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European Journal of Higher Education
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Exploring higher education financing
options
a
Kofi K. Nkrumah-Young & Philip Powell
a
b
Planning and Operations , University of Technology , Jamaica
b
School of Business, Economics and Informatics, Birkbeck ,
University of London , London, UK
Published online: 28 Apr 2011.
To cite this article: Kofi K. Nkrumah-Young & Philip Powell (2011) Exploring higher education
financing options, European Journal of Higher Education, 1:1, 3-21
To link to this article: http://dx.doi.org/10.1080/21568235.2011.577181
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European Journal of Higher Education
Vol. 1, No. 1, March 2011, 321
Exploring higher education financing options
Kofi K. Nkrumah-Younga and Philip Powellb*
a
Planning and Operations, University of Technology, Jamaica; bSchool of Business, Economics
and Informatics, Birkbeck, University of London, London, UK
Downloaded by [University of Malaya] at 19:20 03 March 2014
(Received 23 January 2011; accepted 21 March 2011)
Higher education can be financed privately, financed by governments, or shared.
Given that the benefits of education accrue to the individual and the state, many
governments opt for shared financing. This article examines the underpinnings of
different options for financing higher education and develops a model to compare
conditions to choices and outcomes. As an illustration, it then uses the Jamaican
experience of the past four decades to demonstrate outcomes. This demonstrates
that, for political reasons, there were adverse outcomes, including infrastructural
neglect, enrolment decline, threats to programme quality and financial difficulties
but also that many of these outcomes should have been foreseen.
Keywords: financing; funding; higher education policies; cost sharing
Introduction
Given the recent global financial crisis and substantial increases in government
borrowing, many states have announced reductions in funding for higher education
(HE). In parallel, some governments are also reassessing the balance of HE funding
that is paid by the state and that from students. There are three broad options for
financing higher education: private financing, state financing, and shared financing.
This article examines the nature of these options and explores their economic
contexts and consequences. As an example, it then examines the funding of Jamaican
HE from 1963 onwards.
The article is structured as follows. First, it examines the options for higher
education funding. It then derives a model of choice and the conditions that need to
exist for each option to work successfully. This allows the development of a decision
tree for financing options. Armed with these frameworks, the article then examines,
as an example, the funding experience in Jamaica. The article then reflects on the
outcomes via use of the frameworks and it discusses the implications.
Funding option
The first stage of this research is to develop a model of financing options. Private
funding of HE, typically based on charging students for courses, is argued to be
appropriate predicated on notions of personal liberty, through the operation of
markets (Barr 2004b), and involves economic efficiency, quality and equity (Sanyal
*Corresponding author. Email: [email protected]
ISSN 2156-8235 print/ISSN 2156-8243 online
# 2011 Taylor & Francis
DOI: 10.1080/21568235.2011.577181
http://www.informaworld.com
4
K.K. Nkrumah-Young and P. Powell
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1998). Private financing delivers equity through acquired private benefits by way of
higher income and social status, greater efficiency in consumption, better health,
increased political efficacy and greater access to, and understanding of, culture,
science and technology (Eicher and Chevaillier 2002).
In contrast, others believe that equality is better achieved through state
intervention as markets are inefficient and inequitable since knowledge, power and
capital markets access are correlated with socio-economic status. Impure competition, incomplete markets, market failure and imperfect information justify state
intervention through regulation, financing, production and income transfers (Barr
2004b). Inequity may result from fear of efficiency losses of high taxation; from the
rich having more power; and from the poor favouring some inequality in the hope of
benefiting if they too become rich (Barr 2004a). Harrison (1997), for example,
identifies four bases for state financing:
Externalities: HE benefits society as knowledge transfers improve production
techniques and increase outputs.
Social returns: Graduates pay higher taxes as a result of higher earnings.
Equality of opportunity: Social justice demands that government ensures equal
opportunities. State funding ensures that no one is excluded by an inability
to pay.
