Executive Summary

Executive Summary
Australia must become a learning society.	In the twenty-first century knowledge will be the most important currency of all. If Australia is to prosper in this new environment, and to continue to be a vibrant, open and inclusive society, we must also become a learning society. Higher education has a unique and vital contribution to make to the development of a learning society. Higher education should open, nurture and refine minds, and create independent learners who are able to grow intellectually throughout their lives and contribute fully and at the highest levels to society and the workplace. However, if our higher education system is to make the contribution to Australian society that we envisage in the next century and also operate at an internationally competitive level, we need to rethink fundamentally the way that we finance and regulate our universities. Top THE KEY CHANGES
Higher education has a vital role, but change is needed.	In essence, we need a policy framework that is driven by the needs and preferences of those who use the services of universities. This will involve three key changes. STUDENT CENTRED FUNDING In our view the most fundamental and important change that the Government could make to higher education is to move to a form of student centred funding. Students should have a direct relationship with universities and a real say in what universities provide. The best way to achieve this is to ensure that public funding for tuition is driven by students’ choices—at both the undergraduate and postgraduate levels—not negotiated between universities and the Department of Employment, Education, Training and Youth Affairs, as at present. PRIORITIES IN RESEARCH To increase the responsiveness of higher education research to the needs of the users of that research we need to emphasise strategic planning, priority setting and greater coordination of the national research effort. Australia, together with governments around the world, is experiencing a rapidly increasing gap between the demand by universities for research funding and the public capacity to fund that research. In this context priority setting cannot be avoided. A WORLD-CLASS HIGHER EDUCATION INDUSTRY These changes will come to nothing, however, unless we have a world-class higher education industry. Urgent action is needed to ensure that universities are able to make the investments in information technology and infrastructure that will be needed over the next two decades. Top A VISION FOR HIGHER EDUCATION The Review Committee was set the daunting task of conducting the first major review of higher education in a decade, and of charting a course for higher education for the next 20 years. The terms of reference require a long–term, visionary perspective. We have therefore focused on developing broad principles, goals and strategies rather than a detailed blueprint for the sector. We hope that our report demonstrates why the changes we propose are necessary and, in some cases, urgent.
Underlying our recommendations is a new vision for higher education for the twenty-first century.	Underlying all of our recommendations to the Government and universities to achieve the changes that we think are necessary is a vision for the higher education sector for the twenty-first century. As we observed in the Discussion Paper, many people expressed a feeling that higher education is beginning to lose its way. A new focus and new strategies are required to consolidate past gains and meet future challenges in vastly altered circumstances. A vision for higher education for the twenty-first century must clearly articulate the role of higher education in a learning society, and the importance of higher education’s contribution to lifelong learning. A key requirement is to equip our graduates to play a productive role in an outwardly oriented, knowledge-based economy. This vision must recognise the importance of teaching as a primary objective for universities, as well as the contribution that research makes to the higher education enterprise and to Australia’s economic and social and cultural development. Central to the vision is ensuring that no Australian is denied access to a high quality education at any level merely because of his or her social background or financial circumstances. From the introduction of Commonwealth Scholarships in the 1950s to the birth of Open Learning in the 1990s, Australia has embraced affordable accessibility to higher education as fundamental to national development. Finally, this vision must be owned by universities, governments and the community, including the students and staff of our higher education institutions. Top BUILDING A HIGHER EDUCATION SECTOR FOR THE FUTURE
If we are to realise this vision we need a new financing and regulatory framework	To be successful our report must engender a sense of urgency about the need to reform the funding and regulatory framework for higher education. A new policy and financing framework is needed to achieve the Committee’s vision for higher education. The funding and regulatory framework needed to serve Australia over the next 20 years must be built on clear educational and industry related principles. We think that all Australians should have access to some form of postsecondary education to equip them to prosper in the knowledge economy. Providing high quality learning experiences should be at the heart of university endeavour. Students should be able to choose from a diverse range of study options. The location, content and mode of delivery of education should be built on a direct relationship between the student and the providers of postsecondary education, thus ensuring that institutions are responsive to students’ preferences. Financing arrangements should emphasise accountability to individual students and provide a framework for the management of financial risk to protect students and taxpayers. Financing arrangements should also embody fair levels of private and public contribution that reflect both the benefits to society and the significant private benefits that are generated by participation in postsecondary education. Research funding arrangements should enhance the effectiveness of the Government’s investment in research by ensuring that public funding is allocated in the context of a strategic view of Australia’s total research effort, with an emphasis on transferring knowledge, technology and skills to industry and the broader community. It is vital that adequate government funding be maintained. Given the importance of higher education to economic growth, government decisions on the level of resources to be provided for higher education should be made on the basis that the risks associated with underinvestment in higher education are greater than those of overinvestment. Australia’s universities must transcend local, sectional interests and the historical perception of their role as educators to become major partners in further promoting a world-class education industry that can play an even wider role in driving the growth of our economy. Top WHY IS ACTION NEEDED NOW?
