Presentation to the All-Parliamentary Group: Private Higher Education: Private Gain or Public Interest? Professor Roger King, Centre for Higher Education Research and Information, Open University 16 June 2009, House of Lords Introduction A recent publication by Walter McMahon, a US educational economist, calculates the value or returns of a university education (see Higher Learning, Greater Good: The Private and Social Benefits of Higher Education). He argues that 48 per cent of higher education generates improved private benefits in the form of better job opportunities, improved earnings and health. The other 52 per cent delivers social or public benefits promoting democracy and sustainable growth, and reducing state welfare costs and crime. The private or public funding model of the provider appears to make little difference to these figures. That is, private providers of higher education learning clearly contribute to the public (as well as to the private) 1
interest. So, should the contribution to the public interest by private providers see them more clearly recognized as equal partners by government alongside the state-funded institutions? As the market share of private providers grows (as it is) do we not need to bring them more directly into policy debates and institutional membership forums? Growth Although the number of higher education students and institutions has expanded enormously around the world in the last 10 years or so, its most spectacular component has been the growth of private higher education. Today over one in three students globally is studying in the private sector. (Note: This presentation examines private organizations involved in the delivery of education: the private sector is significantly involved in higher education as a service provider, often in collaboration with the publicly-funded institutions). Although countries such as the USA, Japan and Chile have well-established private sectors of higher education, such provision has grown in 2
virtually all the major regions of the world over the last decade, including Africa, the Middle East and the central and eastern European countries since the fall of Communism. Poland, for example, has seen a dramatic growth in its private sector since 1989 with about 300 of Poland s 430 higher education institutions private (not-for-profit). In China, by 2006, private universities accounted for almost 7 per cent of student enrolments (1.34 million students out of 20.2 million overall). In addition, the major Chinese universities have established their own private institutions, with enrolments of 1.47 million students, a further 7.3 per cent of the total. China s 1998 higher education law stipulates that private universities are legal persons (and able to possess private property) and its 2003 law allows a reasonable return on private school investment. Only in Western Europe does the publicly-funded sector remain relatively unchallenged (although public institutions have become more like private organizations in their market focus as 3
a consequence of the globalization of the New Public Management reforms). But even here the picture is changing, and private provision is slowly growing. For the most part, private higher education has been based on low-cost specialized areas of study in high demand, generally management, commerce and IT, although health and psychology studies are beginning to grow. Increasingly such provision is being offered at degree and post-degree level rather than at pre-degree diploma and certificate levels, which previously was the norm. Outside the special case of the USA, most private university and college providers undertake little or no research they focus on teaching and earn their income from tuition and similar student charges. It is the publiclyfunded universities generally that undertake research functions. Types of private provision Historically, most private provision has been not-for profit, serving what we might call civil society purposes. These include providing something seen by the socio-economically 4
privileged as better than the standards of mass public higher education (as in Latin America, for example), or something different as a result of religious beliefs (for a long time predominantly Catholicism, but increasingly Muslim and Pentecostal, the latter especially in Africa). In the USA, not-for-profit private institutions include some of the longest-established and most prestigious universities, such as Harvard, Stanford and Yale. They possess large research funds (notably as a major consequence of federal research funding which tends to favour the major institutions), and endowment funds. Although such entities have not been slow to raise student tuition fees (and have attracted considerable public criticism by so doing) they do not depend as do many other private institutions on tuition fees as their only or primary source of income. Government regulations usually require not-for-profit private institutions to adopt a charitable-like structure in order to gain tax advantages, even if they are business-like and quite 5
commercial in their operations. In the USA, for example, notfor-profits cannot be organized to benefit private interests such as by distributing net earnings to owners and shareholders, and their assets must be permanently dedicated to charitable purposes, such as by being ploughed back into the enhancement of the institution. The US government defines forprofit providers differently, however. They are able to disburse funds, other than those required for operational costs, to shareholders in return for the investments risks taken. The forprofit institutions are defined not so much by making money or profit as such, but by what they are able to do with that money. The For-Profit Private Sector The for-profit sector is the fastest growing element of the private sector in many parts of the world, although it is larger and more developed in the USA than elsewhere, and the USA is at the core of this growing global phenomenon. Typically, in contrast to many not-for-profit private institutions, which are often focused on what we have termed civil society purposes, 6
