Will Universities Eventually be fully Privatised

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Will Universities Eventually Be Fully Privatised?


Abstract
"Looking to the Future", the speaker will discuss the question: will the Universities ever become privatised? Each year the Government sends us a signal that it would prefer it if the cost of tertiary education was borne by the student and the student's long suffering parents and grandparents. Each year the signal is sent that funding will be by student voucher and not by direct grant. The recent Group of Eight white paper seems to embrace this future. The speaker will outline why floating a major university onto the stock exchange might not be a very far-fetched idea. One thing is certain and that is that academic freedom would be much safer with ASIC and ACCC than it is with Ministers and their accompanying baggage.

Bio-note

Giles Pickford is an ATEM Ghost who works in the ATEM Secretariat. Before that he worked at the University of WA, UNE, AVCC, James Cook University, the Australian Cancer Society, the University of Wollongong and the ANU. He served as an Alderman of the Wollongong City Council from 1985-88 and he has served two terms with the ACT Cultural Council from 1991-96. He has a first class honours degree in English from UWA and is an Associate Fellow of ATEM.

***

Ladies and Gentlemen: Today I will ask you to use your imagination. Because when we look to the future we cannot know anything for certain. All we can do is imagine how it will be. There are many possibilities, as many as there are imaginations alive and well in this room today. None of the ideas that we will develop today can be proved to be right or wrong, yet. Because at this stage we are speculating about the future.

The situation we have today in our universities is quite different from what it was a life time ago when I started to understand the sector. The difference is that Governments are now hugely interested in what we do, and what they think we ought to do, whereas before they were disinterested: I repeat, disinterested, not uninterested.

Qantas Aeroplane

I am going to illustrate my point with a reference to Qantas Airways. A university is very similar to an airline. Both institutions take people from where they are to where they want to be. But the Government's view of the two enterprises is totally different.

One is a privately-owned business which was sold to shareholders by the representatives of the people who used to own it. The other is a publicly owned enterprise that the representatives of the people wish to control and micro-manage in the name of efficiency and effectiveness.

The Government is disinterested in the airline, but it is not at all disinterested in the universities. In fact it is so interested in the universities that the universities could be at the point of failure because of the Government's interest.

During the recent abortive attempt by private equity to buy Qantas the Government maintained an exemplary disinterest. Many pleaded with the Government to intervene, but it did not. The reason why it did not is because it is a given in modern western society that one must never interfere with the freedom of the publicly listed company. The modern corporation is the freest institution in the world today. It is subject only to reasonable constraints imposed by the Australian Securities and Investment Commission (ASIC) and the Australian Consumer and Competition Commission (ACCC).

So when it appeared that private equity was trying to buy the shareholders' airline for $282 million less than it was really worth1, the Government stood back and did nothing. Also ASIC did nothing and the ACCC did nothing. What saved the airline was that a small group of very big shareholders declined to sell. And that was the end of it. That is the freedom that exists in the world of the publicly listed company. How good it would be if universities were similarly free to manage their own destinies?

I will now give you a scenario of what would have happened if the Government had NOT been disinterested in the airline.

Imagine if the Government had told Qantas:

  • That the Government would decide how many seats it could sell
  • That they would have to sell them in 13 clusters with different pricing on each cluster
  • That Qantas would be penalised if it over-sold seats and also if it under-sold seats
  • That if there to be any research groups in Qantas, then the minimum size of the research group would be five
  • That the Government would decide how many directors could sit on the Qantas Board
  • And finally that Qantas would be prevented from paying salary increases to staff based on the usual CPI measures.

If this had been the case the airline would have gone belly-up and private equity would have turned its attention to Fosters instead.

Why we are in such dire trouble?
The university sector today is in dire trouble mainly because crippling funding cuts, combined with massive increases in student load, have made it difficult for academics to train new academics. This has been demonstrated with authority by Dr Mike Kent in Campus Review2

Here is an extract from the article.

"Kent described the higher education sector as a threatened species pushed over the edge by corporatisation and economic rationalism. He drew an analogy with Western Australia's long living but endangered Carnaby's black cockatoos, still seen in Perth even though their habitat has been destroyed and the only remaining specimens may be past breeding age.

