Uncapping university efficiency

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A key policy difference between the federal government and the opposition relates to the capping of federal funding for university places. There are multiple effects of this policy including those relating to society, economic opportunity and equity as well as government cashflow and university efficiency. The research described here examines the consequences on university efficiency (as measured by outputs per million dollars spent) of the uncapping of funding.

In 2010 the then federal education minister announced a policy shift that significantly would reduce restrictions on universities in enrolling domestic undergraduate students. This policy took full effect from 2012 and had an impact on domestic commencing student enrolment.

Note the spike in commencing enrolments peaking in 2012 — the first year of full implementation with the impact largely dissipated by the end of 2014.

The first question examined: Is the uncapping associated with an increase or decrease in overall efficiency of the university sector?

An underpinning rationale for efficiency improvements relates to universities being able to enrol more students with only a marginal cost effect. Essentially, this is an economies of scale argument delivering increased efficiency. An opposing proposition is that adding students who may be less suitable or prepared for university education may increase costs — decreasing efficiency.

The data we use comprises:

• Educational outcomes measured by student load per annum and research published per year as the research outcomes measure.
• Inputs in the form of total annual university expenditure.

The analysis uses the REEF Index, a multivariate frontier analysis model that simultaneously captures the joint effort (and cost) of the key university outputs — education and research. The test is the sector-wide average university efficiency in 2011 (being the year before full implementation) compared with 2012.

The result shows a marked improvement in efficiency between the two years measured sector-wide. A sensitivity test, using 2010-11 pooled data as compared with 2012-13, shows an identical result.

Given this result, the next question becomes: Did this improved efficiency persist? That is to say, was the efficiency gain a one-off or was it enduring?

Using the same analytic approach, results show efficiency increased across the period 2011 to 2016. This result is, however, a sector-wide result masking a wide variation between outcomes for individual universities. While the great majority of universities experienced gains in efficiency (some exceeding 30 per cent) across the five-year period, a few showed signs of lower overall efficiency.

The empirical evidence is consistent with the position that uncapping funding is no threat to university efficiency and is associated with a net sector-wide efficiency improvement that persists beyond initial implementation. However, while the net result is positive, there may be negative effects, at least for some.

The uncapping of funding and the consequential student population growth may have many consequences. Some of these are demand-side effects including the suitability for, and level of preparation of, students admitted to higher education.

There are also supply-side consequences including: Can universities attract appropriately qualified staff? Will the necessary enlarged infrastructure and back-office services be provided efficiently? Other potential consequences also exist.

Some argue that student attrition is a key potential negative consequence. We therefore have two more questions. Did attrition increase after the policy implementation? And was there a negative efficiency effect?

The data shows that attrition increased markedly. In 2012, the national average “new adjusted attrition rate” was 13.3 per cent rising to 14.7 per cent 2013 — a 10.5 per cent year-on-year increase. In 2014 and 2015 it stabilised at 15 per cent, dropping to 14.4 per cent in 2016. More recent data was unavailable at the time of writing.

The efficiency effect of attrition is tested using a three-dimensional REEF Index model, one dimension each for education, research and attrition. Results show a significant negative efficiency effect for attrition. This effect spiked soon after the full implementation of uncapped places. The graph shows the levels of inefficiency attributable to attrition (within a multivariate model including measures for research and education) by university grouping across the period 2010 to 2014.

What is striking is that the negative efficiency impact for 2013-14 is far from being evenly distributed across universities. For the Group of Eight (with one possible exception), there is no significant effect. In the broad, other groups (and ungrouped institutions) bore a negative efficiency burden.

For more than a dozen universities, the inefficiency effects associated with attrition more than tripled between 2012 and 2014. While some may conclude that this simply is a function of demand-side factors, the story may be more complex. We notice that there is an association between higher levels of total efficiency and lower (not higher) levels of academic staff casualisation. We emphasise that attrition is not the only source of observed total inefficiency but for some is an important contributor.

There are complex arguments for and against capping or uncapping of funding for places. Any policy position can have effects both short-lived and enduring. If one pursues a policy of uncapping places and recognises that a potential cost of this policy is attrition, then one may consider adopting support mechanisms for the sector. Two that may warrant consideration are:

• Directly funding institutions most effected by the added attrition.
• Providing additional funding to support educational innovations that lower attrition (one contemporary example being the block teaching arrangements under trial at Victoria University).

There are also other options.

The REEF Index results support the conclusion that uncapping of federal funding of places is not a threat to the efficiency of the university sector as a whole. Further, the increased efficiencies observed persist beyond the initial policy implementation. However, care is needed in managing an environment with uncapped places. Potential consequences, including attrition, warrant careful monitoring and, where relevant, policy action.

Keith Houghton is chief academic strategist and Mark Clisby is chief executive of the Higher Education and Research Group and Research Coaching Australia.