Action is needed because the world is changing and our current policy framework will not cope.	The sense of urgency that we are seeking to generate may surprise some. However, the Review Committee’s reasoning is straightforward: the world in which universities operate is changing—and changing fast—and Australia’s current policy and financing framework will not be able to deal with those changes. FUTURE DEVELOPMENTS
Over the next two decades:	We believe that over the next two decades the operating environment of higher education institutions will be fundamentally changed by developments in four key areas. *Community expectations*
community expectations will increase;	The community’s expectations of higher education institutions will increase. Students, their parents, and their employers will expect better outcomes from universities and, in line with developments in other service industries, they will increasingly look for products tailored to their particular interests and needs. The growing importance of knowledge-based industries, and the increasing role of research in solving social and economic problems, will increase the importance that the community attaches to higher education. *Demand*
demand will increase;	The number of students, from both Australia and overseas, seeking access to Australian higher education will also increase. Demographic pressures mean that the number of Australian students seeking first time access to higher education will rise over the next two decades. We are also confident that in the long term the international market for higher education services will grow (though our place in the international market cannot be taken for granted). In addition, it is clear that significant growth in demand for continuing education among mature age students is likely, as is an increase in demand by employers for skilled workers. *The digital revolution*
the digital revolution will cut even more deeply into our lives;	Developments in information technology have the potential to revolutionise the management processes of universities and the education products that universities provide. Developments such as the Internet and the World Wide Web will create opportunities for higher education institutions to change fundamentally the way that teaching and research are conducted, and to revolutionise the way that they manage their administrative processes. *Competition*
competition will increase.	Competition will increase among Australian higher education providers and among players outside the established networks. Potential competitors for Australian students include not just Australian higher education institutions, but also providers in other education sectors, new entrants in associated industries such as publishing, media and telecommunications, and international higher education providers. Top THE IMPORTANCE OF FLEXIBILITY These challenges are discussed in detail in chapter 2. We do not claim to know precisely how these developments will change the world over the next 20 years. However, we do know that changing patterns of demand, the digital revolution and increased competition will change our world, and it would be very unwise for institutions, or governments, to assume that they will not be touched by such developments. These broad developments, and the ultimate uncertainty of the future, underline the importance of a policy framework which gives as much flexibility as possible to universities and students, and highlights the importance of building institutions that are responsive to change. CURRENT POLICY FRAMEWORK
Our current policy framework is not equipped to deal with change.	The policy and funding framework that has supported the higher education system over the past decade has served Australia well. It has successfully sustained massive growth in student numbers. It has been accessible and has supported the emergence of higher education as a major export earner for Australia. It has supported a significant expansion of funding for research. It has accorded a high degree of autonomy to institutions. However, it is evident that this will not enable universities to respond effectively and quickly enough to the challenges and opportunities that will emerge over the next 20 years. *Inconsistencies in approach*
It is inflexible and inconsistent …	Our regulatory framework is still too dependent upon centrally determined targets, despite progressive decentralisation over the past decade. The number of fully subsidised students, the course mix, and the funding rates per student, are centrally determined. So the largest single element in the budget of institutions is determined centrally, by government. Under these arrangements institutions cannot effectively respond to students’ needs and the system has little capacity to respond to demographic movements. Incremental changes to fee paying arrangements have been made over a number of years to increase the influence of demand for places and to diversify the income sources of universities. The final result is separate arrangements for domestic postgraduate fee paying students, domestic undergraduate fee paying students and overseas fee paying students, reflecting the different policy aims at the time they were introduced. In line with broader industrial relations changes, institutions have greater freedom in wage bargaining. However, this has not been accompanied by the flexibility or incentive to make use of that freedom in ways beneficial to both staff and students. Because greater industrial relations freedom has been granted without a commensurate increase in the capacity of institutions to earn additional revenue, institutions can fund wage increases only through cost cutting, which for many has taken the form of staff redundancies.
