The ‘demand driven’ funding policy starting next month combines deregulated places with regulated prices for student places. This is a potential problem. When the government no longer allocates places between institutions and disciplines the prices universities receive for each place are a key steering mechanism. If the price they receive is unattractive, they can not take Commonwealth-supported students.

The base funding review commissioned a study of costs, and it was able to shed some light on prices relative to costs, as they were in 2010. The figure below shows median, mean, maximum and minimum teaching and scholarship costs in a sample of eight universities.

What this shows (as foreshadowed in a Universities Australia publication) is that overall and in eight of ten broad fields of study median costs are below current Commonwealth-supported funding levels. However, in nine of ten fields of study at least one university had costs significantly above funding levels.

Overall, it explains why we have seen so much ‘over-enrolment’ (ie enrolment above existing government allocations of student places). It provides evidence that we could have a cheaper ‘teaching-only’ funding rates, as the review recommends for non-university higher ed providers. However, it shows that responses would rationally vary around the higher education sector with a one-size-fits-all pricing policy.

Though median health field of education costs are below revenue per student, the mean is above. This is the most concerning finding in the context of the demand-driven system, because we have high demand for health courses and chronic labour shortages in health occupations.

The base funding review does recommend some funding increases in this area. However, the most important weakness of the report is that it does not recommend any on-going institution for adjusting funding levels. It is hard to plan in the long-term when prices are determined according to ad hoc political decisions, exposing the sector to the risk of prices and costs being seriously out of alignment. I think markets are generally best placed to set prices, but the U of M submission to the base funding review recommended a professional price regulator, to give higher education providers confidence that prices would be set on a rational basis.