DOCUMENTS

The fees report: An in-depth analysis

Charles Simkins asks whether the ICL system proposed is workable

UNDERSTANDING THE HEHER COMMISSION ON HIGHER EDUCATION AND TRAINING

I - SCOPE

The following article deals with the analysis and proposals contained in the Heher Commission report. It will outline the scope of the report.

Introduction

In a rational world, the Heher Commission report should have been published at the time of its submission to the President. The report is lengthy, the issues complex and a variety of stakeholders, ranging from the Treasury to the Department of Higher Education to university administrations and students, will need time to consider its recommendations. In the event, there was a delay of two and a half months between submission and publication, serving no useful purpose. Hasty action by the government before the report can be assimilated will make things worse rather than better. The following article is intended to contribute to a discussion of the issues.

The scope of the report

The commission considered university education and technical and vocational education and training (TVET). These are not the only components of the post-school education and training (PSET) system. Two other components fall under the Department of Higher Education and Training: Community Education and Training (CET), and Sector Education and Training Authorities (SETAs). The CET colleges were excluded on the grounds that the training provided in them does not constitute higher education and training. The SETAs, as such, are not institutions of learning, though much of the training they finance is delivered by TVET colleges. 

The ten level National Qualifications Framework (NQF) is divided into three bands:

- School education to Grade 9: NQF level 1

- Further education and training: NQF levels 2 to 4

- Higher education and training: NQF levels 5 to 10.

While universities operate exclusively at the higher education and training level, TVET colleges offer qualifications within the further education and training band as well as at the higher education level. TVET colleges also offer occupational qualifications and part-qualifications, inclusive of workplace-based learning.

The funding problem in TVET colleges and universities have two components:

- The funding of the institutions, conventionally divided into three streams: receipts from government, fees and “third stream’ income derived from other sources.

- The funding of students so that they can have the resources necessary to complete their studies. They need not only tuition fees (including registration fees and other fees necessary for tuition), but also food, accommodation, transport, books, computers/tools/equipment, internet connectivity, and health care. The cost of the entire package is the full cost of study (FCS) and the Commission uses the concept when considering ‘fee-free’ education.

The nexus between the components is the tuition fee: a cost for students and income for the institution.

In what depth has the Commission dealt with institutional funding? The answer is almost certainly in less depth than universities and TVET colleges would have liked. True, the Commission rehearsed the university complaint that the real state subsidy per full time equivalent student has dropped and the TVET college complaint that instead of financing 80% of the cost of ‘ministerial programmes’ as policy requires, the allocation has been reduced to 53% in 2017/18. True, the Commission recommended that universities should be funded to the extent of 1% of GDP. The Commission’s recommendations for the funding of TVET colleges are less clear. Presumably the minimum requirement is that financing of the cost of ministerial programmes is restored to 80%. But, unlike funding of students where actuarial projections have been produced, there is no quantitative projection of what the Commission’s recommendations might mean for universities and TVET colleges. Back of the envelope calculations, as in Table 1 below, are straightforward and yield useful insights.

When it comes to the financing of students, the key Commission proposal is to restrict the National Student Financial Aid Scheme (NSFAS) to TVET students and to institute a new Income Contingent Loan (ICL) scheme for university students. This proposal will be considered in detail in a later section. For now, it should be observed that there will be a transitional demand for NSFAS funds from university students for years to come. Even if the proposal is accepted, it will take time for the ICL system to be instituted, and new university students in 2018 and 2019 will have to be funded through NSFAS. The Commission notes that existing rights will have to be respected, and this must include the rights of students starting with NSFAS loans to complete their studies with them. Given that some undergraduate programmes last for six years, and that NSFAS funds can be accessed for two years beyond the minimum completion tine, university students can remain in the NSFAS system until 2026, the numbers tapering off between 2019 and 2026. 

Finally, consider Table 1. The assumptions behind it are as follows:

Universities

1. The transition to a 1% of GDP allocation to universities will take eight years, in the light of expected low growth over the next several years.

