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An appropriate citation for this paper is:
ACT Education and Training Directorate (2014) Skilled Capital Tuition Fees Issues Paper, Report 3 of 8, Canberra.
Publish date: December 2014
Overview
Tuition fees for training under Skilled Capital will be uncapped and two safeguards will be implementedto prevent registered training organisations(RTOs) from charging students artificially high prices. Thesesafeguards are:- The public disclosure of student fees - Under Skilled Capital, RTOswillbe required to report their student fees to the ACT Government, who willin turn make this information publicly available. By increasing transparency around the cost of skills training, this mechanism will allow students to make informed decisions inrelation to their training options. In this way, public disclosure of fees is also seen as fostering competition in the skills trainingmarket.
- Contractual clauses - Contractual agreements with RTOs accessing Skilled Capital funding willgive the ACT Government the power to intervene in the price setting of individual RTOs if tuition fees are perceived as being unreasonably high. This willsafeguard students against prohibitive pricing by requiring RTOs to price qualificationsat competitive and realistic prices. It willalso encourage innovation in trainingdelivery so that the RTOs can maximise their returns on investment.
While tuition fees will not be capped against high prices, a minimum tuition fee will be imposed for training subsidised through Skilled Capital(excluding students who are eligible for a fee waiver). By ensuring students pay a minimum fee for the training they undertake, a price signal is sent that the government subsisidised training studentsreceive has value. It also provides students with a personal financial stake in their training that gives them greater incentive to complete this training.
This issues paper considers whether tuition fees for training charged by RTOs under Skilled Capital should be completely deregulated (i.e. set flexibly by RTOs) or regulated (i.e. set at a fixed price by government), or some option between the two (such as caps or monitoring).
Multiple tuition fee payment arrangements currently apply to skills training in the ACT. In the noncontestable market, the Canberra Institute of Technology (CIT) is able to sets its own fees. However, it has to obtain Ministerial endorsement of those fees and, in some circumstances, Cabinet endorsement to implement any variations to these fees.
In the contestable market, the situation is less straightforward. Under User Choice, RTOs can charge a fee of up to $500 per student, while employer contributions remain uncapped. Under the Priorities Support Program (PSP), which was targeted to students from priority groups, RTOs could set fees up to a maximum amount set by the ACT Government.
There is merit in considering the amalgamation of these different arrangements into one administratively simple and transparent arrangement that does not place undue red tape on RTOs and which may also result in administrative efficiencies.
This paper sets out the preferred model for tuition fee payment arrangements. The analysis drawson lessons learnt from Victoria’s experience in implementing the Victorian Training Guarantee, as well as the future needs of the ACT in the context of a more contestablemarket. The remainder of the paper is structured as follows.
- Section 1 provides background into recent moves by the skills trainingsector to deregulate fees and discusses Victoria’sexperience as a case study.
- Section 2 puts forward the principles usedto guide development of a preferred model for tuition fees.
- Section 3 provides the results of analysis undertakeninto the competitiveness of the ACT skills trainingsector.
- Based on the above, section 4 puts forward options for tuition fee payment arrangements under Skilled Capital.
1Moves to deregulated fees
A recent major changeoccuring in the skills training sector is the move towards a marketbased allocation of funding. As a result of the National Partnership Agreement on Skills Reform(the National Partnership), state and territory governments across Australia have introduced greater contestability and competition for public skills training funding. There has also been a trend in some jurisdictions towards deregulating fees.
- Under the VictorianTraining Guarantee (implemented in 2009 with flexible fees introduced in 2012), subsidies are uniform across RTOs, however, prices are set at the discretion of the RTOs to reflect its competitive position in the skills training marketplace. RTOs are free to make commercial decisions that reflect the demand for training, the cost of delivery, training quality, and their reputation.[1]
- Under South Australia’s Skills for All (implemented in 2012), foundation skills courses, certificate I and II qualifications, and qualifications in priority areas are free of charge to students. For certificate III qualifications and above, RTOs may charge student fees up to $7,000.[2]
- Under Queensland’s Great Skills – Real Opportunities, participants are expected to contribute to the cost of training through a student contribution fee. The size of the fee is determined by each RTO.[3]
The principle of ‘user pays’ was given prominence originally in the Deveson Report of 1990.[4] That report argued that the skills training sector’s model of resource allocation was inefficient due to the absence of a price mechanism to signal the actual value of training. The Deveson Report suggested some deregulation of fees in skills training to increase efficiency, quality, responsiveness to client needs and private investment in training. A well designed funding system, providing for some degree of fee deregulation, was seen as empowering institutions to set prices with regard to costs and student demand.[5]
These are the ideas that underpin Victoria’s recent move away from regulated fees. This is discussed in greater detail in Box 1.
