In an earlier post I argued that the government’s plans to cap international student numbers, including by education provider and course, would cause actual enrolments to fall well below the official maximum number.

This is due to the inherent weaknesses of bureaucratic systems of student place allocation. Even when meeting demand is a goal the limited information held by central planners, and the long time lags between allocations and enrolments, will cause student places to remain unused.

This post proposes a partial remedy to this problem, a cap-and-trade system for international student places.

Mismatched demand and supply of student places

As announced, the capping policy is over-confident that international students will pursue the government’s own policy objectives. It wants more international students to study in the regions, despite longstanding fee and migration incentives failing to boost numbers significantly. It wants to favour courses that historically have attracted a low percentage of all international students.

The government also proposes allocating student places by ministerial discretion, rather than principles-based rules. The education interest groups and education providers will lobby for their share of the total number of student places allocated, whether that reflects real underlying demand or not.

These design flaws will lead to the stranded student places problem. Many education providers will end up with unusable institution or course-level allocations of international student places, while other institutions and courses turn students away.

Education providers that could use all their allocated places face a different problem. If they exceed their enrolment caps they are banned from enrolling new students for the rest of the year. Enrolments dropping back below the caps, such as through normal processes of students completing or dropping courses, would not automatically lift the ban. The bill includes a process for having the ban lifted early, but that could take months. To avoid exceeding their target, high-demand providers will be very cautious in offering student places. This could leave many of them, along with the lower-demand providers, with fewer students than their cap permits.

Through unusable places and over-caution the overall result will be more disappointed potential international students, more job losses in education providers, and greater collateral damage to the industries relying on international students as customers and employees than is necessary to keep international student numbers within the overall capped number.

Cap-and-trade systems

Other than not proceeding with the caps policy, there is no complete solution to these problems. But capped systems can be made more flexible and efficient by using quasi-market mechanisms. For example, cap-and-trade systems for carbon emissions set overall caps but then let producers find the least costly way of achieving them. We could do something similar for the international student caps. Given the government’s policy goals, multiple markets in international student places would be needed rather than a single national market.

City-level cap-and-trade schemes

The government’s main policy and political goal is to ease pressure on accommodation and other service markets in the major cities, especially Sydney and Melbourne.

Say for example the government set an aggregate international student cap for the Sydney metropolitan area. Initial allocations will have a relationship to existing enrolments, as the bill concedes that the government will have to pay compensation if education providers are forced to cancel contracts with students.

As Australia’s attractiveness as an international student destination sinks, due to changes to post-study migration options and arbitrary visa rejection practices, some education providers will have more places they can use.

Providers could put their surplus rights to places into the places trading market. Other Sydney education providers with demand that exceeds their cap could purchase these surplus places, and so enrol more students.

If providers with more student demand than their cap permits can see liquidity in the places trading market – i.e. high numbers of places for sale – they could take additional risks with their offers, confident that if acceptance rates exceed expectations they can buy additional places and avoid a ban on enrolling other international students during the year.

The price of the places would vary according to the level of government misallocation relative to demand and the price sensitivity of the market players. Presumably the biggest purchasers would be universities that charge high fees, as they have profit margins that can still leave them financially ahead despite having to buy the place.

For the places market to work effectively it would need places with different time rights. A university wanting medium-term enrolment growth would need to buy multi-year rights, so students could complete their courses without the university exceeding its cap in the following years.

A university with a temporary student load management issue might only want to buy six or twelve months of a place. Possibly this could scenario could use a leasing model, so providers can manage short-term ups-and-downs of student markets without losing or adding medium-term capacity.

Class of provider cap and trade

One constraint on places trading is that the government also wants to cap places by class of provider, such as public universities or ‘newly registered providers’. In practice there will be few of these, due to added integrity measures and providers not being able to offer places to international students without first enrolling domestic students for at least two years.

The government’s overall policy stance on international students means that many smaller providers, especially in the VET sector, will have to close down. In the last couple of months more than half of VET visa applications have been rejected, compared to about 20% in higher education – itself well below the more typical 90%+ rates.

If closing-down providers can sell their rights to international student places to other providers it would help the latter group survive, in a regulatory situation which might otherwise not support any provider-level growth at all.

The option to sell rights to international student places would also help reduce demands on the Tuition Protection Service, which assists students enrolled in education providers that go out of business. There would be more money left for the receivers to meet the closed provider’s expenses. Five VET providers have already gone into administration this year and we can expect many more as the regulatory noose tightens.

[Update: Michael Milgate’s comment alerted me to another issue, which is that closing down providers/the TPS are supposed to find affected students a place at another provider to complete their courses. However, provider caps may limit alternative provider options unless there is capacity to change caps to accommodate the affected students.]

Course level cap and trade

The government wants to align international student enrolments with Australian skills needs. This would mean high or no caps on courses it favours – teaching and nursing are given as examples – and tighter caps on courses it thinks are over-supplied, with business courses given as an example.

Again an international student places trading system could ensure more of the places are used without breaching aggregate course, location or provider-type caps.

As business students are the most lucrative type of international student, education providers with insufficient demand for their business courses could sell their allocated places at a good price to providers with enough demand to fill more than their allocation.

Course and provider-level caps are aimed at different policy goals, so it would make sense to split the rights to a place into separate markets. If a provider just wants to buy an international student business place there could be a national course place market. The purchaser would manage their provider-level cap by taking fewer students in other courses. If the purchaser wants business students to add to their total enrolments they would have to buy those places from a provider in their own region.

Who would run the trading system?

The government would need to set rules for this market to operate, and for enforcement purposes would need up-to-date data on which providers own rights.

But I don’t think the government needs to run the market itself. It could be outsourced to firms that already run trading systems, on a fee or commission basis so there is no additional cost to government.

Conclusion

I still hold some hope that course-level caps can be removed from the policy. These do not make sense. International students, who will mostly not be long-term participants in the Australian labour market, should not be restricted to courses chosen according to Australia’s short to medium term skills priorities.

But given the current politics of international education we are stuck with provider-level caps, which will in turn be linked to location-based aggregates designed to ease pressure on rental and other service markets.

What the sector and the government need to do now is work out ways to mitigate the damage this policy will inflict on the Australian education system and the broader economy.

If we stick with purely ministerial-bureaucratic system, which will announce allocations by 1 September each year, at best we will have some mix of net overseas migration considerations, skills priority lists, historical allocations, provider lobbying, and educated guesses about future international student demand.

A cap-and-trade system could greatly improve on the initial allocations of student places, tapping into the most recent information about student demand, and giving education providers greater capacity to meet that demand while not exceeding the headcount caps applying to their location.