2. NSFAS expenditure on university students will not constitute a charge against the allocation to universities.

3. For reasons best known to themselves, the Commission’s evidence leaders specified an enrolment growth rate of 1.9% per annum in their instructions for some scenarios in the actuarial calculations. Their lead is followed in Table 1.

4. Projected GDP and inflation are taken from the October 2017 Medium Term Budget Policy Statement.

TVET colleges

5. TVET enrolments will increase at double the rate of university enrolments.

6. The return to 80:20 funding will be attained by 2019/20.

Table 1 indicates that:

1. The result for universities will be an appreciable real rise in government funding per FET student.

2. The move towards 1% of GDP funding for universities will require an additional allocation of R 2.1 billion in 2018/19 and R 4.5 billion in 2019/20. Given our straitened fiscal circumstances, it may be difficult to find even these additional amounts. Indeed, the original MTEF targets may not be attainable.

3. Getting back to 80:20 funding in TVET colleges will require much less in the way of additional funding than reaching university targets.

Left out of account in Table 1 is investment in infrastructure and student residences. This will be discussed in a later section. 

Table 1 University subsidy projection

Increase if immediate 1%

R million

17 935

16 427

18 086

Increase if gap closed over 8 years

R million

0

2 053

4 522

Per cent increase from gap closure

0,0%

6,3%

13,2%

Allocation as per cent of GDP

0,61%

0,71%

0,74%

Consumer price index

100,0

105,0

110,6

HEPI

100,0

106,8

114,4

FTE enrolment: 1.9% per year

100,0

101,9

103,8

Nominal subsidy index

100,0

122,9

137,7

Real subsidy per FTE index (CPI)

100,0

114,9

119,9

Real subsidy per FTE index (HEPI)

100,0

112,9

115,9

TVET college subsidy projection

Budget allocation 2017

R million

1328

1573

1663

Ministerial programme funding

53%

67%

80%

Enrolment: 3.8% per year

100,0

103,8

107,7

Index of requirement

100,0

130,2

162,6

Requirement

R million

1328

1730

2160

Additional funding

R million

0

157

497

Additional funding for universities

and TVET colleges over and above

the Budget 2017 Medium Term

Expenditure Framework

R million

0

2 210

5 018

II - TECHNICAL AND VOCATIONAL EDUCATION AND TRAINING COLLEGES

Introduction

If things are difficult in universities, they are worse in TVET colleges. TVET colleges have:

- A learners to lecturing staff ratio of 70 in 2015. The student to permanent instructional staff ratio in universities was 53, but the universities depend to a considerable degree of contract staff. When they are taken into account, the ratio drops to 30 or below.

- A ratio of completions to registrations of 5.2% for the National Certificate (Vocational) (a further education and training qualification), 11.1% for N1-N3 students (the further education and training band) and 5.5% for N4-N6 (the higher education and training band) in 2013. The ratio for universities was 19.2%.

- Acute infrastructural deficits in the wake of a very rapid increase in enrolments in recent years. There were 358 393 learners enrolled in 2010 and 737 880 in 2015[1].

- A general sense that TVET colleges are second class in relation to universities. Some learners turn to TVET colleges after dropping out in Grades 10, 11 and 12 before writing the National Senior Certificate. Others write the National Senior Certificate but fail to pass it at all, or at a level permitting progression to university, and reluctantly turn to TVET colleges. The second class view is reinforced by the fact that university graduates have a lower unemployment rate than TVET college graduates, and probably higher incomes. 

The Commission’s analysis and recommendations

The Commission’s fundamental premise is that the system is currently skewed towards university education and it will not self-correct. Accordingly, the Commission states:

A massive focus on TVET colleges is required to develop the system, change perceptions and culture and make TVET colleges attractive institutions of choice as envisaged in the White Paper on Post-School Education and Training.

The Commission notes the policy aim that enrolments in TVET colleges should ultimately be greater than in universities, going so far as to observe that it can be argued that the TVET college sector should increase threefold.

TVET colleges therefore find a champion in the Commission, even though the pressures from university administrators and students has been greater than from colleges. While there have been disruptions in TVET colleges, they do not compare in magnitude with the wild rampage in universities in October and November 2016. There may well be some political resistance to the balance in the report between universities and TVET colleges.

