment and abilities of students.

He says establishing a resource benchmark in hospitals, even though complex, is a simpler exercise, as variables such as the time spent in hospitals by patients and the costs of staff time and consumables are more uniform in nature and are collected.

“Setting a resource benchmark for higher education is a non-trivial technical exercise.” He says counting costs is much harder and the nature of the product is more variable.

Mr Griew says the case for transparently determining some sort of resource benchmark for higher education might, however, be strengthened if government sought to introduce some flexibility to student fees and opted to set a price ceiling or adopt a subsidy taper system as a way to exert downward pressure on fees. A taper system would work by reducing the subsidy a university receives if it charges fees above a set level.

Mr Griew says some sort of a benchmark would be needed to determine where a ceiling would be set or the price increments at which government funding would reduce under a taper system, such as that proposed by Victoria University Vice-Chancellor Peter Dawkins and economist and HECS architect Bruce Chapman.

The tertiary education policy Expert

Professor Peter Noonan, policy expert at Victoria University’s Mitchell Institute and a fellow at the LH Martin, supports the idea of establishing a “resourcing benchmark” for higher education. He argues it is an essential first step for making defensible decisions on the balance of public and private funding for higher education.

It makes it easier to come to decisions on the balance between public and private funding.

Professor Noonan says “it would also force the government to decide what it is it is paying for, whether it is paying just for teaching, or whether it is also paying for a research component in teaching and whether it is paying for the community obligations expected of universities”.

He argues that a resources benchmark in that sense could present an opportunity for government to drive efficiencies at universities in a more transparent and effective manner.

Currently many universities cross-subsidise their research costs from teaching funding. Professor Noonan argues that if teaching money were more explicitly focused on teaching, it could result in greater efficiencies that could help sustain the demand driven system. At the same time it would allow universities to better lobby for increased and explicit funding for research and community engagement.

“A benchmark could be used to force some efficiencies, because the question is, can we afford to continue to expand participation based purely on the current university model? Probably not,” he says.

“In my view the benchmark price would primarily be focused on the cost of teaching, while recognising that all academics should be involved in scholarship. There may be an element in there for the cost of research linked to teaching, but I think universities would have to go through a much more transparent process internally about how they fund research.”

A resources benchmark could be developed based on activity-based costs, he says. But to lessen the danger of costs simply matching available funding, Professor Noonan suggests that the benchmark could be partly based on price signals from institutions being asked to declare the prices they would offer. He says this would inject more efficiency and flexibility into the benchmark.

Professor Noonan also argues that government wouldn’t be obligated to necessarily meet the benchmark. But he says it would provide transparency over what students should have to pay once government funding is taken into account.

“At any point government can apply an efficiency to a benchmark price. The fact that a pricing body recommends a particular pricing level doesn’t mean the government is obligated to pay it. The extent to which the government isn’t prepared to pay it then opens up the question of what is the balance between government funding and student contributions,” he says.

Professor Noonan believes there is no choice but to set a resources benchmark. He notes that the current funding model began as a resources benchmark but then got skewed by decisions based on the perceived value of one degree versus another, and the earning power of different graduates.

“If we are a going to try to continue with the existing system we might as well go back to some form of simple block funding because there is no sense or logic to the current pricing bands.”

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