Fourth Report of the Tertiary Education Advisory Commission - full report 26/58

Shaping the Funding Framework
Fourth Report
of the Tertiary Education Advisory Commission

Chapter 8: Predictability and Fees (Cont...)

8.2 Fee Setting and Fee
Stabilisation

8.2.1 Fee Setting

Current legislative arrangements bestow full autonomy for fee-setting on
individual providers. Nevertheless, the government is able to influence the
setting of fees. For example, the present government has stabilised fees at TEIs
in the past two years by linking tuition-subsidy increases and eligibility for
CoREs funding to the freezing of tuition fees.

Learners at PTEs are also limited to borrowing a maximum of $6,500 in the
tuition-fee component of the Student Loan Scheme. By limiting the ability of
learners to access funds for course costs, the government provides an incentive
for PTEs to keep fees at reasonable levels.

It is also worth noting, as demonstrated in Table 3.7 (in Chapter 3), that
there is often a close link between levels of public tuition subsidy and the
student fees charged by TEIs (similar relationships between subsidies and fees
at PTEs are not so clear). The government is thus able to exercise indirect
influence over fee-setting by varying the available levels of public funding. An
important corollary of this ability, however, is that unless government funding
is increased it is likely that student fees will continue to increase.

Fee-setting practices are driven by both supply and demand factors. Different
approaches to fee-setting are used in different countries. For example, in
Australia fees are set by the federal government for the majority of courses in
universities.¹⁵³ Where the government
provides full tuition subsidies, such as in Ireland, enrolment is invariably
strictly limited (and participation reduced).

Strategies for setting student fees in New Zealand vary between providers.
Some providers appear to have taken a relatively simple approach, wherein fees
represent the difference between the cost of delivery and government subsidies.

Most providers, however, have taken more complex approaches to fee setting,
and these have resulted in commensurately complex fee structures. In some cases,
relatively low fees have been set (at times discounted below average cost) in
areas where a provider faces direct competition or is attempting to attract a
greater share of available learners in a particular programme. In other cases,
it appears that providers may have set fees at a level much higher than course
costs would indicate - because of high demand for the course, price
inelasticities, or a lack of competition.

An important issue in fee-setting is whether fees should be flat or
differentiated. In the early 1990s, most universities initially set a flat fee
across the institution (but this approach is now far less common) while
polytechnics generally differentiated their fees. The main reasons advanced for
adopting a single flat fee across all courses within an institution are to
provide equality of access for all students and to ease administrative and
transaction costs.

A related issue is whether learners in high-cost courses should pay more. If
fee-setting is closely related to cost, an expensive course will attract a
correspondingly high tuition fee. In practice, most providers initially opted to
flatten fees, even where they did not institute a completely flat fee-structure.
A consequence of this approach was that learners in low-cost courses were
cross-subsidising learners in higher-cost courses. In more recent years, fees
have become more sharply differentiated at all providers. Anecdotal evidence,
however, suggests that a high level of cross-subsidisation still occurs within
many providers: for example, most typically charge only marginally higher fees
for science courses than arts courses, even though the respective gap between
costs and subsidies can be significant.

It is difficult to find reliable data that would enable a fair comparison of
fee-setting policies in TEIs and PTEs. The Commission is concerned, however, at
anecdotal evidence that fees in PTEs have not been reduced after the granting of
equal access to tuition subsidies for such providers in 2000.

The key argument in favour of autonomous fee-setting is that providers are
best placed to determine relative cost and quality trade-offs. Delivering
education in an environment of limited financial resources will always require
hard decisions on how costs can be contained while still ensuring that
programmes are delivered in an effective manner. The Commission firmly believes
that those involved in providing a particular programme should, within
reasonable boundaries, be responsible for determining the balance between cost
containment and effective programme-delivery.

Furthermore, in an uncapped environment in which provider funding is tied to
learner enrolments, autonomous fee-setting provides significant efficiency
incentives for providers, as learners will take into account the cost of their
education when deciding what and where to study. It also has the significant
advantage of not involving the government (or such bodies as the TEC) in
protracted debates about the level of funding appropriate for a particular year.

8.2.2 Fee Stabilisation

The present government is committed to stabilising fees and thus ensuring
that the cost of tuition to learners does not significantly rise in the future.
The government's view is that steady increases in fees are not desirable as this
will reduce access to tertiary education, increase student debt, or both. To
this end, a policy of providing increased tuition subsidies in return for the
voluntary freezing of fees at TEPs has been in operation for the past two years.
The Commission has received several oral and written submissions on this
topic.154

There are a variety of potential methods for enhancing fee stability, as set
out in Table 8.1.

Table 8.1 Options for Stabilising Fees

8.2.3 Analysis

The Commission does not believe the current policy of fee stabilisation is
sustainable in the long-term, and consequently does not favour its retention.
The continuation of fee stabilisation policies under the present model would
unduly restrict providers' capacity to manage and plan strategically, and may
therefore negatively affect quality.

