Address to CEDA Vice-Chancellor’s panel

We have been asked to speculate on the future of the Higher Education system in Australia, if the Pyne reform package passes the Senate – which, of course, is by no means certain at this stage. But I will assume for the purposes of today that they will pass in roughly their current shape.

I feel a bit like the British writer JG Ballard, of whose fiction I am a big fan, when he described himself not as a science fiction writer, but 'as a kind of investigator, a scout who is sent on ahead to see if the water is drinkable or not'. So, I see my task as being to see what the drinking water ahead is like – whether it's drinkable or not is something we can discuss afterwards, perhaps.

Like Ballard, however, I believe that the seeds of the future lie in the present. This means that to predict the future, to assess the drinking water, we need a proper understanding of the dynamics that have created the present.

In Australia, as in many other first world countries, the dominant dynamic in higher education (HE) over the last 30 years has been the growth in, or the 'massification' of, the HE sector. The number of full time students in Australia was just under 300,000 in 1989, and is projected to rise to just over 700,000 in 2017. The growth rate has accelerated over time, with the growth between 2007 and 2013 alone amounting to an extra 200,000 students, the equivalent of three or four Monashes. And all this growth has been absorbed into the nation's existing 39 universities.

Three key policy drivers:

• the Dawkins reforms of the late 80s and early 90s, which created the unified national system and increased the number of universities from 19 to 39;
• the stimulation of the international student market from the mid-90s, such that international student revenue accounts for about 30 per cent of university revenues; and
• the demand driven system, or the uncapping of undergraduate places, that came into effect in January 2012, but which most universities began anticipating much earlier (eg, from about 2007)

There is much to celebrate in the achievements of the university sector during this period of growth. Student satisfaction has steadily risen as teaching and learning has been taken more seriously; research output has increased in volume and quality, such that Australia performs well for its size in the international rankings; there has been a significant shift from theoretical to applied research as universities seek to respond to industry needs; and they have have become more inclusive, especially of low SES and disabled students. Women now account for more than half of all students at university. All of this amounts to a significant lift in the sector's productivity over the last 20 to 30 years.

But in spite of its undoubted achievements, the current system is not sustainable.

This is because, as the sector has expanded, funding per student has declined steadily irrespective of the party in government. Average funds per student provided by government have declined from just under $11,000 in 1989 to just under $9000 in 2011; and the last Labor government planned to impose a further 3.5 per cent efficiency dividend on university budgets from 2014. Government contribution to university revenue has declined from about 80 per cent in the late 1980s to about 30 per cent now.

This suggests that we cannot rely on either side of politics to maintain, let alone improve, per student funding rates.

This highlights the dilemma of growth – governments want Higher Education systems to grow, because they are persuaded of the benefits of a better educated workforce, but they are either reluctant or unable to pay for it.

One consequence of this underfunding has been a reliance by the sector on continued growth in student numbers as the solution. The thinking is that shortfalls in annual budgets can be made good by an increase in revenue the year after, mostly from taking more students. That is why every Australian university has grown in the last 20 years  – none has taken the option of staying the same size, let alone shrinking – because that is simply not an option in our system. Instead, we have become hooked on growth as though it was the elixir of life which, in a sense, it has become.

I don't think that is a sustainable basis for the sector. It assumes an unlimited supply of well qualified students who can feed this growth. While that was the case with international students throughout the '90s and early 2000s, up until the 2009 crunch, and subsequently with domestic students under the DDS, I think we have now reached the end of that period of expansion. International numbers are volatile, and always will be. The DDS has effectively exhausted all unmet demand, and we are close to reaching, and may already have reached, the government's own participation and attainment targets.

In short, it's not clear where additional growth can come from other than by universities starting to cannibalise each others market share.

That is why I support fee deregulation. Given the government's track record of underfunding universities, there has to be another way to put university financing on a sustainable footing that doesn't mean one university's survival comes at the expense of another's. Fee deregulation would allow individual universities to decide their own trade off between price and volume, rather than going for volume alone, as they do at the moment. It would allow prestigious universities to slow or even reverse their growth trajectory, through increased charges, thereby releasing more students into the rest of the system.

Which brings me to the Pyne reform package currently before the Senate, which has fee deregulation as it centrepiece, together with expansion of the system to include non-university higher education providers (NUHEPS), and to include sub-bachelor qualifications – all of which I believe are positive.

Unfortunately, though, it has many aspects that are deeply unattractive – such as a 20% cut to govt funding rates (to be made up for through increased charges, a straight shift to user pays), a real rate of interest applicable to student debt (which has very regressive effects) and a 10% reduction to RTS funding for PHD students, none of which I would support, and none of which UA supports.

Before going further, though, it is worth reminding ourselves of the boldness of the Minister's plan. The DDS not only remains in place, but is expanded to include sub-bachelors qualifications and NUHEPS. At the same time, price is to be uncapped and student debt financed through a government backed income contingent loans scheme, again without limit. Much is left to the market to sort out – especially through the assumption that price increases will be restrained by competition between universities and from the non-university sector.