… and it prevents a postsecondary perspective.	The current framework does not allow government to view postsecondary education and training as a whole, and weakly manages the boundaries between higher education and vocational education and training. We do not take the view that the two sectors are homogeneous, or that they ought to be so. But the separate regulatory and funding arrangements for the two sectors mean that decisions cannot be made about the best use of the resources available for postsecondary education in Australia. Artificial boundaries distort students’ choices between vocational education and training and higher education and also affect the way institutions in both sectors respond to student and employer needs. Top *Incentives*
The incentives generated by current arrangements are perverse:	The current funding framework offers incentives to invest time and energy in research more than it encourages an enduring commitment to excellence in teaching. Because most domestic students have no direct financial relationships with their institutions, universities have few direct incentives to ensure that their products and services meet the needs and preferences of Australian students.
incentives to respond to the needs of students are weak;	As long as course fees are centrally fixed there are no incentives to reduce costs to students. The only incentive to seek low cost delivery options is the need to fund salary increases. Controls over student numbers and funding rates mean that institutions cannot make a trade-off between cost and volume. Setting the volume of funded students at a particular university on the basis of negotiations between the institution and DEETYA means that student choice does not drive the allocation of funding to institutions.
Innovation and diversity are not encouraged.	Institutions have few incentives to be innovative or to re-engineer traditional approaches to teaching and administration. It is hard to see tangible ways in which diversity among institutions is encouraged. Funding per student is centrally determined and, so long as each university fills its quota of student places, it is guaranteed 100 per cent of the operating funding that it received in the previous year. While there is some diversity in the system, far greater differentiation is possible and desirable. The end result is that universities have strong incentives to solve funding problems by approaching governments rather than by better using their assets, exploring alternative delivery mechanisms, or attracting new customers. *Management*
Rewards and penalties do not promote an effective management culture.	Our current regulatory framework does not encourage or facilitate good management within universities. Outdated governance arrangements, which emphasise representation rather than experience and skills in the management of large enterprises, hinder many institutions in pursuing their objectives. Centrally determined funding rates and guaranteed funding levels provide few incentives for universities to be cost aware. Consequently, Australia’s universities lack information about costs and do not have a good understanding of cost structures. Poor management can escape unnoticed because current funding arrangements lack transparency in some crucial respects: the opportunity cost of the resources tied up in university assets is not explicitly identified; and subsidies for teaching and research are not differentiated. Top *Equity*
Equity outcomes are mixed.	Clearly some groups have benefited from the Government’s equity initiatives in the past decade. Women’s participation in higher education is now greater than men’s. In 1997, 54 per cent of students were females, up from 50 per cent in 1987. Women’s participation in non-traditional areas of study has also increased. Initiatives to introduce Aboriginal and Torres Strait Islander students to higher education have been very successful. The number of Indigenous students has more than trebled, albeit from a low base. In 1996, the proportion of Indigenous students among commencing students was broadly comparable with the proportion of Indigenous people in the university age population. However, Aboriginal and Torres Strait Islanders continue to be under-represented in many disciplines (particularly law and medicine) and in postgraduate study. Almost half of Indigenous students embarking on higher education courses were enrolled in sub-degree courses and their success rate was low—about 65 per cent, compared with 85 per cent for other students. People from low socioeconomic backgrounds and from rural and isolated areas are still significantly under-represented in higher education (indeed, access and participation rates for rural and isolated students actually declined between 1991 and 1995). Students with disabilities are also still under-represented. *Competition and entry to the market*
Competition is limited and significant barriers to entry to the market exist.	Many of the current practices in Australian higher education would not have survived in an open market—students would have voted with their feet long ago. However, the perverse incentive structures which apply to Australian higher education institutions are underwritten by limitations on competition and the fact that entry to the market in higher education services in Australia is heavily restricted. ‘Public’ universities alone have access to public funds in the form of operating grants. The highly subsidised education at these universities makes it difficult for private institutions to compete for students on price, or even to enter the market. Publicly provided income-contingent finance is available to students only at public universities and to students studying through Open Learning Australia. This constitutes a major disincentive for students wishing to study at a private institution in that they must either pay tuition fees up front or finance tuition costs through a loan at commercial interest rates and under commercial repayment arrangements. Government funded interest free loans to students who defer payment of the Higher Education Contribution Scheme (HECS) contain a hidden subsidy. Accreditation arrangements act as a barrier to new entrants into the higher education sector. The University of Notre Dame Australia, Bond University and institutions such as the Melbourne College of Divinity are the only private higher education providers that can accredit their own awards. Limited access to the status of a self-accrediting body gives existing universities, which are established under their own acts, a substantial competitive edge. Established universities also have a substantial competitive edge owing to the long periods of public subsidy and endowments which they have enjoyed. Prospective competitors would need to make extremely large outlays before they could offer the same services. Top *Developing a globally competitive higher education industry* Australian universities will have difficulty maintaining competitiveness in world markets unless they are able to finance the investment in new technologies and other infrastructure needed over the next 20 years.
