Australian university productivity growth and public funding revisited

ABSTRACT

The Australian Government provides basic operating grants to universities, which are used to teach domestic undergraduate students. It imposes a productivity offset on the grants to encourage improvements in university productivity. But it is not transparent and does not vary across universities. Thus, universities have little incentive to improve performance. This paper develops an alternative framework that uses incentive regulation to allocate these grants to universities, which provides stronger incentives for universities to improve productivity. Regulators often use a similar framework to set prices for natural monopoly services such as utilities and public transport. Under incentive regulation, the basic operating grants could be reduced, on average, by 1.76% per annum over 5 years, which is about $100 million per annum. This finding is contrary to several recent Australian Government inquires that suggest the basic operating grant is inadequate and that this compromises the quality of undergraduate teaching.

KEYWORDS:

• Higher education
• productivity
• incentive regulation
• grants
• economies of scale and scope
• data envelopment analysis

Acknowledgements

The authors would like to thank two anonymous referees who provided helpful comments and suggestions. Any remaining errors are those of the authors.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 However, the legislation was not passed by the Australian Parliament.

2 Furthermore, the former Australia University Quality Agency (AUQA) said that universities made ‘little systematic use of benchmarking to monitor institutional performance’ (AUQA 2007, 6).

3 The commonwealth proposes to allocate $100 million to the fund and the grants to universities are to be paid over 3 years. The first grants are expected to be paid in 2016. However, some commentators like Universities Australia (2015) suggest the size of the fund is inadequate and that it be expanded to $500 million.

4 Efficient teaching costs are defined as the minimum cost of teaching a certain number of university students across different disciplines. There is no particular efficient teaching cost that applies to all groups of universities as this will vary according to disciplines taught by a university and its size. For example, the efficient cost of metropolitan universities will differ from regional universities as the metropolitan universities have more opportunities to achieve economies of scale and scope. Efficient costs are often identified through benchmarking exercises.

5 The CPI may not be the best measure of movements in the input costs for universities. Therefore, the commonwealth could consider alternative input price indexes for universities when allocating teaching grants to universities within an incentive regulation framework.

6 Some regulators, such as the UK water and sewerage regulator, consider service quality standards when setting prices. Firms that exceed certain quality standards are allowed to charge higher prices.

7 Regulators often set price caps that allow firms to pass on uncontrollable costs to consumers.

8 See Dow and Braithwaite (2013) and Kemp and Norton (2014) for further details on the characteristics of Australian universities and the regulatory web that governs university activities.

9 EFTSL is defined in the Higher Education Support Act 2003 (Cwlth) as a measure of student load, for a year, for a student studying a course full time. An EFTSL of one is the standard annual study load of a full time student. A 6-point course unit studied as part of a standard annual study load of 48 points would be assigned 0.125 EFTSL. EFTSL was previously called an equivalent full-time student unit.

10 Commonwealth funding for an EFTSL varies across the various designated courses according to a set of course weights. Science disciplines receive a higher cost weight compared to humanities because they often require more resources to teach students compared to humanities. For example, universities receive $18,769 for a science EFTSL compared to $4,979 for a humanities EFTSL. There are eight-course clusters that receive commonwealth funding. See Lomax-Smith, Watson, and Webster (2011) for the commonwealth contribution for courses within these clusters.

11 Several papers have attempted to measure teaching quality using this approach. See, for example, Glass et al. (2006, 2009) and Abbott and Doucouliagos (2009). However, Glass et al. (2009) state that student assessments of teaching quality could measure the teaching process rather than the quality of teaching.

12 In recent years, the commonwealth has funded several new medical faculties in outer metropolitan and regional universities. And some regional universities offer law degrees by distance education. These initiatives provide greater opportunities for students from low socioeconomic backgrounds to undertake these degrees.

13 See Carrington (2014) for further details on the construction of the Törnqvist input price index for other university costs.

14 This information is now available from the Department of Education and Training website (http://www.education.gov.au).

15 Diversity in higher education is a multifaceted concept. For example, the then Minister of Employment, The Honourable Brenden O’Connor MP (2008) suggested that diversity in the higher education sector was reflected in the 39 universities that existed in Australia at the time, of which 2 were private. Furthermore, he said that universities vary in size, sources of income, types of student, range of disciplines, participation of certain equity groups, intensity of research, and their history. That said, we are unaware of a suite of key performance indicators that the commonwealth uses to assess diversity in higher education or the importance that it attaches to the various aspects of diversity.

16 This approach may create an incentive for the regulated firm to increase costs in the final year of the regulatory period. However, the use of an average cost for the firm for the previous regulatory period would provide fewer incentives for firms to display this behaviour.

17 See the Department of Education and Training website for further details on the structural adjustment fund (http://www.education.gov.au/structural-adjustment-fund).

18 See, for example, the Australian Energy Regulator’s discussion on the use of various benchmarking techniques, financial modelling and industry, and consumer views of electricity distribution network costs, which are used to help set efficient prices for electricity distribution companies (AER 2014).

19 Carrington (2014) calculates the opportunity costs for teaching and research for individual universities over the period 2005–2010.