for-profits are demand-absorbers, meeting the demand not met by conventional providers. Of the nearly 9000 higher education institutions in the USA, nearly half are represented by for-profit providers. Almost all of these have traditionally provided for non-university students, although since the 1990s, for-profit universities have taken the largest share of the expansion, and degree-granting places are increasing rapidly. Now around 800 such institutions are degree-awarding, with around 300 being four-year universities (the rest being two-year), and with about half of these (150) offering postgraduate degrees. These are the ones most often identified with for-profit higher education worldwide. Several large US-based for-profit listed companies, such as Apollo, Laureate, and Kaplan, have an increasing worldwide presence, establishing campuses in other countries, purchasing existing foreign institutions, or marketing distance education curricula for international delivery. There are around 10 of these major listed conglomerates in the USA. In 2007, one of the 7
largest, the Education Management Corporation, was sold to private equity in a $3.4 billion buyout (and so heightening concerns about the wider public accountability of for-profit entities). Corporate universities We should also note that in the USA, thousands of companies have their own universities, where the main aim is to build the company s human resources capacity to sustain long-term profitability. Only about 200 or so offer programmes comparable to the other post-secondary institutions. Finance The business models of the for-profit providers are less dependent on individual consumer finance than is often believed. Third party monies from governments and employers have fuelled their expansion, especially since the system of student financial aid, featuring government-provided grants and loans, and institutional bursaries, which followed the 1965 US Higher Education Act. 8
Using a slightly different business model, the University of Phoenix (owned by Apollo), the largest US university by student numbers, has focused on working adults and employer-funded support for such students. More recently, however, it too relies much more on student financial aid for younger students to fuel its growth. It is estimated that governmental student financial aid (to help pay tuition and other costs) provides over 80 per cent of the income for the for-profit providers. More particularly (as in Australia) students in the USA attending accredited public and private institutions are eligible for such funding. That is, student financial aid follows the student who may, of course, choose a private provider for their higher education. There are signs in the US (and also Australia) that governmental funds to institutions for operational costs may also in time follow the student ( student vouchers ). That is, governmental control of the allocation of student places (as happens in the UK) is becoming deregulated in some other 9
countries (although prices, i.e. tuition fees, are subject to much slower de-regulatory processes). It is doubtful that for-profit providers could survive on private revenues from students alone. The private market is supported by third-party payers and for-profits represent an effective means of levering public funds for private reward. It is politics the rules governing financial aid at both federal and state levels, not simply the market place that matters for the forprofit providers. Effective regulation, governmental and by the more self-regulatory regional accreditation bodies, seeks to constrain for-profit provision (such as on quality assurance). Yet regional accreditation in the USA also provides added legitimacy through formal recognition (especially for the large listed private providers). Moreover brand reputation means a lot on the stock and money markets, and regulatory scandals and tales of over-aggressive selling can impact negatively (and are thus increasingly avoided in favour of building up the business on a more solid and reputable basis). 10
UK In the UK the three most favoured categories for private provision (ignoring the private role of the public universities in trading overseas for international students) are as follows: 1. Private providers offering their own degree using achieved Degree Awarding Powers (DAP) (from government, formally the Privy Council, on the advice of the QAA). Currently four private institutions have DAP: BPP Ltd, The College of Law, the University of Buckingham and Ashridge Business School. However, several other private entities have such applications in the pipeline. 2. Private providers offering their own non-uk awards. The most common group of these are the American businesses based in London, such as the American Intercontinental University, Richmond International University and Schiller University. Most of these recruit international students with relatively few drawn from the UK. 11
