Are mini-demand driven systems a good idea?

In their second submissions to the Universities Accord review Universities Australia and Innovative Research Universities both call for extending the existing demand driven system for regional and remote Indigenous students to all Indigenous students.

Mini-demand driven systems support increasing enrolments from a target population, or potentially in a target course, without risking (from a government perspective) a major cost escalation under a full demand driven system.

Although I support a return to full demand driven funding I doubt that mini-demand driven systems are a good idea.

The risks of restricted-use funds

From a government perspective the attraction of mini-demand driven systems is their apparent pursuit of some desirable outcome at low cost. Only funding for the estimated additional student places is likely to be ‘new’ money.

If so, in the transition to a new mini-demand driven system each university would lose from its overall maximum block grant amount estimated funding for current students meeting the mini-demand driven criteria – in the UA/IRU case, probably the Commonwealth contribution value of their existing student load of Indigenous students living in metropolitan areas.

As a result, ‘old’ money that could once be used flexibly for any domestic student could after the clawback only be used for about four per cent of the population.

If in practice the university attracts fewer Indigenous students than expected, or these students enrol in subjects valued at less in Commonwealth contribution terms than forecast, then the university is left with stranded resources. It has student funding that is theoretically available but in practice cannot be used.

The practical consequence of moving funding from flexible use to restricted use may be that non-Indigenous prospective students miss out or universities take them on a student contribution basis only, forgoing Commonwealth contribution income.

The Indigenous regional and remote demand driven scheme provides a case study. As the table below shows its expenditure was over-estimated for both 2021 and 2022 and started at a more cautious level for 2023. Universities have lower resources than they anticipated. Given current weak overall demand for higher education perhaps this money could not have been used anyway, but it is much easier to find a student who is not Indigenous and from regional or remote area than one who is.

Funding estimates for the Indigenous regional and remote demand driven program, 2021 to 2023

YearOriginal estimateLatest estimatePercentage change
Source: Department of Education, Funding determinations webpage

If however the number of metropolitan Indigenous students exceeds expectations then the university gamble appears to pay off – the Indigenous students can be enrolled without any loss of opportunity for other prospective students.

In any given year of mini-demand driven systems the Commonwealth takes the financial risk of the value of demand driven student places being higher than expected, and universities take the financial risk of the value being lower than expected.

However, the Commonwealth could come out ahead over multiple budget rounds. It will keep the under-spends, such as shown in the table, but could decide to deduct higher than expected demand driven expenditure from the next allocations of general flexible grants.

Flexible grants are best

Earmarked student places are best for when the government wants to limit its spending or the number of students, as it does for medicine. But if the policy goal is to maximise the number of students, or to efficiently move resources to areas of demand or need, or to minimise zero-sum trade-offs between students or courses, then a full demand driven funding system is best and general block grants are second best.

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