"Australian higher education could be in the same situation, Kent argued, due to the twin threats of casualisation and an ageing workforce. The increasing reliance on casual teaching staff now estimated to teach 70 per cent of all first year classes means the workforce lacks the inherent ability to regenerate. And the looming retirement of a big chunk of the baby boomer dominated workforce now aged in their early 50s, on average means many of today's university staff will be gone in a decade or so.

"Universities may be 'destroying the long ­term viability of the industry by failing to address the sustainability of the academic workforce,' wrote Kent. 'The short term gains of casual employment will damage the long term productivity of the workforce, making it harder to attract and retrain staff just as the retirement of existing staff is about to enter a crisis period.'

"And there'll be no replenishing the workforce with overseas academics, Kent said. North America, the UK and New Zealand are experiencing the same problems. It may turn out that what we are witnessing now is an institution which is already extinct, but not yet dead."

That in a nutshell describes the problem and the urgent need to do something about it.

Gulliver Tied Down

The universities have been tied down like Gulliver by the Lilliputians. The Lilliputians are not only in Parliament and the bureaucracy, but also in the universities themselves. Universities have actually been complicit in creating the situation they are now in, although they complained loudly and ineffectively all along the way.

There may be a number of ways to escape from the extinction that approaches. My purpose today is to describe one of them. But I am not saying that it is the only way out.

How can universities regain the ability to manage their own destinies?
Let us imagine a large, prestigious university that was owned by its alumni, staff, benefactors and friends. This would be a publicly listed company, which with the help of the Macquarie Bank, Goldman Sachs Were and Credit Suisse, floated itself on the ASX.

It has three classes of shareholders A, B and C

  • A-Class preference shareholders would be the alumni, staff and the University's friends and benefactors. Only A-Class shareholders would participate in electing Management.
  • B-Class ordinary shareholders would be the investing public which would participate in dividends but which would not have a vote on choosing management.
  • C-Class deferred shareholders would be students. Their shares would be deferred shares which would convert to A-Class shares when the student had graduated and could afford to pay a discounted price for the shares.

The University would be floated to these publics. My guess is that the book build would result in a major prestigious University being valued at around $11.11 billion which is about the value of Qantas today3.

Having imagined this situation, let us imagine all the objections that some people would raise. Here are a few.

  1. How will the public be compensated for the loss of sunk capital?
    (sunk capital is the land and everything on it which was paid for by tax payers years ago) The answer is that the public would be compensated by being served by a truly efficient and effective University. My definition of such an institution is that it could even afford to pay its staff (gasp) the same as a private school teacher. It would be an institution in charge of its own affairs. It would be free to be the best that it could be.
  2. Who would want to buy shares in a University?
    The answer is that the UK higher education sector yields a rate of return (RoR) of 13% to a graduate and by extrapolation Australian graduates should be similar4. Qantas has a return on equity (RoE) of 9.2% and the ANZ Bank 18%. Prospective students looking at a return like that would be prepared to pay the cost of such an investment. People do not realise how profitable universities are: or rather how profitable they could be if they were free to do what they need to do and charge what the market would willingly bear.
  3. Who would want to buy non-voting shares in a University?
    The answer is that Standard and Poors would give a credit rating to the University which does not indicate profitability, but it does indicate the ability to borrow against assets and income. For example, the ANU has a credit rating of A-, Qantas has one of BBB+ and the ANZ Bank has one of AA (source - Citigroup). After shares in the University had been trading for a minimum period of time it would be given a weighting in the stock market indices, and once it had a weighting then the index funds would buy shares in it according to that weighting. And the index funds won't be the only ones buying such non-voting shares either. Anyone with a brain will be buying them.
  4. How could anyone sell a university to investors?
    The answer is given by the poet William Blake who said, with tongue in cheek, that "Education is the only commodity that people are prepared to pay for without getting anything in return". If you are selling a commodity like that then you are going to succeed.
  5. Why should anyone own a University?
    The Moon is free, Antarctica is free: nobody owns them. Why can't universities be like that?

    I think that in the age we live in, the freest institutions are businesses. Universities ought to be free. Therefore Universities ought to be businesses: PROVIDED that they are owned by staff and alumni.

    The Moon is free and so is Antarctica: which is good. But Universities are not free. They became captive at around about the time that graduates invaded parliament and the public service. They must be freed again. The graduates have to become shareholders before their vision will become clearer than it is at the moment. There is nothing more clarifying than having ten bob on it.

