Time to take the politicking out of HECS pricing

The ALP’s fiery attacks on Dr Nelson’s higher education reforms hide how similar their policies are. Both are interventionist towards universities and paternalist towards students. Neither parties trust universities to set prices or trust students to decide how much they want to pay, at least for HECS-liable students.

For HECS-liable students the issue between the parties isn’t whether there should be a price cap on HECS, but the precise dollar amounts. The difference between the parties is not one of principle, but of $1,604 a year.

In a radio interview earlier this month, Dr Nelson responded to a call from the economist Bruce Chapman for price caps on fee-paying undergraduates by saying, “It is one of the things that I would be prepared to consider”. The differences between the parties could narrow further.

Let’s hope they don’t. Even existing price caps set for the new policy environment will alleviate, but nevertheless replicate, the chronic under investment that characterises the current system. This is because the caps are based on near-arbitrary numbers - essentially the hopelessly out-of-date relative funding model plus up to 25 per cent.

Neither number nor their totals bears much relationship to current costs. From dubious base figures funding has been indexed since the mid-1990s at a rate that we know to be lower than universities’ cost increases. Universities avoided insolvency by pushing up average income per student through international student charges that are often twice or more what HECS students pay.

The Coalition’s 25 per cent increase in HECS won’t necessarily be enough to cover all HECS students’ costs. Because the 25 per cent applies only to what the student pays toward his or her course, and not the Commonwealth contribution, the 25 per cent will translate into total revenue per HECS student increases of as low as 7 per cent, depending on faculty. The ALP’s policy is even worse.

To be at all functional, a price capping system requires price setters to use real cost data. This hasn’t happened. Yet senior analysts of the system seem undeterred by the past failure of price capping.

David Phillips has suggested that prices for full-fee undergraduates be set slightly above the maximum HECS rate. This, however, carries over into the full-fee system the same arbitrary and inadequate numbers that cause the Commonwealth supported system to operate in deficit.

The incentives are weak for universities to enrol students in any but the cheapest courses under Phillips’ proposed scheme. It would be a classic price cap outcome, with the potential buyers, the students, and the potential sellers, the universities, not being able to come together because of obstacles created by regulation.

Being an economist, Bruce Chapman is not against some price flexibility, but objects to “unfettered price competition”. He argues that some universities benefit because of their standing built up over time, enabling them to extract “rents” as a result - that is, they could use their position to charge much more than their degrees cost to deliver.

It is difficult to disentangle genuine gains in human capital from value created by prestige, but let’s assume for the sake of argument that market fees incorporate a significant element of “rent” at prestigious universities. Does it follow that those universities ought to be prevented from setting those high fees?
 
The problem with Chapman’s argument is that someone is going to get those prestige “rents”. Under the current system HECS students at prestige universities are the main beneficiaries. They receive better jobs, higher value networks and more social cachet than other HECS students who paid the same amount but studied elsewhere.

By contrast, if the university charged higher fees, prestige “rents” would be spread more widely through cross-subsidies to other university programmes. The net private benefit of attending a prestige university would be lower, but the public benefit higher. In this sense, HECS places are more regressive than full-fee places in their final distribution of financial and social benefit.

Universities, of course, ought to be restrained in what they charge. But we already have a better mechanism than blundering bureaucrats or politicians taking numbers out of the air - competition between the universities. “Unfettered price competition” is a good thing, preventing the real problem of unfettered price setting.

On top of these market constraints we have cultural constraints. Witness the angst many universities suffered in deciding on the HECS increases allowed under the Nelson reforms, small as they are relative to the real value of most courses.

Politically determined prices are a solution much worse than the problem they are designed to fix. Dr Nelson should consider price caps, but to get rid of them rather than impose more of them.