The Commission wishes to see tertiary education remain affordable for
learners, but recognises that there are trade-offs that need to be made in an
environment of limited financial resources. It is desirable to keep fees as low
as possible, so that any borrowing from the loan scheme is kept to a minimum.

The Commission is not generally in favour of centralised control of
fee-setting, nor does it favour centralised scrutiny and control of provider
inputs. These approaches are unduly bureaucratic, inconsistent with provider
autonomy, undermine the responsiveness of providers, and would not in the long
term achieve the objective of establishing a strong, self-managing tertiary
education system.

Individual providers are in the best position to determine the appropriate
balance between keeping fees low and delivering high-quality programmes. The
Commission thus favours confirmation in strong terms of the current legislative
provision that each TEI Council has the power to prescribe fees payable by
students of that institution. It does not support the abolition of this
legislative provision.

At the same time, the Commission sees merit in strengthening systems of
performance indicators and accountability while preserving provider autonomy
over fee-setting. A key element in this would be to ensure there is improved
information available on the quality of relevant programmes. This would allow
learners to make more accurate judgements about the relationship between the
cost of a particular programme and its likely quality. Chapter 12 provides in
depth discussion and recommendations in this area.

The Commission believes that strengthening accountability is consistent with
providing strong incentives for effective management, and that this does not
interfere with the ability of providers to determine the appropriate balance
between educational quality and the cost of delivering particular programmes. A
strengthening of accountability approach would not be unduly intrusive - and it
is likely in the long-term to lead to sounder financial management by providers,
a better quality of tertiary education, and better 'value-formoney' for
learners.

There were mixed views within the Commission on how any proposed
strengthening of accountability might be implemented in practice. The combined
use of charters, profiles, the desirability and quality tests, and an improved
accountability regime hold the best promise for keeping fees as low as possible
while ensuring that providers are able to manage effectively and that learners
obtain value for money.

The Commission does recognise, however, that there may be some merit, if the
government wished to continue its fee stabilisation policy, in identifying a
middle ground where tuition fees could be adjusted for changes in
cost.¹⁵⁵ The rate could be determined
either by application of the Consumer Price Index (CPI) or the proposed TEPI.
This policy would have the advantage of allowing some providers flexibility in
revenue gathering in order to manage cost changes, but would keep control on
movements in fees. If this measure was pursued, then tuition subsidies and
related Funds¹⁵⁶ would also have to be
linked to the CPI or TEPI.¹⁵⁷

It is also worth reiterating that learner fee levels are closely related to
the level of public investment in the tertiary education system. The government
is therefore able to influence the overall level of fees through adjusting the
levels of tuition subsidies.

To summarise, the Commission wishes to see tertiary education remain
affordable for learners. Nevertheless, the Commission believes that fee-setting
authority should remain with providers. Centralised fee-setting arrangements
have the potential to significantly increase administrative costs for
government,¹⁵⁸ to conflict with
principles of provider autonomy, and to restrict the responsiveness of
providers. They are also inconsistent with the objective of establishing a
strong and self-managing system. Furthermore, the Commission believes that
central government is not able to make appropriate judgements on the balance
between acceptable fee-levels and the delivery of high-quality education.
Retaining provider autonomy in fee setting is integral to maintaining and
improving the quality of the tertiary education system.

Recommendation 36

The Commission recommends the retention of the current legislation that gives
councils of Tertiary Education Institutions the power to prescribe fees payable
by students of the institution.

Minority View

One Commissioner favours the view that a funding system driven by learner
demand and choice should closely align learner fees with the total cost of
delivering a programme. This Commissioner believes that providers will
increasingly reject cross-subsidisation and instead diminish the quality and
quantity of lowmargin courses. The Commissioner therefore favours developing a
larger number of funding categories to underpin the delivery of tuition
subsidies and so ensure there is a close relationship between the tuition
subsidy and the cost of programmes. It is argued that this approach, when taken
in conjunction with the retention of provider autonomy in fee-setting, will be
the most effective way of achieving differentiation and appropriate quality.

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Footnote(s):

153

This can and has, in Australia's case, led to problems where fee levels are
constrained but costs and (in particular) salaries are not.

154

For example, a letter from Dr. John Hood, Vice-Chancellor of the University
of Auckland, contains background explaining the financial pressures facing the
university.

155

This could be determined either at an average level within a provider, or on
a course-by-course basis.

156

The CoREs (Models A and B), SDF, PBRF and ACE Fund.

157

There is an argument for increasing public funding while maintaining fees at
their current level. This would increase the overall level of funding available
to providers of tertiary education and would consequently enhance their ability
to deliver programmes of an appropriately high quality.

158

Especially if policy-makers set multiple, rather than flat, fee levels.