Soaring university fees ‘reflect lack of efficiency incentives’

Australian degrees are becoming ever more expensive because universities have no incentive to make them cheaper, a professor claims.

In a new paper, University of Melbourne accountancy professor Matt Pinnuck says no Australian universities have the “stated objective” of reducing costs for students. Instead, annual reports and strategic documents proclaim every institution’s ambition to spend as much as possible on “grand” research projects.

Much of this spending is lavished on acquisitions that are “difficult to reverse”, like buildings and additional academics. The costs of running the new facilities and paying the extra staff, combined with an average “degree mark-up” of 18 per cent, are baked into ever-higher fees.

The report, which is being published on the university’s website pending peer review, tracks the per-student costs of education – including salaries, operating and capital expenses – between 2004 and 2022. In real terms they have risen about 18 per cent despite technological advances and increasing economies of scale.

Professor Pinnuck said the rising cost of education delivery was “strongly associated with the increasing revenue stream from overseas fees”. There was little evidence that this income had delivered better quality, with no corresponding increase in students’ ratings of their university experience.

Rather, the money stream had delivered lower productivity. “Universities are very…inefficient in delivering education,” the paper says.

Professor Pinnuck conceded that universities could not devote all their resources to teaching because they were legally obligated to conduct research. “The question is, how much research should the university sector be doing?” he said. “The question is never asked.

“Planet Earth has said everybody must go to uni…so universities employ all these teaching and research staff. We’ve got a massive oversupply of researchers. It’s supply-driven rather than demand-side driven.”

He said shareholders in the corporate world expected executives to provide consumers with “the highest quality product at the lowest possible cost. Unfortunately, [in] the university sector…we don’t have the external shareholders turning up to an annual general meeting and [asking], ‘Why are these costs going up?’

“Students simply haven’t got sufficient vested interest. They just assume the adults are in charge and we’re doing a good job.”

The paper says the government’s debt relief proposals will make matters worse by offering no incentives for efficiency.

A better solution, it says, would be for universities to adopt a “cost minimisation” objective and demonstrate it through mandated reporting in their annual financial statements, backed up by “greater accountability and corporate governance over these cost-efficient metrics”.

Universities’ current reporting is dictated by accounting standards that “are designed for for-profit entities”, the paper says.

Professor Pinnuck said universities routinely breached one of those standards, AASB 8, which requires organisations to report separately on the performance of their distinct operating segments.

He said universities separately reported the revenue they earned for their “two main products”, teaching and research, but made no attempt to separate out the costs. This robbed their students, the public and their own executives of crucial information to evaluate their performance.

“If you want to manage a resource, you should know the…investment you’re making in that particular product,” he said. “The deans and the vice-chancellors wouldn’t have a clue, really.”

john.ross@timeshighereducation.com