the evolving reform agenda

The changes being introduced by the Government impact on the issues examined by the Panel in several ways. The Government is increasing funding to universities, with some elements of this funding directly related to student places and others impacting on the demands on general revenue. The answer to the question of whether Government funding is adequate will be affected by this additional funding. The timing of these changes has been a challenge to the Panel as the increased funding is being phased in and the full effect will not be apparent until after 2012. Apart from the increase in funding, the changes involve policy shifts that affect the mechanisms of distributing base funding both by Government and by universities internally.

To implement its response to the Bradley Review, the Government has provided the higher education sector with a significant increase in funding since 2010 and has committed to further growth in funding over coming years.

In 2007, total government funding to the higher education sector was $8 billion, of which base funding was $6.4 billion. In 2011, total government funding had reached close to $12 billion, of which $8.5 billion is base funding (Figure 1.3). It is estimated that in 2013, total government funding will be $13.6 billion and total base funding will be $10 billion. These funding increases will amount to an additional $8.2 billion to the sector over the four year period 2010–2015 to support equity, Performance Funding, and the demand driven system as well as research excellence. A further $500 million will come from the Education Investment Fund for the tertiary sector over the next five years, although it is not yet known what proportion of these funds will be allocated to universities.

Figure 1.3: Total government funding and base funding (actual dollars)

0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 2005 2006 2007 2008 2009 2010 2011 (est.) $ millions

Government funding, excluding base funding CGS/Operating Grant HECS/student contribution

1.8.1 The demand driven system for undergraduate student places

The Government’s decision to introduce a demand driven system of undergraduate student places from 2012 has already resulted in a rapid expansion of places as universities have used transitional arrangements to increase enrolments before its introduction.

The increase in base funding for the demand driven system will be the main reason for the growth in government expenditure in the immediate future. This increase in funding can be expected to have a significant bearing on how Australia performs in terms of aggregate investment in higher education. It is likely that future Organisation for Economic Co-operation Development (OECD) data on the change in public investment on tertiary education over time will show an increase over these years. Total investment, often assessed in terms of a percentage of gross domestic product (GDP), is one measure of funding levels, but the Panel has been especially concerned with the funding per student place as this is a measure of adequacy of funding for each student. The funding for the demand driven system is for expansion of numbers rather than affecting funding per student. While the Panel notes that additional places can sometimes be delivered at a marginal cost, expansion at an inadequate funding rate is a significant risk to quality. It is reasonable to expect that at least some universities have been delivering extra places in 2010 and 2011 at marginal costs as they have used existing infrastructure capacity and other existing fixed cost resources. However, there is a limit to the capacity of universities to expand enrolments without also expanding these resources.

To meet the participation targets, universities will be required to go past the point of using spare capacity. So while the current increase in funding for student places may have given an overall boost to university revenue in the short term, this cannot continue indefinitely and the adequacy of future funding must be addressed against a model of the full cost of a place. When this transition occurs will vary by institution but there may still be a window over the next one or two years in which the adequacy of funding is partly connected to marginal costs. This situation cannot be taken to be a long-term policy solution.

The demand driven system also changes the role the cluster funding model plays in allocating funding. Both the original Relative Funding Model and the CGS funding clusters were designed to allocate aggregate base funding amounts to universities that fairly reflected their respective discipline mixes. The focus in this process was the relative funding of disciplines, not the absolute amount received. That model was appropriate in a funding system where there was a fixed amount of funding available and targets were agreed for places to be offered in different disciplines. The introduction of the demand driven system removes the cap on funding and the allocation of places. Universities will now be responsible for decisions about the number of places they offer in each discipline at the undergraduate level. It can be expected that university decisions will be strongly influenced by the extent to which discipline funding matches the costs. Over- or underfunding has the potential to create a range of inefficient incentives and disincentives. Bringing funding and costs broadly in line will be crucial for the efficient operation of the demand driven system. For this reason the Panel has sought to assess whether any disciplines are significantly over- or underfunded.