Institutional funding

The critical constraint in the effective expansion of TVET colleges is the availability of appropriately trained lecturing staff and their ability to manage work experience as part of training. Finding firms willing to take on TVET learners, especially in a time of low economic growth, takes considerable time and money, as do supervision of learners at work and keeping abreast of new industrial technology. Developing human and social capital takes years, even if adequate funds are available. Import of suitably qualified people would help.

But adequate funds are not available. As was pointed out in the first section, the government is currently not fully meeting the 80% of costs it is supposed to provide for students in ministerially approved programmes. Moreover, enrolments in ministerially approved programmes are only 65% of total enrolments. The Commission presents finding from the Research Report on the Costing and Financing of the White Paper on Post-School Education and Training, published in 2016 by DHET. In order to meet White Paper targets, spending by TVET colleges would have to rise from R 8.7 billion in 2014 to R112.4 billion (in 2014 prices) in 2030. This estimate is driven by rapid increase in enrolments, improvements to the quality of programmes, changes in the mix of programmes, effectively shifting from predominantly part-time or part-year enrolments towards full-time study.

Infrastructure can be supplied more rapidly, though time has to be devoted to its planning. The Commission makes the bold recommendation that new legislation authorise the transfer over time of R 50 billion from the reserves of the Unemployment Insurance Fund to the development of TVET College infrastructure. Currently there is no infrastructural development grant from the National Treasury and new TVET campus infrastructure is financed by the National Skills Fund.

Student funding

The 2017 NSFAS Annual Report stated that R 2.1 billion had been disbursed to 255 557 TVET students in 2016/17. R 10.3 billion was disbursed to 225 590 university students. The Commission’s recommendation that NSFAS funds be reserved for TVET college students would radically increase the bursary support for TVET students, but for 2018 and 2019 university students will continue to need NSFAS funding, even if an ICL system is instituted for them, and there would be a tapering university student demand up to 2026.

The current policy is to provide 100% bursaries to TVET students who are financially needy and academically capable. In addition, accommodation and/or travel allowances to needy students living 10 kilometres or more from their TVET campuses. The Commission reports that there is insufficient funding to support all poor students, but has not quantified the shortfall. The Commission recommends that the full cost of TVET colleges be met by DHET, effectively abolishing TVET fees, at least for ministerially approved programmes. It also recommends that stipends be made available through TVET colleges covering the full cost of study. Should this not be possible, these students should have access to income contingent loans.

Student housing for TVET students is in very short supply, with a 2015 DHET survey finding only 10 120 beds for 319 587 full time equivalent students or 32 beds per 1 000 FTE students. DHET estimates that there is a need for at least 100 000 beds to meet the immediate demand.

The Public investment Corporation (PIC) has different asset classes, one of which is a broad development asset class. This class has a social infrastructure component which funds education and skills development and student accommodation. The Commission’s report notes that the PIC had invested in 10 000 student beds by 2016 and that it aims to increase that number to 50 000 by 2020 and 80 000 by 2025. The PIC intends to build this accommodation, operate it and own it for 25 years before selling it to the Department of Public Works. The PIC proposes that student accommodation also be funded by development finance institutions (backed by a government guarantee) and the private sector.

III - UNIVERSITIES

Introduction

Universities are much more expensive to run than TVET colleges. The DHET costing study estimated that the total expenditure by universities in 2014 was R 52.9 billion in 2014, compared with R 8.7 billion by TVET colleges. The difference is partly explained by the difference in the size of the sectors. Even so, university expenditure per full-time equivalent student was R 79 200, compared with R 28 600 in TVET colleges.

The Commission’s analysis and recommendations

The main reason for the difference is that universities produce research as well as instruction. This means that teaching loads must be lighter in universities and that universities have to invest heavily in libraries and research equipment, especially in the fields of science, engineering and medicine. The Commission’s report devotes a chapter to libraries, pointing out the emphasis has shifted from the acquisition of printed material to access to very costly electronic information (partly as a result of monopolistic or oligopolistic pricing power on the part of providers), a burden felt by university libraries around the world. Electronic information brings with it ancillary costs in the form of computers and internet connectivity. The development of human capital to support research takes a long time. The minimum period of study for a PhD is seven years and many students take a lot longer. Grants are needed to fund field work, research assistants and other recurrent costs of research.