There are different views about how effectively competition will work in a market that operates on limited information and in which the commodity is a positional good such as a university degree. Some commentators have no confidence that competition can bear the pivotal role assigned to it, and have called for the imposition of fee caps, or borrowing limits, as a way of restraining excessive price increases.

I disagree with this. Just as I support uncapping demand, so I support leaving price uncapped – not because I have absolute faith in the effect of competition, but because I think caps will themselves have a distorting effect on pricing behaviour – universities will quickly race to the top in a capped system, and students could end up paying more, perhaps much more, than they would have done when everyone faces the uncertain task of pricing in an open market. This has been the experience every time a capped system has been introduced, for example in Australia in the early 2000s and in the UK in 2012.

So, rather than constraining the market in advance my preference is for there to be some way of monitoring the market, and some way to intervene if it fails – for example, through excessive and unjustified price increases, or through closure of courses or campuses of strategic significance. When other sectors of the economy have been deregulated, such as energy, water or telecommunications, such mechanisms have put in place – why not here?

But, leaving that aside and looking to the future, what are the likely consequences of these reforms being implemented? How drinkable will the water be?

First, a disclaimer. In making these predictions of consequences, I am not necessarily endorsing them as desirable developments for the sector. Rather, for the most part, they are a working out of forces already latent in the system that would be accelerated or accentuated if these reforms come to pass. As JG Ballard might have said, they are a 'long range weather forecast', not a prescription.

Given the constraints of time, I have limited myself to four such forecasts.

• First, what is likely to happen to demand as a result of increased fees? UK experience is the most relevant here, when a new system of higher but capped fees was introduced at the start of the 2012/13 academic year. There, applications in the year before the fee increase came into effect rose to a peak, and then fell back dramatically in the year the new fees were introduced, but picked up again the year after, ie at the start of the northern academic year that has just finished. This suggests that a higher education market will absorb even quite a significant increase in fees over time; and the evidence is that fee increases have not deterred disadvantaged students from coming to university. The group that appears to be hardest hit are part time students, whose numbers have plummeted two years in a row – but there are likely to be specific local reasons for that, not directly related to fee increases as such. And there are limits to how many conclusions we can draw from the UK, where student fee are capped at $9000 a year (about $16500).
• Second, the link between funding for teaching and research. It has long been accepted that universities use at least some of the money they receive for teaching students to cross-subsidise their research – even though the govt doesn't specify what percentage is attributable to research, and universities don't account for it. Nevertheless, the Minister has set the rate of govt subsidy for NUHEPS at 70 per cent of the university rate, partly on this basis since NUHEPS don't conduct research and therefore don't carry that overhead. I was very conscious that, in formulating this advice to government, the working group I chaired was handing government a solid case for looking again at whether there should be such a component and, if so, whether it should just follow the student rather than follow the research. My gut feeling is that any government, of either persuasion, that wants to look again at our research and innovation system will also want to look again at whether this way of allocating money for research is sensible, given the huge variations in levels of research intensity across the sector. I'm not suggesting that this money, let's say 10 per cent of the Commonwealth Supported Place (CPS) funding, should be redirected solely towards high performing research universities – but it could perhaps be used more strategically in the system than it is at the moment. I suspect that this will be an issue that would interest a future Labor administration as much as a Coalition one.
• Third, institutional diversity.  It is inevitable that more students will receive their degrees from non-universities, given that NUHEPS will be eligible for government funding and will participate in the DDS. This will address one of the peculiarities of the Australian system, which is that 95 per cent of bachelors graduates receive their degrees from a doctorate granting university, i.e one that can award PhDs. The equivalent figure for the US, which has a much more diverse system than we do, is 28 per cent. But over time I suspect that there will emerge here a new category of institution, akin to the US Liberal Arts or Community College – one that is university-like in the range of disciplines offered at Bachelors and perhaps masters level, but unlike universities will not have a serious research mission. This category currently does not exist in Australia, and may or may not get to call itself a university, but the forces at work in the new system will produce it before long.
• Finally, we can expect to see an increased focus on managing costs in the university sector – the introduction of NUHEPS as competitors, many of whom do not have the overheads associated with conducting research and the CSO obligations of universities, will force increased scrutiny of the cost base of universities, especially those for whom the NUHEPS are a significant competitive threat. More prestigious universities with a strong market position and brand may feel less compelled to do this, and may simply pass on their inefficiencies to their students in increased fees – but I would hope, as suggested above, that there would be some mechanism for calling this behavior out.

But I think the drinkability of the water will ultimately depend on the extent to which universities can cling to their core values through this period of tumultuous change. Universities will have to become nimbler in a more competitive environment, but they will also have to retain that special sense of mission or public purpose – to provide life changing opportunities to young people through education, and to transform the world through research - for which they were established and which motivates so many people to work in them. That will be the challenge of university leadership in the next couple of decades.