3. Private providers offering an award from a UK or foreign partner institution. This is the most common category of provider. The accreditation service provided to private bodies (such as Regent s College in London, for example) by particularly the University of Wales (32 UK entities) and the Open University Validation Service (29 UK clients), brings in income to UK public institutions. Australia Recent governmental moves in Australia are quite interesting, not least as the UK often follows the Australian lead (as in adopting a students contribution and loans repayment scheme for the cost of tuition). As we have already noted, Australia for some time has allowed private students to access governmental loan schemes for study. Until recently, it has also permitted Australian universities to charge domestic students for a full-fee place along the lines available to overseas students (this is being rescinded, however). 12
Recent governmental policy changes in Australia following the Bradley Review seem likely to boost private provision even more. Dismantling the system of full-fee domestic undergraduates for a start leaves a less competitive field for such provision to the private providers. Even more striking is the governmental decision to scrap controls over the allocation of student places. Student choice (including for private provision rather than public if they so wish) will determine where funded student places will be found. Thus, private providers will have access to full-fee students as well as to governmentally-supported students (unlike the public universities who, domestically, are restricted to the latter). More particularly, although domestic undergraduate tuition fees remain controlled by government in the public sector, the number of international universities offering full-fee undergraduate places in Australia is almost certain to grow. If tuition fee deregulation in the public sector was to occur (to match that of student places deregulation) then private and 13
especially private international providers would have an even stronger financial incentive to get involved in Australia. (Note: Australia s private education market already includes two private Australian universities, several international universities, around 70 pathway colleges including private arms of public universities and some 4000 private vocational education and training providers). Finally, the Australian government has committed itself to strongly extending student access to higher education. It is doubtful if ambitious targets will be achieved unless FE (TAFE) is allowed to expand by offering undergraduate degrees. There are many private FE providers in Australia and thus widening participation policies are also bound to increase private provision. And, although all higher education institutions will be subject to a stronger quality regulator than before, we have noted that regulation can also increase the legitimacy of the best private providers. 14
(Note: The top-ranking research-based Australian universities are limited on positional goods and status grounds in enhancing their student numbers too much, including from overseas, as this will diminish their offerings and mission. It will be the other universities and public providers that will seek to expand volume and here they will come up against a strongly growing private sector). Conclusion Both public and private higher education generates private and public benefits. In terms of actual behaviour, following the NPM reforms of recent times, public entities are much more marketfocused than before (and operate quite aggressively themselves in the international fee market as private entities). However, outside the US especially, publicly-funded institutions carry out the important research function and cover a much wider spectrum of subjects. Governments increasingly recognise the need to be economically competitive in the global knowledge economy and that means generating research and 15
innovation, thus they will continue to fund the top universities from the public purse for basic science for some time. It will be the predominantly less research-based public universities that will feel most competitive threat from the private sector, in Australia, but perhaps also in the UK. Yet student choice, and increasing diversity in higher education systems, may suggest policies that give more funding expression to student choice when it comes to teaching and learning, especially at undergraduate level. Moreover, many governments around the world cannot afford the fiscal cost or the electoral impact if their taxpayers alone are asked to fund provision to meet rising demand for higher education. Rather, quality assurance and other forms of regulation of the private sector are regarded as effectively guaranteeing a public interest rather than reliance on state funding and ownership of the institutions. In policy terms, then: when regulated effectively, the private sector is able to make a valuable contribution to the reputation 16
and market share of UK higher education (not least in the recruitment of international students). Increasingly they collaborate with the public institutions and do not simply compete with them. However, they do threaten the market share of some existing, predominantly non-research-based institutions. Has the time come to more fully recognise them as equal partners with government and the public sector such as by being involved more in policy discussions and dialogues? Should policies place the gaining of DAP on a more equal basis than operates currently (private providers in the UK receive only periodic degree-awarding powers (6 years) while the public sector enjoys them in perpetuity in Australia there is a proposal to subject all institutions to equal periodic accreditation)? Should student financial aid and even student places operate on a more deregulated basis in which student choice rather the nature of the provider counts (providing all such institutions meet quality and similar tests)? That is, should private students and private institutions be entitled to similar 17
grants and funds as the public sector provide they sign up to national quality assurance arrangements? 18