University reforms of international significance

The demand-driven university reform introduced by the Australian government this year is significant on the world scale. This is because the reform established one feature of a genuine market: open competition for market share, albeit funded by a government voucher not commercial fees, and operating in some rather than all institutions.

So said Simon Marginson, a professor in the Centre for the Study of Higher Education at the University of Melbourne, in a commentary at this week’s Universities Australia conference on commercial markets and higher education around the world.

Marginson said that while competition pervaded higher education systems – with institutions competing for prestige, research kudos, funding and high-quality people – in most countries there was no outright competition for market share of first-degree undergraduate students.

“We have always had competition for the best students. Now we have competition for mass custom. The Australian system uses a volume voucher, a unique policy tool,” Marginson said.

“This might reduce the dominance of the supply side in shaping what is produced, though it is more likely to wipe out less popular programmes than to nuance offerings on the basis of demand.”

Marginson said that Australia, along with the United Kingdom, New Zealand and the United States, was closer to the product market template than most systems but was still some distance from it. The UK reforms had also created a more defined competition for customers at two levels, although this was highly orchestrated by the policy settings.

“Neither system uses price signals, and fees are set on the basis of costs (in fact below cost in much of the Australian system) rather than surplus generation. But competition for volume does generate one set of market signals.”

The American system, underpinned by federal student loans, ran a competition in volume that primarily affected the non-selective institutions, Marginson said. It also used price signals, though it was not really price-regulated. In private institutions, the nominal level of fees is at full cost and more.

But the level of subsidy by institutions, philanthropy and government was high and inconsistent. Subsidies in expensive universities were very large. Work by Gordon Winston at Williams College suggested that the average American student, public and private, paid about 45% of the ‘sticker price’ for places.

“It is impossible to conceive of a market for cars or televisions or financial securities or homes where the average customer pays for 45% of the costs. And in the foreseeable future, this will remain the case in Australia,” Marginson said.

“I think that what the demand-driven system reform will do is begin to stratify the system more decisively on mission. Institutions whose brand is less strong than average must work hard to recruit and they will become more customer-focused over time.

“The map of programmes will become more tailored to student demand because these institutions want economies of scale, and at current funding rates the scope for cross-subsidisation is limited.

“In part the leeway to maintain supply-side control over offerings is dependent on the international market, but this is likely to stay depressed for the next couple of years.”

He said institutions whose brand was strong, the selecting institutions and also the major players in research performance, could largely stand aside from the demand-driven system while taking advantage of the greater flexibility. They would remain constrained in graduate education, which was a significant limitation and, if funding was not increased, they would be forced to again boost international student numbers.

“Institutions poised between the two missions will agonise over the balance between volume building and research building. The decisive factor in sorting the market will be research capacity and performance.

“Here the last two decades of policy have come home to roost. The recent policy from the Group of Eight [Go8] research-intensive universities notes that Australia has focused on research selectivity, meaning competitive allocation, rather than research concentration. Almost right but not quite,” Marginson continued.

“There has been a de facto concentration as competitive systems favour those with existing capacity. The Go8 has more than maintained its share of research action. This de facto concentration has not been enough to build the global competitiveness of the Go8 but it has sustained them in Australia.”

If price was deregulated along with volume, Australia would move decisively towards an American system and its current ‘one-size fits all’ would be finished, Marginson said. Australia’s system of government-backed loans for students was under enormous pressure in fiscal terms and would break down, unless the top layer of fees was supported by commercial loans.

But this weakened equity in the Go8 universities, where the sorting role of research would become even more decisive, beyond the reach of government to modify it.

“Using their existing research strength, the Go8 and a few others will leverage their brands to build globally competitive research strength on significantly larger scale. They will also be able to carry the cost of curriculum initiatives, flagships of their own.

“The market will be more firmly bifurcated between institutions playing that game, and those for whom building volume, enticing and holding customers, is their only main mission. The institutions caught in the middle will have an even harder time of it,” Marginson concluded.