Equity: Equality requires redistribution of income from rich to poor. By
managing returns from labour the state is able to redirect resources to the poor.
Others argue that better educated societies produce more effectively and efficiently.
Eicher and Chevailler (2002) identify that education is a ‘pure public good.’ But, as
demand for HE increases and budget constraints have grown, egalitarian arguments
diminish and universal support is felt unsustainable, and instead of engendering
equality, it causes inequity. Vawda (2003) argues that public expenditure generally
favours the more fortunate, while Gradstein (2003) shows that public spending on
education is skewed towards the rich.
The outcome of these opposing views tend, in most countries, to result in mixed
financing of HE from private and public funds. The unsustainability and inequity of
public HE financing have led many countries to introduce private contributions. As
HE benefits the individual and society, responsibility for payment needs to be shared.
Public economists believe that ‘in countries where public powers have a strong
control over the institutions, fees increase their autonomy and their capacity for
innovation’ (Eicher 1998, 36). They also feel that private contributions effectively
co-ordinate demand and supply, motivate students as payments discourage
inefficient use of university resources, and perform the role of price in highlighting
the perceived value of programmes (Kupper 2002; Ziderman and Albrecht 1995;
Eicher and Chevaillier 2002). Cost sharing however does not, by itself, solve the
problems of market efficiency and equity.
Any form of joint HE financing requires a method of determining the share of
funding charged to students. This gives rise to debates about capacity to pay and
state fee setting. For example, Carlson (1992, cited in Ziderman and Albrecht 1995)
offers ‘affordability’ as a means of determining fees. An alternative is to measure
HE’s price elasticity. Studies show that demand for HE is inelastic in relation to
tuition fees moderate price increases do not discourage enrolment and increase
European Journal of Higher Education
5
revenue (Ziderman and Albrecht 1995). But, price elasticity only measures the
response to tuition fees and not to total cost. Also, it does not explain the effect of
price changes on the poorest. Stager (1989, cited in Ziderman and Albrecht 1995)
argues that demand for HE is elastic in relation to total cost and the poorest are most
responsive to increases in tuition fees. Eicher (1998) suggests price control is the
wrong solution for the equity problem and that it should be addressed through
targeted assistance. Mitigating the equity problem has led to proposals for loans and/
or selective bursary schemes to reduce the financial hardship of needy students,
graduate taxes and income contingent loans (Johnes and Johnes 1994; Eicher 1998;
Creedy 1994; Jacobs 2002; Barr 2003; Kupper 2002).
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Option choice
If efficiency and equity are grounds for state intervention, then total state financing
only works in a centrally-planned economy. Full privatisation of HE is consistent
with perfect competition, and joint private/public financing is suitable under
imperfect market conditions. Based on the arguments developed so far, this article
develops a model of the ‘conditions precedent’ for HE financing (Table 1). The
model proposes that, in order for an option to be feasible, certain preconditions must
be met.
According to Table 1 the conditions precedent for privatisation of HE are those
of perfect market conditions where private and social rates of return are in
equilibrium so that all programmes have equal demand, with freedom of access to
any HE provider.
In contrast, the conditions necessary for state financing are those associated with
a centrally-planned environment. Here, the state controls the total resource
requirements of higher education institutions (HEIs) to ensure that there is a
balance between societal needs for high-level trained individuals and their
availability. Cost is controlled through university staff being state employees and
by enrolment management. State control mitigates the equity problem by placing
limits on private benefits as individuals are prevented from earning a premium for
educational qualifications. But central control is inefficient, resulting in moral
hazards as individuals are not encouraged to be productive and it may result in the
loss of academic freedom.
In the absence of centrally-planned, or perfect market conditions, state subsidy is
expected to maintain the benefits, social and private, of HE. The intervention
options are upfront charges, upfront charges with loans for the needy, loans with
income contingent repayment schemes, or loans with graduate taxation. The general
preconditions for shared HE costs in an imperfect market are state supervision,
student freedom of choice, institutional autonomy and government freedom to
determine its contribution.