Teaching, too, is more complex in universities because the inequality in the school system means that students arrive at universities with different levels of preparedness. This has necessitated academic support for many students, over and above regular instruction, sometimes extending the minimum period of study by a year. 

The government funding system

Government funding of universities is provided into two ways. The first component is the block grant, which can be used for any legitimate university purpose. This grant has four elements:

- a teaching input grant based on the number of full-time equivalent students weighted by field and level of study ,

- a teaching output grant based on the number of graduates up to taught Master’s level,

- a research output grant based on research publications and research degree graduations,

- an institutional grant, based on the number of disadvantaged students and the size of the institution, with smaller institutions more heavily supported per student. 

The teaching input grant is based on an enrolment plan. More students may be enrolled than planned, but no grant is made to cover the surplus. If fewer students are enrolled, the university has to refund the government for the deficit.

The second component comprises earmarked grants, which have to be used for designated purposes. There are several forms of earmarked grant:

- an infrastructure grant

- a grant for academic support programmes

- a teaching development and a research development grant, designed to support universities in achieving better student throughput rates and develop research capacity

- a clinical training grant and a grant in support of MBChB (medical doctor) students

- a veterinary sciences grant

- a historically disadvantaged institutional development grant

- grants to support the creation two new universities in Nelspruit and Kimberley

- a grant to finance the 0% fee increase in 2017 for all students from families with incomes of less than R 600 000 per annum.

The amount allocated through earmarked funding as a proportion of the whole rose from 15% in 2011/12 to 22% in 2015/16 and is projected to rise further to 34% in 2018/19. This has implied pressure on the block grant designed to support core teaching. The nominal increase in the block grant was 25% between 2011/12, and 2015/16, compared with an increase of 23% in consumer prices plus a 3% increase in the number of students, implying a small drop in the real block grant per student if the CPI is used and a greater drop if HEPI is used to reflect cost increases. The projected increase nominal increase between 2015/16 and 2018/19 is 31%, compared with an projected increase of 18% in consumer prices and a 5% increase in the number of students, implying a reversal of the trend, confirming findings in the first section in this series.

Worse, the money supplied for infrastructure is wholly inadequate. The Commission reports that universities have found it hard to maintain current infrastructure, and those without reserves could not expand. Lack of maintenance has led to an even greater infrastructure backlog, and institutions under severe financial strain continue to prioritise immediate costs over long term maintenance. The annual infrastructure grant is running at about R 2.5 billion per year at present, whereas the DHET costing study found that R 771 billion would be required between 2014 and 2030. The latter amount includes student housing but, even with that removed, the gap between need and provision is enormous. 

Student housing in universities is better in universities than in TVET colleges. In 2011, there were 107 598 beds for 535 000 contact students, or 201 per 1 000. Bed shortages were estimated at 207 800 in 2013. The cost in current prices of eliminating the backlog over ten years is estimated at R 147 billion. The section on TVET colleges outlined the process by which the PIC and others could finance additional beds. This provision implies that residence fees would have to be set at a level which covers not only operating and maintenance costs but a competitive return on investment.

IV - FINANCING UNIVERSITY STUDENTS

Introduction

The Commission was much impressed by the testimonies of George Hull and Lorenzo Fioramonti, and it has published a study by each as annexures to its report. In line with their recommendations, the Commission advocates a new income contingent loan (ICL) system for university students, with NSFAS reserved for TVET students. There are differences in detail between the three recommendations, but all three advocate a universal system of income contingent loans covering the full cost of study.

Can such a system work?

Analysis

As the Commission points out, NSFAS is itself an income contingent loan scheme, but it is not universal since it is available only to students coming from families earning less than R 122 000 per annum. Nor does it always cover the full cost of study, since the annual loan size is capped at less than the full cost of study at some universities, and some universities top slice allocations in an attempt to give some assistance to all eligible students. And the earnings threshold at which repayments start has not been adjusted for several years and is now a very low R 30 000 per annum.

