Sunday, June 01, 2014

Over-reach: deregulation, fees and university education

Sometimes, you have to be careful in what you ask for. In the run-up to the Federal election, the bigger Australian metro universities supported deregulation of university fees. What they hadn’t expected was that this would be combined with a significant reduction in base funding plus an increase in the interest rate on student loans. Now the alarm bells are ringing among just that group that previously supported fee deregulation.

We are in uncharted waters because we are dealing with interacting changes whose effects are very unclear. I don’t pretend to understand them. If we apply simple economics, service delivery costs mean that the price change for qualifications is going to vary very significantly between academic fields. That’s one thing that has the Group of Eight worried. If we look at the demand side, the price paid goes up by the combination of the fee increase plus the cost of the interest charge. Depending on price elasticties, that should result in some reduction in overall demand. However, because the price change varies, there are going to be differential demand effects across disciplines. 

One of my underlying points in Credential creep, the economics of education, with a dash of contract breaking or (alternatively) retrospective taxation, is that the absolute as compared to the relative return on some degrees may not be as high as people think. If people really want to be a nurse or teacher or fire fighter or an engineer, then they will be prepared to pay a certain higher price for that satisfaction. However, to the degree that people are motivated by financial return, there will certainly be demand shifts reflecting shifts in financial return at the margin. I don’t think anybody really knows what these will be. We will just have to wait and see while people crunch numbers and set new prices.

Minister Pyne places considerable weight on the suggestion that some degree prices will fall. I’m sure that’s the case, although it may take a little time. At  any price, you can get a supply so long as production costs can be sufficiently lowered. As former UNE VC Jim Barber liked to point out, new delivery technology means that cheap mass on-line delivery is possible. To the degree that the market demands or is required to demand a credential, that credential will be supplied.

One important issue ignored in the current domestically focused Australian discussion is the impact on the country’s export of education services. Measured by net contribution (exports minus imports), this is by far the largest Australian services’ export sector, yet the impact has not been discussed. Perhaps it’s not important, the changes won’t have any affect. I’m not sure about that, although I don’t have a formed view.

The political process will dictate changes, compromises, so we can’t be sure what will finally emerge. My feeling is that Minister Pyne and his advisers have not fully thought through the dynamic aspects of their proposals. They have over-reached. They will have to make changes.


Minister Pyne is sticking to his guns on his claims. Noting that the Government had eighteen months to implement the new funding model, he said:

"I'm not going to respond to the different statements or claims being made by particular vice-chancellors because at the end of the day, I think competition will drive prices down and students will be the winner in terms of quality and price." 

The Universities face a complex commercial challenge in part because the Minister can actually retaliate to any decisions they make by simply cutting funding, in part because of pricing complexity. The Minister uses the phrase at the end of the day. That allows for unforeseen price effects being subsequently corrected via competition.

Ignoring Ministerial retaliation, I commented above that price change for qualifications is going to vary very significantly between academic fields. I want to amplify that a little.

All businesses work on cost plus a margin. To the degree that they cannot control price, cost becomes the immediate driver. However, they also have to balance quality. In the longer term, they try to influence price through product differentiation and innovation or restrictive practices. They also choose which market segments to operate in. If they get all this wrong, they suffer and so may the consumer.

In the university sector where domestic prices have been fixed, the main marker of competitive performance has been varying academic entry scores. These show quite clear variations between institutions and courses. Because Australian students are increasingly immobile, most wish to or are forced to study near home, universities with high population immediate catchments have an advantage.

Distance education and international education raise somewhat different issues. In Sydney, university education is effectively an oligopoly so far as campus study is concerned. Distance education is both more price sensitive and competitive since locational advantages are largely removed. International education generally involves full price. although prices vary between institutions and countries. I spoke of Australia’s exports of education services earlier. However, we also import, with an increasing number of Australian students studying overseas. Here students have made a judgement that they will get a better personal return despite the higher price. This imposes a probably minor if growing price constraint on Australian universities.

Australia’s larger universities are big businesses. You just have to walk any one of the campuses to see it. They have buildings to maintain, debts to service, residential accommodation to fill, fixed costs to meet. You can see why the size of the initial funding cut is causing pain. The hurt is greatest at the higher cost institutions including many of the metros. Later, when they can charge fees, the equation may change to some degrees. 

Last year, a number of the bigger universities placed an effective freeze on any further expansion in student numbers, using increased entry scores to ration places. We have become big enough, they said. This is important because it affects their market freedom, including their ability to price. If you don’t want to grow student numbers and have unmet demand, you can use price as a rationing device.

How all this is going to play out on the ground is beyond me and, I suspect, anyone else for the moment, To say, as Mr Pyne did, that students will be a winner in term of price is clearly a nonsense. A key part of the exercise is to make students pay more. Mr Pyne just hopes that the competition will limit the extent or price increases. The only exception I can see is the entry of vocational providers with lower cost bases into parts of the university sector saying to students that your HECS debt will be lower if you study with us. I think that’s the real competitive constraint.

Postscript two

My highly valued if unpaid research kvd found this post on the comparative costs of international education: COMPARING THE COST OF A DEGREE OVERSEAS. Some interesting stuff,


Anonymous said...

By the same logic, that of the uni education enabling one to earn a higher income, I'm wondering why we stop at deregulating just the university sector?

Surely high, primary, and pre -schools also prepare us for the road ahead - and they are also the recipients of various government funding. So why not start the ball rolling a little earlier in life? Let's monetise those earlier years as well and, with a suitable rate of interest, it might be possible to then offload the government's entire education expenditure.

This concentration on uni learning smacks of ageism: why aren't the little tykes also made to do some of the heavy lifting?


Jim Belshaw said...

That could be a good idea, kvd. One mustn't be too extreme. If an acceptable percentage, say 50%, of the cost of all education funded by the state or federal governments was tuned into a student loan to be repaid with interest over the life of the student, then we would be capturing the individual full life benefit from all forms of education. As you say, why discriminate?

Anonymous said...

Can't help thinking there's a reasonable business opportunity here for somebody to pick up the uni costs for Aussie students to study in New Zealand. I understand if the student 'permanently resides' in NZ for the whole course then their fees become the (cheaper) domestic student rate.

So, add in the purchase with Aus dollars of a few up-market dormitories, and I think there's money to be made in the land of Frodor for the likes of MacBank.

Bet any money you like that the NZ unis are eyeing off the possibilities as we speak...


Anonymous said...

Graphic noted as 28 Jan 2014:

- included for interest, but note 2 things:

1) Under earnings, I think the US is short a pig.

2) Again re earnings: how is it that Aus is again noted as so high compared to the US?


Jim Belshaw said...

Interesting material, kvd. I hadn't thought, I should have, of NZ as a competitor.

I will bring the hotcourses comparison up in the the post. How do you find these things?! Without saying the figures are correct, I haven't checked, the Oz minimum wage is far higher than the US adjusting for exchange rate differences. Mind you, anecdotal evidence suggests that quite a few places around UNSW don't pay minimum wages. But then, they don't deduct tax either.