The discussion so far only addresses mechanisms for pricing and quality; it does
not address equity, adverse selection and moral hazard. Countries favouring upfront
charges for students tend to have budgetary constraints, as they are unable to provide
advance funding. While up front charges satisfy institutions’ need for funds, they
do not address equity that arises from disadvantaged students being unable to
access HE. Loans for needy students entail problems, as the risks associated with
6
K.K. Nkrumah-Young and P. Powell
Table 1. Conditions and results from financing options.
Options
Privatisation
Conditions Precedent
j
j
j
j
j
j
j
j
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Total state financing
j
j
j
Publicly subsidised
j
j
j
j
j
j
Free market conditions social and private rate of returns are in equilibrium
No price control institutions are allowed to determine fees
State does not offer any support to HE
Subsidy to students via vouchers to attend institutions of their choice
No state accountability mechanism to supervise or control
Freedom of access for all education providers
Staff are employees of institutions
Institutions compete for students and research grants
Total state control of educational planning and the education productive processes
Detailed planning by the state
HEIs operate as agents of the state
Enrolment controlled by state (matriculation requirements and quantity)
HE staff employees of the state
State dictates HE staffing needs
No market competition
State organises staffing to ensure no advantage for particular institutions
Salaries and wages determined by the state
Uniform wage rates regardless of function in HEIs
Employers not allowed to compete for graduates
Graduates not paid higher salaries than non-graduates
No distinction among HEIs on the basis of quality
No resource constraints
Disequilibria between social and
Upfront charges
private rates of return to HE offerings j Severe budgetary constraints
Mortgage-type loan programme
Market-based accountability model
Students allowed choice of HEI
j
Institutions specialising in
Staff are employees of HEIs,
lending for human capital
conditions of service are decided
development
j
Sufficient capital fund for loans
between institutions and staff
j
Labour market certainties
Income contingent loan programme
Institutions determine their own fees
Government determines its
j
National budget can afford
contributions independent of
upfront cost of HEIs
j
Tax system able to track
institutions’ fees
citizens through lifetime
j
Information encourages
participation of low-risk, highreturn graduates
j
Provision for early repayment
j
Provision for society to absorb
risk for non-payers
Graduate taxes
j
Mandatory participation
j
Efficient income tax collection
system
non-payment result in high risk for the lender. Uncertain and intangible future
earnings create difficulties for this type of lending.
Income contingent loans (ICL) and graduate taxes (GT) are equity participation
schemes that avoid the ill-effects of mortgage-type loan schemes. They reduce risk by
pooling among participants and risk shifting to society. Risk pooling is possible as
higher income participants absorb the costs of lower earners and those unable to pay.
Under risk shifting, society absorbs the cost of those in default. Jacobs (2002),
European Journal of Higher Education
7
however, thinks there are still potential problems of adverse selection and moral
hazard. Adverse selection occurs when there are too many high risk-low return
graduates and the low risk-high return graduates opt out. Moral hazard arises when
beneficiaries do not exert enough effort to avoid defaulting. Jacob offered four
solutions:
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Government-generated information on risk characteristics, abilities and
motivation of students so that the problem may be tackled directly.
An opting-out clause, so that low-risk, high-return students are encouraged to
participate.
Allowing the cost of default to be borne by society thereby separating
repayment conditions from risk-characteristics, preference and abilities of the
students.
Making participation obligatory so that low-risk students are forced to
participate.
Jacob’s proposals dictate the preconditions for ICL and GT. GT are more efficient
and more egalitarian than ICLs as they avoid reverse redistribution (Gracı´a-Pen˜ alosa
and Wa¨ lde 2000). For GT to work, however, there must be mandatory participation.
ICLs can be constructed with early exit options thereby avoiding adverse selection
and moral hazard. Both ICL and GT depend on the country’s ability to provide
funds in advance to the HEIs and on an efficient collection system to recoup them.