The demand driven system accompanied by the attainment and low SES student targets should see a lift in the number of university students and a change in the mix of the undergraduate student cohort. The evidence is that the expansion in the sector in 2010 and 2011 has come from reasonably qualified students previously excluded from higher education by the cap on student places. It can be expected that further growth will depend on participation by less qualified or less well prepared applicants. In this environment it will be a challenge to maintain levels of retention and completion

studies. The efficiency and effectiveness of base funding will be determined by whether the sector can be expanded while maintaining and enhancing quality, including retention and completions. The Panel considers that there is a point at which cost savings are achieved at the expense of quality. Judging the point at which this occurs is difficult but the Panel has sought to strike the balance between quality and efficiency in its deliberations.

1.8.2 improved indexation of higher education grants

In addition to the increase in base funding for the higher number of student places, the Government has also instituted a new indexation formula that better reflects the changes in costs facing

universities. The new formula was applied in 2011 for student contributions, and in 2012 for government grants under HESA, including the CGS (DEEWR 2010).

The new indexation arrangements represent a substantial increase in the funding to the sector over the next decade. The Panel supports the sector’s view that improved indexation maintains rather than improves the level of funding, and in the case of base funding only maintains the level of funding per student place.

Having said that, the value of the improved indexation is much greater than if the old arrangements had continued. The additional quantum of money from the new indexation rate is estimated to be $367 million in 2012 and grows cumulatively each year. This increased indexation will provide an additional $3.15 billion over the period 2011–2015. The intention of the new indexation formula is to provide universities with an indexation rate that is more realistic in terms of their salary and other cost pressures. It is hoped that with adequate indexation, the funding in real terms would reduce the need for universities to impose cost efficiency measures on delivery models that could impact on quality.

1.8.3 Funding for participation and performance

The Panel also considered the Higher Education Participation and Partnerships Program (HEPPP) since it is relevant to equity issues within the Panel’s Terms of Reference and therefore within the scope of its deliberations. The HEPPP is part of the increased funding available to the sector from 2010, and will play a part in improving the overall resourcing of universities.

In particular, the HEPPP was considered because it was designed to generate increased aspiration and participation through its partnership component, and through its participation component, improved success rates for students less likely to undertake and achieve a higher education qualification. The context and the impact of the HEPPP are discussed further in Chapter 6. The HEPPP provides $793 million over the period 2010–2011 to 2014–2015. When the participation component of the program is fully implemented in 2013 the Government estimates that it will provide approximately $1,000 for each low SES student (EFTSL).

The Panel has also been interested in Performance Funding in relation to the question of how a funding model could support higher levels of teaching quality.

Performance Funding includes $400 million over four years from 2011 for universities to develop agreed strategies for achieving teaching and learning, and equity performance targets, and reward funding of $335 million provided over four years from 2012 to universities that meet targets against a framework of performance indicators.

1.8.4 Funding the indirect costs of research

The Sustainable Research Excellence (SRE) program, administered by the Department of Innovation, Industry, Science and Research (DIISR), was implemented in 2009 and seeks to help universities meet the indirect costs of their Australian Competitive Grants activities. In combination with the Research Infrastructure Block Grant, also administered by DIISR, the SRE program aims to lift government funding for the indirect costs of competitive research grants from around 20 cents to 50 cents for every dollar of competitive research funding from 2013, when fully implemented. Funding for the SRE program will total $512 million for the period 2009–10 to 2012–13. From 2013, it will provide an additional $300 million (indexed) annually to help universities meet the indirect costs of research. This additional funding addresses an area of cross-subsidisation that the Panel has sought to clarify. As will be discussed later, the Panel considers that cross-subsidies are reasonable where they are associated with the university’s strategy and long-term goals, and they are an inevitable element of university autonomy. But it is not desirable that underfunding should necessitate cross-subsidisation. In the case of cross-subsidies to assist the activities supported by competitive research grants, the source of funding has been other university revenue, including funding for teaching and scholarship, making it part of what has been referred to as ‘unfunded’ research. The impact of SRE program should be that less teaching and scholarship funding will be used for this purpose and that the amount of ‘unfunded’ research will decrease. The Panel believes that the impact of the SRE program will be a positive factor in the future sufficiency of funding for teaching and scholarship.