    The current disconnect between graduates and their university is extremely unhealthy and something must be done to alter that. Selling ownership of their universities to graduates achieves three things. It raises money for universities, it removes the dead hand of government and it gives the graduates a pecuniary interest in maintaining and improving their university.

6. I don't believe any of this. Who owns Bond University and is it profitable?

  • The answer is on the Bond University web site and here it is.
  • Total revenue is $98.244M representing growth of 20.5% over the prior year
  • Total expenditure at $82.780M grew by 6.2% over the prior year
  • Total Assets at $110.625M increased by $8.76M principally through growth in cash reserves and property, plant and equipment
  • Bond is a company limited by guarantee with no shareholders.

The only pity in all that is that Bond has no shareholders. Shareholders are an asset, not a liability.

7. It is not appropriate for higher education to be sold to the highest bidder and to be subject to the crass world of commerce.

Bad luck, it already is. Luke Slattery writing in the Australian Financial Review of 20 August 2007 noted that "The number of students paying full fees of as much as $237,000 for undergraduate degrees has doubled over the past year, suggesting that the equivalent of a large metropolitan private university for Australian Students is already operating within the public university system".

Tim Curtin an education economist from the ANU Emeritus Faculty has produced the following tables derived from Bond University's data above:

Bond University A$M
Assets 110.63
Revenue 98.24
Expenditure 82.78
Net Income or Profit before tax 15.46
Return on Assets (%) 14.46

Tax @ 30% 4.64
Profit after tax 10.82
Dividend @50% of PAT fully franked 5.41
Grossed up by franking credit 10.05
Retained profit 5.41

Curtin raises the troubling question of how tax would impact on my proposed model. It certainly would reduce dividend yield to around 5.5%. My only answer to that difficulty is that the government may be persuaded that, in exchange for zero direct grants to privatised universities and increasing revenue from the private sector, legislation limiting the tax take from these special institutions should be passed.

Curtin also raised the problem of what to do about HECS and the low-income student. I quote. "What I suggest is that the privatised University takes over the HECS loan book, itself providing new loans, and charging a fully commercial rate of interest to be collectable BY DEDUCTION (managed by ATO) from the students' future income tax payments (NOT from their pre-tax income as under HECS). Thus students' loan repayments would not be additional to their income tax as now, but would be funded by their income tax."

"I think this would really capture the attention of Howard and Shergold as the universities would then be fully self-funded, using their own borrowing powers to fund the poorer students' fees, with collection of repayments from the ATO by simple deduction from the extra tax (not income) payable on their higher than average earnings as a result of their degrees. Costello should like it once he sees the saving from not having to pay any operating grants to the University and from not having to effect the transfers of HECS repayments to the universities. With its assured cash flow from these repayments, a privatised University would be able to pay handsome dividends."

How do we get past the obstacles?
I wonder whether governments would not want to lose control of universities. They have decided for better or for worse that they need to interfere constantly in university management. They do this in the name of efficiency and effectiveness, which has meant that Australian universities are now so efficient that they cannot compete in any real market that is geared towards keeping its staff happy, productive and profitable.

Here are the comparisons (data from web sites on 20 June 2007)

  • A recently advertised academic post: University of Melbourne: Sen. Lect. in Hydrology $96,410: Assoc. Prof. in Engineering Management $110,914.
  • Current School Teachers' Salaries: Range $27,000 to $125,000, Average $63,150 (Ref. mycareer.com)
  • UK Comparison. Senior lecturers' pay rises to £47,262 (or £44,328 in post-92 institutions) and professors can earn between £44,818 and £200,000 per annum. New pay negotiating machinery was introduced in 2000-01 and, since 2001, average earnings for academic staff have increased by 20.3 per cent. (Ref. Higher Education Funding Council for England, Issues Paper July 2006/21)
  • Academic Salary relativities in Australia reveal that while Average Weekly Earnings rose 351% between 1977 and 2002, Professors rose 239%, Senior Lecturers 240% and Lecturers $283% (Ref. Australian Academic Salaries Time Series Report 1977-2002 Horsley and Woodburn)

The only conclusion we can reach is that in these conditions those with any get-up-and-go would have got up and left some time ago.

If a large prestigious university put a case to the Government that it wanted to privatise and that as a result of that it would no longer require a direct grant, what do you imagine the result would be: outrage or relief? It is hard to say.

But such a university would naturally request the FEE HELP subsidy which is given to the private sector institutions, and it would be entitled to do so, because it would have joined those institutions. It would have a substantial income coming through the doors in the form of student vouchers, which are clearly on their way in for all universities, private or public.