The framework of preconditions guides the process of understanding financing
option for HE. A decision tree (Figure 1) outlines the paths. If the conditions
associated with central planning and the monopolistic market are fulfilled then the
state can take the path of ‘no tuition’ and full financial support for HE. Under
perfect competition privatisation is an option. In the case of partial public subsidy, a
country has to decide between upfront charges or deferred payments. Upfront
charges necessitate a loan scheme to assist the needy. The choice of loan scheme
depends on the country’s ability to manage the risks of non-payment, as this has to
take precedence over the desire to deal with equity problems.
States do not, of course, simply follow the path suggested by the decision tree as
politics and ideology come into play. However, if issues of equity, efficiency and
resource availability are the driving forces, then the consequences are identified by
the tree.
In order to demonstrate the interplay between financing options and the
consequences, this article now investigates the experiences of one state in financing
its higher education. Clearly, to be of interest here, the exemplar state needs to have
employed a variety of financing methods and there needs to be a sufficient body of
documentary evidence to allow examination of choice and effects. This research
uses documentary analysis of parliamentary and media resources augmented by
interviews with some of the leading politicians who drove change.
Jamaica is a suitable case example as it employed four approaches to financing
higher education in the 40-years from 1963. As will be explained, the Jamaican HE
system is somewhat atypical as it also involves a pan-national institution, the
University of the West Indies, funded by a number of national governments. While
the financing of such an HEI engenders an additional level of complexity in that
8
K.K. Nkrumah-Young and P. Powell
Total State
Support
Free
Education
Mortgaged
Type
Students
with Problems
Loans
Income
Contingent
Up Front
Charges
State Support
Students
without Problems
Financing HE
Partial State
Support
Pay Fees
Cost
Sharing
Graduate
Tax
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No State
Support
Privatisation
Deferred
Payment
Mortgaged
Type
Loans
Income
Contingent
Figure 1. Decision tree for a financing option for higher education.
changes need to be negotiated between a more diverse set of stakeholders, it does not
impact on the fundamental financing choices and consequences investigated here.
The Jamaican experience
Between 1963 and 2003 Jamaica tried four approaches to financing HE the Mixed
System 196373, Free Education 197386, the Cess (a tax) 198693 and Cost
Sharing 19932003. These financing methods and their consequences are now
analysed.
Mixed system 1962 73
During the ‘mixed system’ treatment of secondary education, teacher training,
vocational education and HE varied. Technical high schools, junior secondary
schools and primary schools were funded from the national budget. Students did not
pay tuition fees. Some secondary schools were operated by the church and by trusts,
and supported by the government through ‘grant-aid’ with scholarships for
successful students. Teacher training was a government priority and was fully funded.
The financing of the College of Arts, Science and Technology (CAST) and the
Jamaica School of Agriculture (JSA) was shared between state and students. The
government contributed 75% of CAST income while student fees accounted for 13%.
CAST was responsible for setting fees. The government granted scholarships to
needy students to cover tuition, boarding, and other education-related expenses.
European Journal of Higher Education
9
The University of the West Indies (UWI) was the only HE provider. Regional
contributing governments were responsible for 67% of UWI’s income. Students made
a small contribution towards recurrent cost but this averaged only 4%. Support was
available for the neediest students in the form of scholarships, bursaries and loans.
A consequence of this funding model was the perception that it did not
sufficiently widen access to HE. Alexander, Morgan, and Stone (1967) suggested that
access could be increased by eliminating fees though the average growth rate for
Jamaicans enrolled in HE was 21%.
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Free education system
In 1973 Jamaica moved to a free education system involving four distinguishing
features. There was a single policy for the entire system. No level of education was
prioritised. No student was required to pay tuition fees. The government assumed
financial responsibility for all activities in publicly-supported HEIs.
