The proponents of an unfettered free market in higher education would be "somewhat disappointed," Education Minister Brendan Nelson said of his reform package.
With emphasis on the "somewhat", he is right. The package has much that critics of the present system applaud but also proposes more detailed regulation of Commonwealth-subsidised places. At the same time it enhances and curtails markets.
To the good news first. Even with a price cap, letting universities set their own fees allows for more investment in higher education. As I have long argued, one of the existing system's most perverse features is that it effectively forbids Australian undergraduates from increasing investment in their most important income-earning asset, their own human capital.
In addition to added investment, competition between universities for the students prepared to pay higher fees creates a financial incentive to improve the quality of undergraduate education. There are at present no such incentives for Australian commonwealth-subsidised students, still by far the largest category.
In policy terms, going further would be better. The Commonwealth still wants to second-guess students and universities on the right amount to invest. For disciplines such as law, business and the humanities, universities can earn, after combining the government subsidy with the highest student fee, less than $10,000 per student.
This may improve, but will not revolutionise, what is on offer.
Price caps narrow the range of price differences, reducing competition on price. This distorts the market in favour of the better-known universities, which can offer higher status for little extra cost.
Yet the fully price-deregulated model David Kemp took to cabinet in 1999 is too easy to portray as a threat to access. Price caps are a policy liability but a political necessity.
The most surprising reform is that as well as universities being allocated total numbers of students, they will have to meet targets by discipline, with a small margin for error. The Commonwealth will pay up to one per cent more than negotiated and impose unspecified penalties for exceeding student targets by more than two per cent. Presumably the aim is to restrict the Commonwealth's subsidy bill.
This aspect of the reform package is in marked contrast with Kemp's proposal in his leaked 1999 cabinet submission. Kemp's model was student-demand driven, whereas Nelson's further blunts the role of student demand by weakening universities' capacity to shift places between disciplines.
While Kemp's policy on place allocation frightened some weaker universities, Nelson's is likely to frustrate them all. Most universities' student offer acceptance rates and drop-out rates vary in ways that are predictable only in ranges that exceed one per cent.
Aside from the inherent difficulties in meeting discipline targets, other aspects of the package may further reduce their viability. Universities rarely enrol fewer than their Commonwealth target number because the total number of student places is kept below demand, almost guaranteeing that all available places are filled.
In the future, this protection may fade. Medium-term demand is difficult to predict exactly but there is a chance it will be less than subsidised supply, as several factors drive up the supply of places. The Commonwealth is directly increasing their number through partial subsidies. The new loans scheme for full-fee-paying students in public and private institutions is likely to lead to significant exits from subsidised to full-fee places.
In low-subsidy disciplines such as law and business, popular universities could enrol (depending on what the over-enrolment penalty is) students in subsidised places, with the university receiving only the student contribution. In 2010, the five-year learning entitlement will see students who have taken too long vacate subsidised places.
Cumulatively, supply may exceed demand, making it impossible to meet targets and accidentally creating a more competitive system.
Nelson's mix of markets and planning is going to cause policy problems but that's the price to be paid for keeping Treasury happy while not doing anything that frightens middle Australia too much, despite the efforts of reform opponents.
The package's fate is in the ALP's hands. It needs to pass it or match it. Doing neither would leave more than free marketeers "somewhat disappointed". For all its faults, what's on offer is better for students, universities and Australia than the status quo.