The Group of Eight White Paper5
The Group of Eight Universities in its recent White Paper has stated that something must be done now to change higher education in Australia. I have extracted some phrases from the summary which say it all.

"A considered process of transition management will find redundant at various stages not only particular settings on the policy instruments in place but also the instruments themselves. A tipping point is reached eventually when the redundancy of the instruments requires a new policy paradigm. We believe that point has been reached.

"We see the opportunity to replace the existing centrally controlled supply model with a more dynamic model of 'balanced incentives' to steer the future development of a diverse, high quality sector.

The cost-setter proposed by the Go8 is the Productivity Commission while the regulator will be the new Australian Tertiary Education Commission, with ACCC having the industry overview.

In my model the cost setter is the market with the regulators being ASIC and the ACCC.

To my mind the Go8 paper goes part of the way towards the ultimate goal of freedom for universities. The ideas I have put forward today go all the way.

I close by noting that I did submit this paper to the Go8 for comment. The response from the Go8 spokesman was that if he was reviewing this paper for publication in a refereed Journal he would recommend against publishing it. So would I. These ideas are purely imaginative, as I said in the beginning, and I put them forward for discussion by practitioners gathered at a Conference. Not every speculation or kite flown at a Conference is ready for publication.


References

Table 1

Private

Public

Social

Rates of return

%

%

%

Lower Quartile

12.25

5.41

8.17

Median

12.49

6.14

8.87

Upper Quartile

12.67

6.53

9.46





Net Present Value

£

£

£

Lower Quartile

34,529

8,233

42,762

Median

48,828

15,007

63,835

Upper Quartile

79,970

23,081

103,052

Notes to Table 1

The Table shows "internal rates of return" to private and public investment in tertiary education. The base data come from the UK's General Household Survey 1990 and from its Inland Revenue Statistics 1994. The former shows average earnings by age and level of final education, and the latter provides data on income tax paid by level of income. The procedure is to take the difference between the after-tax earnings of Year-12 school leavers who did not acquire degrees and the earnings of graduates. The Survey provides only cross-section data for 1990 but it is possible to obtain a time series by assuming that those aged say 25-30 in 1990 would by 2000 be earning what those aged 35-40 earned in 1990, and so on. In 1990 tuition fees were nominal, but graduates incurred costs in the form of earnings forgone; such earnings are approximated by the actual earnings of non-graduate Year12 leavers in the relevant age-group. These forgone earnings were the main private costs of tertiary education in 1990 (except for those whose parents were means-tested out of the government's student support grants). The private rate of return relates the extra after-tax lifetime earnings of graduates to their private costs. The data in Table 1 show that the average individual's Private rate of return on a degree ranged from 12.25% for the lower quartile to 12.67% for the upper. Both are well above the real rate of return on private equity shareholdings.

The Public (i.e. government) rate of return relates the extra tax receipts it obtains from the earnings of graduates vis `a vis its tax receipts from non-graduate Year 12 leavers to the government's average cost per student in higher education (including support grants). The data in Table 1 show that the British government obtained a real rate of return on its investment of up to 6.4% p.a., which is well above the long-run real rate of interest on government borrowing (currently about 2.9%).

The so-called Social ("national" would be a better term) rate of return is simply the before-tax income of graduates vis `a vis non-graduate Year-12 leavers with respect to the total per-student private and public costs of higher education. This was the rate of return concept used by Bob Jenkins, and Bruce Chapman in the Wran Committee Report (1988); by assuming that graduates pay no income tax, they were able to justify the introduction of HECS.

The Net Present Values (NPVs) show the monetary value in pounds sterling in 1990 of the lifetime incomes of graduates before- and after-tax when discounted at 4%. But as Table 1 shows, graduates' after-tax private NPVs were well below the "social" NPVs - for an upper quartile graduate the difference was £23,081, which represents the net benefit to the Government after it spent £22,500 per graduate. In other words, the British government more than doubled its money outlay by providing subsidized higher education.

 

The complete data-base used in the calculations in Table 1 may be found in Tim Curtin's paper

"Project Appraisal and Human Capital Theory", Project Appraisal, 11.2, June 1996
(photo-copies available on request to
tcurtin@bigblue.net.au) Tim Curtin
ANU Emeritus Faculty 1st August 2007

 


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