The second feature was guaranteed financing for any Jamaican student accepted
for study. The then prime minister stated in 2004 that ‘because of the importance of
higher skills and our determination to bring these skills within the reach of the
poorest in the land the government would be making available free tuition for
university education for all Jamaicans qualifying for and gaining entrance at the
UWI.’
The third feature was that the government funded students’ living expenses.
While the fourth feature was expansion of the loan scheme to provide for other
personal education expenses. Since tuition and boarding were free, loans were no
longer granted to students studying locally. Loans, however, continued for people
studying overseas.
Interviews with the president of UTech (the technical university, formally CAST)
and the then ministers of Education and Finance reveal a perception that the Free
Education policy resulted in increased access to HE:
Dealing with the ‘free education,’ clearly, in terms of education supporting the economy,
if you have a strong education system all the studies indicate that the result will be
a strong economy and therefore a nation can look forward to a free flow from whatever
level, primary straight through to higher education with no concern about payment for
everything, then the end result would be more empowerment to the teaching
environment, a stronger economy, so that clearly would benefit most of the poorer
class. (President of UTech 2003)
Definitely, many students benefited those who could not afford it. They benefited
from education so if there was any major benefit sure it was the question of access.
Once you qualified and there was a space in the University then you got a space.
(Minister of Education 2004)
Yes, in a sense, it sought, in a crude way, to remove the possibility that someone would
be excluded from tertiary education because of resources that was a major factor,
in our point of view towards the promotion of equity. (Minister of Finance 2004)
The average enrolment rate for Jamaicans at UWI during fee paying ranged from
721%, However, during the free education period average growth exceeded
20%. The Jamaican enrolment growth rate was consistently above the regional
average. This was a reversal of the trend in the fee paying era. More Jamaicans were
10
K.K. Nkrumah-Young and P. Powell
admitted to UWI than from other UWI-funding countries. It cannot be concluded,
however, that free education resulted in improved access of Jamaicans to HE as the
growth rate at the end of the period was 2% less that of the first year. Indeed, when
fees were re-introduced the growth rate increased.
The economic plight of Jamaica was partly a consequence of the free education
policy of the 1970s. According to the president of UTech (2003):
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The problems started probably in the mid to late 1970s then the weight of responsibility
of funding all the different elements of tertiary education including providing a boarding
grant and so on began to take its toll on the economy and they started thinking of a
different model and from even in the early to mid 1980s studies were being done to look
at an alternative to funding education in general and tertiary education.
In keeping with the ruling party’s election manifesto many new social and economic
programmes were introduced in 19726 (Sharpley 1984). ‘Democratic Socialism’
influenced the priorities attached to income distribution, inflation and the balance of
payments. Free education was one of the wide-ranging social programmes
introduced during the first two years that resulted in government expenditure
exceeding approved estimates by over 20% in 1974. By 1975 the country had a budget
deficit of 37%, escalating to 75% by 1976. Public sector expenditure increased from
18.6% to 26.3% of GDP in 197376. The increase was mainly for consumption,
including supporting free education. The economy plunged into prolonged recession
and 197280 real GDP per capita declined at an average annual rate of 4%.
The free education policy, which eliminated fees and was intended to increased
access to HE, led to increased government costs. The inability to meet costs resulted
in cash flow difficulties for UWI. Liabilities increased and the problems were
exacerbated by foreign exchange risks. CAST consistently operated with deficits.
Flowing from the financial difficulties, the policy strained resources for capital
development, limited capacity and restricted access. A UWI document, Capital Needs
(January 1975) identifies that the physical facilities could not support free education.
Further increases in enrolment were impossible, as the facilities were up to capacity
and there was no funding for additional infrastructure. From 196575 enrolment
doubled without increased capacity.
A further consequence was that funding instability impacted on quality
assurance. The administrator of University Hospital threatened to withdraw
accreditation of the medical faculty and hospital as a teaching institution if funding
was not provided to maintain it.