Box 1 – The Victorian Case StudyIn 2011 the Essentials Services Commission (ESC) embarked on a review of fees and funding under the Victorian Training Guarantee (VTG). The ESC’s final report recommended a number of changes to the approach taken to the setting of tuition fees in the skills trainingmarket. Eventually, these recommendations led to the Victorian Government removing capped fees in favour of flexible fees in 2012. This case study discusses the ESC’s key findings in order to understand the Victorian Government’s rationale for moving to deregulated fees.
Prior to 2012, tuition fees under the VTG were calculated based on the number of scheduled hours per calendar year and the category of qualification a student was enrolled in. RTOs were free to determine the hourly rate up to a prescribed maximum, subject to the application of specified course category minima and maxima. A further annual fee cap applied if the student was enrolled in more than one course category. Appendix A provides greater detail on the VTG’s previous tuition fee arrangements.
According to the review, the tuition fee payment arrangements under the original VTG were too complex. While the ESC recommended retaining the maximum hourly tuition fee rates under a number of provisos, it argued that the complexity around the course category minima and maxima as well as the annual caps outweighed any benefits of improved affordability.
In the absence of a fully competitive market in Victoria, it was the ESC’s view that the specified maximum hourly tuition fee rates would prevent RTOs charging artificially high fees for students in government subsidised places. The maximum hourly rate was favoured by the ESC as a protective mechanism as it allowed RTOs to be competitive and charge hourly tuition fee rates below the maximum level. The ESC recommended that maximum hourly tuition fee rates should be retained only while there is limited competition in the skills training sector. Over time, in areas or qualificationswhere greater competitive provision can be verified, the ESC recommended that the maximum hourly rate should be increased and eventually removed. The review also recommended that in the meantime, the maximum hourly rate should be revised following an independent cost and pricing review to determine the cost of provision.
Source: Essential Services Commission (2011) VET fee and funding review,
2Principles for tuition fee arrangements
The Victorian case study has provided valuable insights in what matters when setting policy around tuition fees. In line with these insights, the following principles have been considered when designing the best possible tuition fee payment arrangement for the ACT:
- in the absence of a fully competitive market, tuition fee arrangements should protect students from RTOs charging artificially high prices
- tuition fee arrangements should not put RTOs out of pocket for costs incurred in the delivery of training
- tuition fee arrangements should be simple and transparent, limiting regulatory burden on RTOs
- tuition fee arrangements should consider and limit any perverse incentives on students or RTOs created by government intervention.
3Fee competitiveness in the ACT
To apply the first of the principles outlined above requires some preliminary analysis of the current state of competitiveness of the ACT skills trainingsector.
In an efficient market the sum of the tuition fee and government subsidy should equal the efficient cost of an RTO to provide a given qualification. However, in the absence of fully competitive and efficient markets, there is scope for RTOs to charge artificially high fees for students in government subsidised places.
Even if the ACT Government capsits subsidy payments to an efficient cost, flexible fees would allow the RTO to increase its profit margin by raising tuition fees such that the total revenue for each qualification is greater than efficient cost. Students are particularly likely to be exposed to this for qualifications where fee competition is limited – that is, markets identified as having both few students and fewRTOs for a particular qualification.
An analysis of qualifications delivered in the ACT using User Choice data identified that while there are a number of qualifications that are offered by a large number of RTOs and evidence of fee competition, there are also many qualifications that are only offered by one RTO.
Markets where fee competition is limited were classified in this analysis as those being offered by only one or two RTOs and having less than 20commencements between 1January 2012 and 30October 2013.Out of the 307 qualifications examined, 162 were identified by the analysis as potentially having limited competition in the ACT (53per cent of qualifications). Of those, 59 are provided by CIT, with the remaining 103 by private RTOs. A further 24 qualifications were offered by only one RTO, even though commencements exceeded 20 during this period. This suggests that in a contestable market, measures may need to be taken to ensure RTOs in these markets do not take advantage of the lack of competition to artificially increase tuition fees.[6]
4Options for tuition fees
The ACT’s Implementation Plan for the National Partnershipcommits the ACT Government to increases in qualification completions and commencements, particularly for identified priority groups such as Indigenous Australians, people witha disability and mature age workers. Skilled Capital must ensure that affordability issues do not place additional barriers on these people to access skills training.
Given the imperfect competition in the ACT skills training market currently, the full deregulated option for tuition fees does not seem possible without some sort of mechanism in place to safeguard against artificially high and prohibitive pricing.In the medium to longer term, once a contestable market has been more established, and greater competitive provision can be verified, there should be no reason against the ACT moving to completely flexible tuition fees.