Australian universities do not have the resources to make the investments in information technology and courseware that will be necessary.	Urgent action is needed to strengthen universities’ ability to mobilise resources, and in particular to increase their capacity to invest in information and communications technology. This is all the more pressing because we detect an unwillingness in the sector to do the things that are necessary for higher education to realise its potential to become a world-class industry in the next century. Compared with the prestigious private universities in the USA, Australian universities have limited reserves and endowments. There has been no large scale private equity investment in higher education in Australia to date. Australian universities do not have the same access to cash reserves and the capital market as potential international competitors. However, under current arrangements, Australian universities are constrained in their ability to borrow funds (often approval is required from the relevant State or Territory Government and universities are generally unable to use land or buildings as security for commercial loans). THE WAY FORWARD Instead of the perverse incentive structures, inflexibility, restrictions on competition and entry to the market, and the poor access of Australian institutions to finance, we need a financing and regulatory framework that: responds to students’ preferences about study options and the location, content and mode of delivery of education, and provides high quality learning experiences which meet the particular needs of individual learners; protects students and taxpayers and is accountable to students and taxpayers for the investment that they make in higher education; facilitates effective investment by the Government in research and research training; and enables Australia’s universities to become major partners in a world-class education industry that can play a direct role in driving the growth of our economy. Our conclusion is that fundamental reform is needed in the funding of teaching and research and in the way that government supports higher education as an industry. Top SUPPORTING THE FABRIC – A WORLD-CLASS HIGHER EDUCATION INDUSTRY
A commitment to the industry is essential.	The reforms that we believe are necessary to the funding of teaching and research must be underpinned by a commitment to strengthening higher education as an industry. The Discussion Paper observed that many people within the system are uncomfortable with viewing higher education as an ‘industry’. We think that it is desirable and necessary for the Government to take an industry perspective on the higher education sector. Australia’s higher education institutions are a vital part of our economy. In 1996, higher education represented about 1.3 per cent of Gross Domestic Product, employed nearly 83,000 people and enrolled 53,200 international students—in the process generating about $1.4 billion in export revenue. Higher education institutions consume resources, provide services, manage assets and have customers. If these resources are not used effectively governments, students and the community will receive poor returns for the investments that they make in universities. To ensure that Australia’s institutions are able to develop into a world-class higher education industry in the next century, the Review Committee believes that action is needed in four key areas. Urgent action is needed to strengthen universities’ ability to mobilise resources, and in particular to increase their capacity to invest in information technology. Action is needed to reduce barriers to entry to the industry and increase competition. We believe that increased competition will produce a stronger Australian higher education sector while also benefiting Australian students and the community as a whole. An increasingly competitive industry structure must be accompanied by better consumer protection mechanisms than exist at present. Universities must do more to ensure that their decision making structures are effective. Top *Access to resources*
Universities must be able to have access to greater resources …	There is a pressing need to invest in information technology, computer assisted courseware and other infrastructure to maintain competitiveness in world markets. The paper prepared for the Review Committee by Global Alliance Ltd (GAL) argued that Australian universities do not have the capacity to finance substantial infrastructure investments. Compared with the prestigious private universities in the USA, Australian universities have limited reserves and endowments. However, the next wave of computer assisted courseware will be expensive to produce. GAL estimates that at least US$500 million would be required to develop computer assisted learning packages for half the first and second year subjects at a typical Australian university.