The advantage of a universal system is that it removes the necessity for a means test which, as Hull points out is expensive to administer, often unreliable, open to corruption and resented by students. The disadvantage is the heavy financing requirement, especially since the Commission recommends that postgraduate students should have access. The average full cost of study for undergraduates was assumed in the actuarial analysis appended to the Commission’s report to be R 92 000 per annum and for postgraduates R 57 600 for postgraduates in 2017 prices. The actuaries estimate that the initial loan advance will be R 53.2 billion and, assuming a 1.9% annual increase in enrolments, the value of the loan book in 2030 will be R 786 billion (in 2017 prices) in 2030. The assumption is that the real interest rate (the nominal interest rate minus inflation) will be 2%. There are reasons (see below) that it might need to be higher. 

Moreover, the actuaries’ calculation has been based on public universities only, despite the fact that the Commission has recommended that students at private universities have access to the ICL system as well. In 2015, 147 210 students were enrolled in private universities, adding 15% to those enrolled in public universities. Such an extension would promote the private sector, taking financial pressure off public universities, since private universities, as opposed to their students, would not be subsidised by the government at all. But DHET has always set its face against it.

Several things follow:

1. A case can be made for government borrowing the money to finance the advances, but this will be impossible to achieve at a time when government debt as a percentage of GDP is rising rapidly, from 50.7% in 2016/17 to 59.7% projected in the October 2017 Medium Term Budget Policy Statement in 2020/21, and when the risk of government debt guarantees being called is rising.

2. It follows that reliance will have to be placed largely on wholly on the private sector. The Commission reported that, although the Banking Association of South Africa has expressed the interest of its members in participating, it has remained essentially uncommitted. As well it might, given the risks.

3. Assume that the private sector does become involved. In Fioramonti’s view it would require a return of at least prime (currently at 10.25%). This would in turn require that all the subsidies presently available in NSFAS be withdrawn, and this is what the Commission recommends. But nobody has considered the implications for repayments. Consider, for example, a capable and diligent B Com student who passes all her courses the first time round and completes the degree in three years. She would be entitled to a 40% rebate on the first tranche, a 40% rebate on the second tranche and a 100% on the third tranche. Her loans would attract no interest until 12 months after graduation and the interest rate charged thereafter would currently be 5.4% (80% of the current repo rate), just over half of prime. Discounting advances and repayments back to the present (or any other date) at prime, the value of repayments would be about a quarter of the value of advances. Three quarters of the loan is effectively a bursary. Put another way: if all these concessions were withdrawn, her repayments would quadruple.

4. One way to cut down on the need for constant new injections of funds – and the actuaries conclude that it will take more than 30 years and high rates of collection for the loan book to be self-sustaining – is to specify that, while every student would be entitled to a loan for the full cost of study, every student would equally have the right to waive part or all of that entitlement. Students might do this because they can be accommodated and fed at home, or their parents might be able to willing to pay part or all of their tuition fees. In effect, waivers would amount to self-administered means tests. The right to waive might seem obvious, since to require students to take a loan they do not want would be odd.

5. But Fioremonti specifies that a graduate with ‘good’ earnings should repay 100% of their loans and high earners should pay more than 100%, i.e. face a loan surcharge. He does not specify how this surcharge might be imposed, but the notion resurfaces in the Commission’s recommendation that any student should be able to opt out of the ICL system, but at the cost of paying a substantial equalisation premium to the state. Such payments should be held in a special account dedicated to making up any shortfall resulting from any student failing to meet his or her loan repayment obligation. This premium will act as a disincentive to opt out and hence will raise the need for injections of loan capital.

6. And there is the question of what to do with incomplete loan repayments. Repayments terminated by death or inability to work can be covered by insurance arrangements, which will add to the burden on students. More serious is the number of students who fail to graduate and are, on average, ever in a position to fully repay their loans.

Of the students entering universities, just over 50% graduate. The Commission’s report emphasises the importance of measures to improve throughput, but these require resources and, in any event, there is a ceiling on what can be achieved. Only 70% of students who enrol in state universities in the United States graduate. The actuaries estimate that R 119 billion of the loan book in 2030 would be bad or doubtful loans on baseline assumptions, though they warn that this estimate is very sensitive to changes in their assumptions. How are these losses to be financed? Surely not from opt-out equalisation charges.