It is acknowledged that for some qualifications, due to population size and the nature of the training, monopolies of RTOs may always exist within the ACT. For example, automotive qualifications might be considered ‘natural monopolies’ given large set up costs to provide the training. For these qualifications, and in a possible future of completely deregulated fees, close monitoring will be required to ensure that RTOs are not engaging in uncompetitive behaviour.
It is also recognised that it may not be optimal for RTOs to compete to the extent that training is offered at zero cost to students. For this reason, the setting of minimum fees has also been examined.
4.1Setting maximum fee limits
The first approach to protecting students from prohibitive pricing is an upper limit placed on the fees RTOs can charge per unit of competency (UoC). It is proposed that the upper limit would be equal to the efficient cost for that UoC, minus any government subsidy, plus a pre-determined profit margin. This is shown in Equation 1. This would effectively set the tuition fee to a multiple of the efficient cost.
A potential option to set maximum fee limitswould be to calculate the current difference in tuition fees charged by RTOs and the efficient cost. This would result in an approximate profit margin percentage estimate which could then be applied in the maxium fee per UoC calculation as per Equation1.
Equation 1
Maximum fee per UoC= [(efficient cost – government subsidy)*(1+% margin)]
Table 1illustrates two examples using a margin of 20 per cent above efficient cost maximum.
Table 1: Examples of tuition fee maximums
Student A / Student BEfficient cost / $1,000 / $1,000
Subsidy rate / 80% / 20%
Subsidy value / $800 / $200
Efficient tuition fee / $200 / $800
Margin / 20% / 20%
Maximum tuition fee / $240=$200*(1+20%) / $960=$800*(1+20%)
Increment above efficient tuition fee: / $40 / $160
The tableshows that when the government subsidy is a larger share of the efficient cost, the increment above the efficient tuition fee a RTO is able to charge is lower, even though it remains relative at a 20percent margin in both examples. As subsidy levels will be informed by the ACT Skills Needs List, this is another mechanism to constrain fees in qualifications that are identified as skills needs qualifications.
A number of other benefits are associated with this approach, including the following.
- The maximum tuition fee per UoC should be effective on its own in addressing concerns about affordability, by limiting the total fees payable by a student.
- An upper limit allows RTOs to compete and charge tuition fees below the maximum level.
- An upper limit at the UoC level rather than at the qualification level enables tuition fees to dynamically adjust with individual student choice. That is, the cost of providing the same qualification will vary depending on the electives chosen by a student. If tuition fees were capped at the qualification level, RTOs would not be compensated for any additional costs associated with more expensive electives over and above the maximum.
- As demonstrated in the example in Box 2 below, the maximum would only be constraining if the RTO wanted to engage in uncompetitive behaviour, as it is set at a margin above the efficient fee. As such, the benefit of setting a maximum is to reduce uncompetitive behaviour and should not place any unfair restrictions on the market.
Box 2 – ‘Skills R Us’ Example
In a fictional market, the efficient cost for a Certificate III in Aged Care is $1,000 and a RTO ‘SkillsR Us’ offers thetrainingfor $1,500. The take-up of this qualificationat ‘SkillsR Us’ is 50 students.
After Skilled Capital is introduced, this qualification is subsidised at 80 per cent of the efficient cost to attract higher student participation. A maximum fee of $2,000 is placed on the market.
In a competitive market, the tuition fee should be set such that the RTO’s total revenue from that qualification(government subsidy + tuition fee) is in line with the efficient cost of providing it, allowing for differences in brand and quality. If ‘Skills R Us’ sets its tuition fee substantially above that of other RTOs with similar training prestige and similar training quality, students would switch to the more competitive RTOs. If ’Skills R Us’ wanted to maintain its enrolment base, it would then be forced to reduce its fee in line with other RTOs in the market.
In this way, competition would moderate the ‘Skills R Us’ tuition fee, and in the long run it would be expected to reduce the current price of $1,500 towards the efficient cost of $1,000. In this case, the maximum fee would not affect the market.
In an uncompetitive market, ‘Skills R Us’ does not necessarily have any incentive to lower fees, as it would be able to offer the same 50 places at its current fee of $1,500, and at the same time usethe government subsidy to obtain a higher profit margin. If a fully deregulated system of tuition fees was adopted, depending on the responsiveness of students to price, ‘Skills R Us’ could potentially raise its fee.
In this way, a lack of competition would provide no moderation on tuition fees, and thereby create no incentive for ‘Skills R Us’ to lower fees toward the efficient cost. Potentially, there could be an incentive for ‘Skills R Us’ to raise its current fee above $1,500. Even in this case, however, the maximum fee would not affect the market unless the RTO attempted to raise fees above $2,000.
While there are clear benefits associated with this approach, another guiding principle in the design of Skilled Capital is to minimise regulation in the system. Setting fee limits could be considered a regulatory burden on RTOs.