… and must have incentives to use their assets more effectively.	Institutions should be given enhanced power to use their assets to help finance the investments which will be required to take full advantage of the power of the new technologies. This could be achieved by the Commonwealth and State/Territory Governments developing a process for rationalising the ownership and control of assets used by universities. Furthermore, we recommend that once this is complete, the capital assets of universities should be liable to the same taxes and charges that apply to private higher education providers. This would help reduce the barriers to the higher education market that have resulted from favourable taxation and charging regimes. Because institutions would face taxes and charges on their assets they would have an incentive to sell assets that they were not using effectively. However, freeing up the assets of universities and providing them with incentives to use those assets more effectively will not be sufficient to ensure that universities are able to finance the investment that is needed. We therefore recommend that the Government establish a loan fund to finance major programs of innovation and structural change. We prefer loans over grants because loans provide far greater incentives for universities to focus their efforts on projects that will genuinely increase their efficiency. However, we believe that the loan conditions should allow flexibility in cases where the investments are unlikely to yield benefits for some years. Top *Regulation*
We must increase access to the market, while ensuring minimum standards	Current accreditation arrangements are a significant barrier to entry to the market. However, reforms in this area must be balanced by the need to ensure that all postsecondary providers meet minimum academic standards. Students need to know what they are paying for and taxpayers need to understand what they are subsidising. In the future, it is likely that a national system of qualifications will be an increasingly important source of competitive advantage in the international marketplace. We have made recommendations to ensure that there are nationally consistent criteria and processes for the recognition of university level qualifications and the use of the titles ‘university’ and ‘higher education institution’, and to ensure that accreditation processes allow private providers of higher education to become self-accrediting bodies with the same powers in this respect as universities which operate under their own acts of parliament. *Consumer protection* In the new, more competitive environment that we envisage for higher education enhanced consumer protection mechanisms will be required. In chapter 4 we make recommendations on the provision of information about university services, the establishment of an independent complaints procedure to support students, and the development of minimum standards of financial probity for institutions. Governance Sooner, rather than later, universities will need to address the essential incompatibility of a view of the world based on collegial decision making and an alternative view based on executive decision making and reflected in the size and style of operation of most business boards. Ultimately, the internal decision making processes of universities can be reformed only by universities themselves. We note that the imperative for universities to review and modify their decision making structures will intensify as their environment changes. Failure to address the inflexibilities of their current decision making processes will mean that institutions will not be well placed to operate under any financing and regulatory framework which increases competition among institutions and gives greater influence to student choice. Top TEACHING AND LEARNING
Building a direct financial relationship between students and providers is the best way to ensure that providers have real incentives to meet students’ needs.	Universities must be more responsive to students’ choices and preferences. The only effective way to achieve this is by building a direct financial relationship between providers of higher education and students. The Review Committee favours a model where public funding for tuition would be driven by students’ choices, institutions would be able to set fees for all students (initially subject to an upper limit for students receiving Commonwealth tuition funding), and access to public funding and income-contingent loan arrangements would be provided to all accredited higher education providers. Student centred funding is the best way of creating a truly responsive relationship between students and institutions. When combined with a lifelong learning entitlement, a student choice based approach to funding would provide universal access to government support across the postsecondary education sector. In particular, this student centred funding would: allow students’ choices to drive the flow of resources between providers and courses, thus giving institutions a real incentive to respond to students’ needs and preferences;
Student choice must drive funding and there must be price competition.	eliminate some of the current restrictions on competition and reduce barriers to entry to the market by freeing up access to government funding and income-contingent loan arrangements; and introduce an element of price competition, and significantly deregulate the setting of fee levels, thereby allowing institutions to make meaningful decisions about prices and volumes, and introduce real incentives for institutions to manage their assets effectively and to control costs. Top *Implementation—the need for a staged approach and reform to Commonwealth–State roles* In chapter 5 we outline how a student centred funding model might work. The Review Committee is mindful that some elements of its favoured approach may take time to implement. For this reason, and to allow universities time to adjust to their new environment, we advocate an incremental approach to reform based on four implementation stages. The four stages are described below. We note that each stage can be considered as a self-contained option. Our long term goal—the development of a lifelong learning entitlement—creates a consistent treatment of postsecondary education and training providers. This does not mean that we wish to see a convergence between the missions of the postsecondary sectors. Rather, we are advocating a ‘seamless’ funding system which minimises the potential for students’ choices to be distorted by artificial administrative boundaries between vocational education and training providers and higher education institutions. We acknowledge that this will require a rationalisation of the funding responsibilities of the Commonwealth Government and State/Territory Governments. Next