The Commission has considered the proposals of the Ikusasa Student Financial Aid Programme (ISFAP), which has been running a pilot programme in 2017. The proposal provides for a system of loans and grants for students from families who are deemed poor or part of the ‘missing middle’ (i.e students from families with incomes between R 150 000 and R 600 000 per annum). Loans would become more prominent as family incomes rise. The Commission observes that this would require more extensive means testing than NSFAS, since the only students who are means tested now are those who believe they might be eligible. And the accuracy of the means test would be more important.

Moreover, ISFAP would require funds from NSFAS as well as funds from the private sector, the NSFAS funds being necessary for the grants provided in the earlier years of study and to fund any losses on loans. This would make reallocation of university NSFAS funds to TVET students very limited or even completely impossible. The Commission regards the mobilisation of private sector funding as a positive aspect of the ISFAP proposal. But it observes that there remains a question of whether the ISFAP model is currently affordable. 

Both the ISFAP proposal and the ICL proposal envisage recovery of loan repayments through the South African Revenue Service, which would be an improvement on the inefficient system currently run by NSFAS.

V - CONCLUSIONS

There is inevitably much detail in the Commission’s 752 page report that is not covered in the preceding four sections, but they do outline the main features of the funding proposals. This final section draws conclusions from the analysis.

1. It now appears that the National Development Plan targets of 1.6 million enrolments in universities and 2.5 million in TVET colleges is not achievable. The International Monetary Fund’s growth projection for South Africa implies an average annual growth rate of 1.7 % per annum between the beginning of 2017 and the end of 2022. A rapid acceleration of growth as the next decade progresses would help, but we cannot take it for granted. Fiscal constraints are already great and low growth will continue to limit the resources available for higher education and training, even though the sector is an apex priority. The Commission views downward revision of enrolment targets as inevitable.

2. The Commission’s recommendations will be controversial, as is already apparent. The Daily Maverick reported on 13 November that the President appears to want to bypass the Commission’s recommendations. It’s been reported that he plans to introduce grants to cover free higher education for students from households with an annual income of up to R350 000, beginning in 2018. The initial cost will be up to R 40 billion per year, and officials have been instructed to find the money required. ENCA reported on 14 November that Sasco, the Economic Freedom Fighters (EFF), and Democratic Alliance (DA) student organisations have rejected the report. The Ikusasa Student Financial Aid Programme (ISFAP) has released a statement, saying it does not support the recommendation of replacing the National Student Financial Aid Scheme (NSFAS) with an income contingency loan (ICL) system.

3. The Commission has recommended that a careful costing and actuarial analysis of the various recommendations in this report be carried out. The tendency to develop policy without costing it prior to publishing should be avoided. It has not fully followed its own advice. The actuarial analysis was commissioned as late as 20 March 2017, and it relies on simplified assumptions. The hard work of balancing interests has yet to begin.

4. As the Commission points out, special attention will have to be paid to TVET colleges if their enrolments are to overtake university enrolments within the next decade. TVET colleges and their students will have to focus all their energies not to be drowned out by the more prestigious, more articulate and noisier university interests. 

5. At the end of the day, no-one – not the National Treasury, nor the Department of Higher Education and Training, nor universities, nor TVET colleges, nor students – are going to get what they want, and the route towards the necessary tough compromises remains as difficult as ever. A group of academics, represented by Professor Vally, submitted to the Commission that decisions should not be left to experts, advisors, consultants and the agents of institutions that represent a narrow fiscal driven approach to the provision of public goods like higher education. But outcomes will be determined by the interaction of desire and constraint, and optimizing will require much technical work.

In short, a luta continua. 

Charles Simkins is Head of Research at the Helen Suzman Foundation.

This article first appeared as a series of HSF Briefs.

Footnote:


[1] All statistics in this section are taken from the Department of Higher Education and Training’s Statistics on Post-School Education and Training in South Africa, 2013 and 2015. They refer to public institutions only.