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Funding cuts pose challenges for the university business model

Universities source around 60% of their funding from the government - down from 90% in the 1980s. AAP

As state premiers meet to thrash out an agreement on funding the Gonski school reforms, universities have been gnashing their teeth at being the losers in the funding equation.

Earlier this week, Vice-Chancellor of Monash University, Professor Ed Byrne, told ABC Radio that the higher education public funding cuts announced to help pay for the schools reforms were a “significant blow” to the university sector, adding that “we don’t have any fat in the system … we’ve pretty much cut to the bone”.

Fred Hilmer, Vice-Chancellor of the University of New South Wales, said the cuts were “short-sighted” and “cynical”.

In light of this debate, it’s worth delving into just where Australian universities source their funding.

In the early 1980s, public funding was the source of approximately 90% of university income. However, the most recent financial reports provided by the Department of Innovation shows that this has dropped to roughly 60%. So where are universities getting the rest of the money?

About 15% comes from fee-paying overseas students. But the value is far greater than that and not just to the universities.

Education is now Australia’s third biggest export sector, generating $18.6 billion in 2009 and supporting approximately 125,000 jobs across Australia. This includes students in secondary and vocational institutions; however the universities generate the lion’s share of this economic activity.

It is the reason why the sector is very sensitive to economic pressures such as the high Australian dollar, social pressures such as student safety or racial tension, and brand issues regarding the reputational quality of Australian qualifications.

It’s not so simple, however, to increase revenue by increasing international student enrolments. Previous quality reviews of university quality and standards (formerly by AUQA and now TEQSA), have identified the challenge for universities with high numbers of international students to be able to deliver an “Australian” university experience. So more international students equals more money, but possibly damages “Brand Australia”.

Next in terms of value are consultancies and contracts (mostly research), which accounts for 5%. It may come as a surprise to many that this figure is so low. The main reason is that universities encourage their researchers to concentrate on government funding schemes for their multiplier effect.

Not only does the university get the direct funds for the research, they also get additional recurrent funding via Research Infrastructure Block Grants scheme. Good research generates good findings, which are taken as evidence of research quality, which ultimately secures even more money via the Sustainable Research Excellence scheme.

If the government wants universities to engage with industry more, it can either use more carrots (e.g. add a multiplier to industry-funded research, such as the ARC Linkage Scheme), a stick (remove the multiplier for government funds) or both. It also needs to get serious about supporting universities in creating a robust framework for dealing with intellectual property disputes.

As The University of Western Australia vs. Professor Bruce Gray saga demonstrated, research conducted in our universities is often in a grey area (no pun intended) in respect of whether it leads to an ‘invention’ or a ‘discovery’. Furthermore, it is complicated when an invention is founded on iterative discoveries across government and privately-funded projects, or whether the eureka moment occurred when the researcher was working on the company dime or consulting privately.

At 4.5%, investments generate almost as much money for universities as the privately contracted research. Universities also earn 4.5% in various fees and charges, of which the main one is the Student Services and Amenities Fee.

After that, it’s a long tail. Domestic fee-paying students account for just over 2%; donations and bequests barely 1%. The rest is made up of a potpourri of sources including royalties, trademarks and licenses, non-government grants, scholarships and prizes and taxation minimisation strategies.

The actual mix of funding varies between universities. Some universities have international student populations approaching 40%; others secure the majority of their state’s private research investment and others rely on the public for around 70% of their funding. However, all universities assume that the trend is towards sourcing more private funding, regardless of which political party is in power.

In the immediate future, the policy pressure is for universities to become more productive – or in other words - to continue with essentially the same business model, but operate more efficiently.

This would involve decisions on which of the above-mentioned income streams to focus on and whether to specialise as an institution or remain comprehensive. A key consideration is whether or not a future government will allow universities to charge domestic students full fees. The Howard government introduced them in 2005, but they were repealed by the Rudd government in 2007.

Further deregulation of the sector presents government with a quandary, because its educational policies are social as well as economic. If the sector is encouraged to pursue full fees and offer genuine price differentiation, choice (perversely) may decrease for students.

In higher education, the theory of positional goods shows that as the cost of education rises, people tend towards greater risk aversion. This means the elite universities benefit the most and competition, innovation and quality in the sector may well suffer. This is what happened in IT in the early 2000s, leading to the famous United States vs. Microsoft Corporation antitrust law case.

There is also the fundamental question regarding the true purpose of a university, as demonstrated by the growth of Massive Open Online Courses. As David Glance has already explained on this site, an important function of public universities is to communicate new knowledge freely – MOOCs are just the latest way of doing this.

The more a government controls higher education funding, the greater the say it has over what knowledge will be valued and shared. Once a government becomes a minority financial stakeholder in the sector, there is a strong argument that it also cedes the right to dictate national education and research priorities. Apart from their other benefits, MOOCs are one way in which universities can remind government of the important social function they serve and for the need to maintain adequate levels of public funding.

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