Pay up: the market forces about to hit universities

With true market competition, universities will have a new purpose to fulfil. mirsasha/Flickr, CC BY-NC-ND

The debate about opening Australian universities to competition has so far been dominated by discussions about fees. While this is of particular interest to students whose education will receive a smaller subsidy in future, the implications of some of the other changes are likely to be more profound.

Public universities will now compete directly with a range of other businesses.

Competitive neutrality

The rules which govern how public businesses compete with private ones were embedded in the National Competition Policy reform package and set out by the Australian Government in June 1996.

The “competitive neutrality” rules are designed to promote efficient competition so that government businesses do not enjoy competitive advantages or detriments relative to their private sector competitors.

Competitive neutrality requires government businesses to:

  • Charge prices that fully reflect costs
  • Pay or make allowance for all government taxes, charges and local government rates
  • Pay commercial interest on borrowings
  • Generate commercially acceptable profits
  • Comply with the same regulations as apply to private businesses.

In some areas, universities already comply with these obligations, but in others, they have self-declared an exemption, such as for “publicly funded higher education teaching and research”.

In the proposed deregulated fee environment this will not be sustainable, and universities will have to change their business models quite dramatically.

Universities in competition with private providers will have to pay taxes (or tax equivalents), they will have to pay rates, and they will have to pay commercial rents on the properties they use.

For centrally located universities – UTS, QUT, University of Adelaide, RMIT, University of Melbourne – the implication of their paying commercial rents and rates is likely to cost them hundreds of millions of dollars.

A major change to business operations

Forcing the universities to meet competition will also disrupt their business models. All Australian universities extract large profits from their business faculties in order to subsidise their administrative costs, their medical schools, and their science faculties. Such cross-subsidies are not likely to be sustainable in the face of competition.

As in any market, entrants (and even some incumbents) will attack the profitable segments of the education market. This means some entities will offer business degrees for much less than the existing prices. The effect of competition will thus be to force down the prices universities currently charge for some courses. If they do not do this they will lose market share, and thus have less profit with which to subsidise their current favourite faculties and activities.

Competition will thus limit the ability of universities to cross-subsidise from business towards other faculties. In the new world, each faculty is likely to stand or fall on its own ability to generate the revenues which support its costs.

So how will they adjust?

The normal first approach when public businesses are faced by competition is to change the governance structures and to implement a corporate model. State governments, under which universities are established, are likely to insist on this as part of the process of raising management standards to a level which allows the universities to compete effectively.

As part of the process research is likely to be separately funded. This seems necessary since competitive neutrality requires that the public corporation should face no competitive disadvantage.

At the moment 40% of all academic wage costs are supposed to go towards research. If the private providers have no research obligation, their wage costs will be 40% below those of their public competitors. The best way of addressing this would be for the government to provide an explicit subsidy for research. It then makes sense for private universities to be allowed to compete for such funds.