Potential efficiencies for a merger of three SA public universities

INSIGHTS & RESOURCES

A merger of the three SA public universities could bring efficiencies

The Australian
by Keith Houghton
11 May 2022

Quick read:

South Australia’s new Premier, Peter Malinauskas, proposes creating a commission to investigate merging the state’s public universities (Adelaide, Flinders, and South Australia).

The goal is to improve the state’s economy by creating a larger, more internationally competitive university. The potential outcomes include enhanced university-industry engagement and research commercialization.

However, there are concerns about productivity gains and possible diseconomies of large scale. An analysis using the Research and Education Efficiency Frontier (REEF) modeling technique shows the merged entity’s productivity outcome to be strong but not sector-leading, assuming no merger benefits or losses and no effects from economies of scale.

The discussion in the post focuses on a merger of all three public universities.

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Full article:

South Australia’s new Premier, Peter Malinauskas, has proposed creating a commission to investigate merging the state’s public universities.

As he said in his pre-election policy statement: “Our universities (Adelaide, Flinders and South Australia) are crucial for our state’s economy … However, each of our universities alone is too small and too undercapitalised to make it into a list of top international universities. This is holding our state back.

“(We) will establish a university merger commission to chart a path for the future… Its task will be to determine how the state can be best served by the university sector and determine the path toward a successful merger.”

Other potential outcomes include strengthened university engagement with local industry and business that supports investment and research commercialisation.

Key to any merger is productivity gain, where “the whole (of the merged entity) is greater than the sum of the individual parts”. But gain is not guaranteed with mergers, and one potential fear is around diseconomies of large scale.
An enlarged entity may not be nimble and responsive to opportunities, or there may be no cohesive culture or shared vision.

Based on official 2020 student data, a merger involving all three universities would create a large university but not Australia’s largest. Such a merger would create a university of 66,000 students (full-time equivalent), marginally smaller than Monash University at 68,000, which itself grew through earlier mergers.

An analysis using the Research and Education Efficiency Frontier modelling technique provides insights into a merger’s potential productivity gain.

The REEF approach, developed by the Higher Education and Research Group, provides an integrated measure of productivity because it captures outcomes for both major activities of universities – education and research – in a single measure.
While there are many scenarios in respect of possible mergers, the discussion below focuses only on a merger of all three public universities.

The institution marked ‘A’ on the chart shows the productivity of the three universities summed together.

The merged entity achieves a strong, but not sector-leading, productivity outcome with above-average research intensity. This outcome assumes no merger benefits (or losses) and no effects from economies of scale.

 

 

Applying “what if” analysis reveals intriguing results. One scenario, which assumes that a merged entity achieves the strongest outcome found in any of the three universities across each of the two dimensions (teaching and research), results in significantly stronger productivity outcomes than any university currently achieves in Australia.

A less optimistic and arguably more realistic scenario is where the merged entity achieves productivity equal to the weighted average of the two strongest performing universities across the two dimensions. The performance of the least productive university in each dimension is discarded.

This analysis excludes possible benefits from the economies of scale of an enlarged institution. As acknowledged in the Malinauskas policy statement, each of the three universities is small.

The mean size of South Australian public universities in 2020 was 22,150 students (full-time equivalent) compared with an average of 33,400 across other state capital cities.

International data shows that small-scale diseconomies can exist where universities seek to be comprehensive, as opposed to being specialist.
This second scenario, (dot B in the chart), shows a unified South Australian public university outperforming others with a balance of research and education intensity.

It redefines the “productivity frontier” (purple line). This frontier represents the strongest level of productivity across the sector, irrespective of the research/education intensity mix.

Should this merger occur, South Australia could have a large, diverse institution with strong productivity outcomes freeing up funding to support further highpriority activities.

Additionally, it would result in an institution of the size well beyond where diseconomies of small scale occur. 

Importantly, HERG estimates that if we assume there are no significant emerging inefficiencies in academic activity and that, in the survey component of the ranking process, the merged university is identified as being linked to its predecessor institutions, then the new university will likely be included in a top 100 ranking.

The story, however, does not end there. Another key stated objective in the merger discussions is the potential for enhanced contributions to South Australia’s economy and community.

The importance of engagement and impact in this case (and others) has resulted in work by HERG in developing a third dimension to the REEF methodology. This third dimension recognises that, for some, productivity focuses not just on teaching and education but also on impact and engagement.

The analysis above is a first estimation. Use of granular data from individual universities will strengthen the validity and robustness of these estimates.

Important to acknowledge is that there are both costs and benefits with mergers. The challenges in implementing a merger – not least of which are employmentrelated and in the crafting of a shared culture and vision – can be significant. Resolving these and other strategic challenges will be crucial.

The potential for diseconomies of scale requires investigation. A merger into one mega institution creates a size rare in global terms. Less than 2 per cent of the world’s English-speaking universities are this large.

Any inquiry into the possibility of a university merger needs to investigate viable options with objectivity and rigour. We would argue that, based on the data, there is a case to establish an independent and authoritative universities commission.

The importance of the leadership shown by the state government should not be overlooked. If a merger inquiry occurs and new structural arrangements take effect, these events will inevitably alter the Australian national university landscape.

Keith Houghton is chief academic strategist at Higher Education and Research Group

There is growing anticipation that the federal government’s response to the Universities Accord review’s final report will come soon. Given this and the fact that the budget is less than a month away, it is timely to review one of the final report’s key insights.

Recently released analysis finds that one large Group of Eight university outperformed other public universities in its research and education productivity outcomes during the pandemic.

The joint and common cost problem arises where there are two or more outputs that arise from costs that are shared in the production of these outputs. In many situations, the ability to assign costs to these two or more outputs is not complex. But there are instances where it is highly complex. In these situations, there is a need to use advanced analytics to provide a valid and reliable estimate of costs.

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