Opinion & Commentary
No point in Bradley's vouchers
For more than a decade, first as a ministerial adviser and later as a think-tank researcher, I have argued for a higher education voucher scheme. But now the Bradley higher education review has finally put vouchers on the policy agenda, I oppose the proposal. The Bradley plan won't work as intended, and risks perverse outcomes.
Under the Bradley voucher scheme -- or a demand-driven entitlement system, as the review calls it -- universities would no longer have student places allocated to them by Canberra. Instead, the idea is that universities would expand or shrink according to student demand and their own strategic decisions. Once a new regulatory system is in place, the Bradley committee proposes opening the voucher system to any higher education provider meeting accreditation standards.
In principle, the dynamism of a voucher scheme would significantly improve on the status quo, in which the most powerful force is inertia.
The same list of public universities gets all but a handful of the commonwealth-supported places each year, even though many students choose to attend the wide variety of other higher education providers, often paying considerably higher fees than students at public universities. Many more students are likely to choose smaller or more specialised higher education providers if a voucher scheme narrows price differences.
A voucher scheme is also likely to improve on the allocation of places between fields of study. At present the federal Government does not steer the system, except through new places. And with university funding agreements setting out student numbers up to three years in advance, market forces operate only at the margins. Under this system, a health workforce crisis developed while thousands of would-be health professionals were turned away from public universities.
To work as planned, a voucher system must have a price-setting mechanism. The price per student place provides the incentive to take additional students, replacing the command mechanism of the funding agreement. If the price is too low, there is no financial incentive to expand. Present prices are almost certainly too low. We see obvious system-level symptoms in rising full-fee international student enrolments, as universities meet the average cost of a student place by mixing high-fee international with low-fee local students. The one published study of disciplinary costs, by Access Economics, found that in 2005 half the disciplines it looked at in six universities were, on average, loss making.
The flaw in the Bradley voucher scheme is that there is no clear process for setting prices for student places that provide adequate financial incentives. There would be an increase in commonwealth contribution amounts, out of a 10 per cent increase in teaching and learning funding.
But this number seems to have been picked out of the air, with no examination at the discipline level of whether it is too little, too much, or about right.
Except for teaching and nursing, student contributions would remain unchanged.
In real markets, prices adjust regularly in light of new information about costs and demand. The best that higher education providers are offered in the Bradley report is a triennial review of base funding, and how this would work at the discipline level is left uncertain.
This lack of a price-setting mechanism undermines the viability of the Bradley voucher scheme. Existing private providers would be reluctant to sign up to a scheme that gives them no guarantee they can cover their costs. Many already charge fees in excess of the maximum amounts they are likely to receive under the Bradley funding system. So we would not see the increased student choice a voucher scheme should produce.
Public universities would have their commonwealth-supported places converted to voucher places. The public policy risk is that universities will ignore demand in order to protect finances, by shifting places from loss-making to surplus-generating disciplines. The Bradley committee already thinks low funding rates are causing some universities to scale back teaching and nursing. This could become more widespread with the greater management discretion created by vouchers.
Some submissions to the Bradley review called for an agency that would review costs and set prices so that revenue and expenditure could balance. While better than the Bradley proposal, this assumes the existing one-size-fits-all model of higher education, from which a single price cap could be determined. Setting common prices for a system that could include multinational online providers and liberal arts colleges offering a campus experience with small classes is an impossible task.
While a government agency needs to determine subsidy levels, setting prices is outside their competence. The diversity of student preferences and the complexity of underlying cost structures make it impossible to set prices that won't distort the system. Higher education providers should be left to set their own fees, regulated by market competition rather than by government.
Andrew Norton is a research fellow with The Centre for Independent Studies. This article is based on an paper titled Fixing Prices: Why Vouchers Won't Work While Government Sets Fees, published in February by the CIS.
