The Australian federal government again failed in its attempt to allow universities to set their own prices for student fees. The key concern with the package was that student fees would rise sharply. However, this is not a necessary outcome of a deregulated university system. Prices could be pressured to stay low if there were more competition.

The high fees argument is clear. With HECS providing “learn now, pay later” pricing, existing universities, particularly the prestigious Group of Eight, face little constraint on their prices. So fee deregulation could mean A$100,000 degrees.

Solutions such as fee caps and a tax on universities\’ profits were suggested. But these proposals don’t address the key market power problem.

Education is not the only market with price-insensitive demand. But that doesn’t necessarily mean high prices. In other markets, competition between alternative suppliers benefits consumers. If competition normally works to produce lower prices for consumers, why won’t this also hold for tertiary education?

How do you make it easier for businesses to enter the market and force down prices?

Experience shows that quality institutions are more than happy to enter new markets and provide teaching for tertiary students. UCL in Australia and INSEAD and NYU in Singapore are just three recent examples. The problem for Australia is the way we fund universities – tying teaching and research funding together – makes new entry almost impossible. Hence, UCL’s recently announced exit.

So if the government wants to deregulate university fees then it must simultaneously remove the barriers to new competition. And that means separating university funding into a research component and a teaching component.

Currently, about 70% of university funding is notionally for teaching and 30% for research. But because the funds are provided jointly it is impossible to tell whether teaching is being used to cross-subsidise research or vice versa. It is impossible to tell if the government is getting “value for money” from the universities for either research or teaching.

Under the failed reform package, the government would have paid new providers a reduced “teaching only” amount. But this would have favoured the government-owned universities. Those universities with a poor research record and which would have been most vulnerable to competition would still receive research funding. They could use that funding to cross-subsidise teaching and undercut new teaching-only providers that receive less government funds.

New entrants that wanted to compete with the Go8 would also be hamstrung. The Go8 would get Australian government research funds to attract big-name academics and build their brand reputation. New entrants would be locked out of these funds. We could have the bizarre situation where Harvard or Oxford might want to enter the Australian tertiary education market but would be locked out of funding for Australian-based research.

Separately allocating government teaching and research funds solves these problems. Both government-owned universities and new entrants could then decide if they wanted to be teaching only – and bid for government teaching support only – or if they also wanted to have research activities.

Government-owned universities that were unable to justify their current 30% subsidy for research would move down the teaching path, providing high-quality and dedicated teaching in competition with new entrants. Fees to students could drop as they would be paying for teaching only, not cross-subsidising research.

Government-owned universities with research excellence would continue to provide research and teaching. But they would compete directly with new entrants and research bodies like the CSIRO for both teaching and research funds. They would be unable to cross-subsidise research from teaching income.

At a minimum, competition from new entrants would cap any power of the Go8 to raise fees. However, with a true level playing field, new entry and competition could cause students fees to drop as the costs of providing degrees falls by some 30%.

What are the objections to this proposal?

First is the claim that teaching and research are inextricably linked, and that teaching-only universities would inevitably be of lower quality. However, this is inconsistent with reality. Some of the world’s best academic institutions, like Wellesley College, Bryn Mawr College and Barnard College in the US, are predominantly teaching institutions.

They arguably provide better education for their students than any Australian universities as they concentrate on excellence in teaching rather than trying to have good researchers give poor lectures, or good teachers do bad research.

Even if the claim was true, the idea that UCL Australia or NYU Australia would be unable to compete with our Go8 in both teaching and research is absurd. If the world’s best universities can compete on an equal basis with our Go8, then our Go8 will have to lift their game significantly.

Second, it is claimed that it would be difficult for universities to manage the transition. Of course! But managers in virtually every other industry are involved in managing transition – driven by technology, by exchange rates, or by spending patterns – so it is hard to see why university managers should not be expected to manage change too. That is what they are paid for.

Government could help by staging the transition over a period (say three years), but this is simply a management problem. There is no problem of principle.

Properly done, university deregulation could lead to lower student fees. The only impediments are on the supply side, not the demand side.