The cess
As a result of the problems experienced in financing the free education policy the
government decided to charge a cess to UWI and CAST students. A cess is a tax or a
levy and is a concise version of the word assessment. The president of UTech (2003)
explains the system:
The cess was imposed by the GOJ (Government of Jamaica) but the fee for UWI and
CAST remained the same, i.e. the tuition fee, but the cess went to the GOJ who used that
to provide subventions for the University. Of course, as far as the students were
concerned it was more money even though they paid the cess at the Bank of Jamaica.
European Journal of Higher Education
11
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The UWI and CAST didn’t actually get the cess on their hands. It came back through
the subvention but certainly it was increased student-participation in funding their own
education.
Sherlock (1986) points out that the reasons for the change in government policy
were: dramatic increases in the cost of education; accelerating population pressure,
and consequent increases in the number of students; a fall in government revenue
from bauxite; and the need to rebalance the educational budget without sacrificing
the maintenance and development of basic education.
Students were required to pay a fee (tax) pegged to the economic cost of their
education. The rate was announced at 30% of the economic cost. CAST students
paid a fixed fee while those of UWI varied. The cess was restricted to students of
UWI and CAST, others were exempt. Automatic boarding grants were abolished,
though the government later accepted a recommendation that the boarding grant
should continue for those in need.
UWI enrolment demonstrates that the cess did not seriously affect Jamaican HE
growth. By 1992 the growth rate relative to 1963 recovered to 20%. It fell for the first
year and then recovered thereafter.
Cost sharing 1993 present
As of September 1993 the government accepted a policy of cost sharing for all
educational institutions from secondary level. By so doing it gave sanction to reality
as several institutions, out of desperation, started charging fees under various guises.
The government sought to develop governance regulations, but there are no policies
and procedure for the tertiary system. During this period CAST became a university,
renamed the University of Technology, Jamaica (UTech), so the government was
committed to supporting two HEIs.
The bases for the cost sharing in the tertiary level were contained (Davis Report
1994):
(1) Funding was a shared responsibility between the state, corporate sector,
students and educational institutions.
(2) The state would provide a significant portion of the funds and create policies
to facilitate participation of other partners.
(3) The state would ensure the most effective use of HEI’s resources and equity in
the allocation of available benefits.
The distinguishing features of the cost sharing policy for tertiary education include
shared responsibilities for HE costs, the state to provide major contribution and the
regulatory framework, and assistance for the most vulnerable by way of loans and
grants.
The cost sharing policy improved HEI financial performance. UTech, which
implemented cost sharing before the official pronouncement, showed positive results
from 1991 where it recorded a surplus of 6%. This was a reversal of 10-years of
deficits. During cost sharing surpluses averaged 12% compared to negative returns in
the three previous periods. UWI had a 3% average annual surplus compared to 1%
for the two immediate periods. Cost sharing reversed the previous 10-years of
negative accumulated funds resulting in a positive net worth. As UWI increased its
12
K.K. Nkrumah-Young and P. Powell
dependence on government, its ability to manage its receivables decreased. UTech,
which embarked earlier on cost sharing, had far better receivable management ratios.
Cost sharing has seen the most rapid growth in enrolment in HE in Jamaica. The
growth rate for Jamaicans in UWI increased from 20% average in 1993 to 23% in 2003.
It appears that access is more dependent on capacity rather than fees. When the cess
was introduced, growth declined in the first two years due to of capacity constraints.
The decline started before the cess, from 21% in 1984 to 19% in 1985. During cost
sharing there was substantial growth as more institutions were designated HEIs.
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Assessing models for financing HE
The article now assesses the consequences of the financing models. Data do not
reveal significant problems with the financing policy of fee payment that existed up
to 1973. Both the HEI and CAST set their own fees. However, there were no fee
increases 196273. There is no evidence of dissatisfaction or difficulty with the fees
charged by the institutions. Alexander et al. (1967) speculate that the possibility of
eliminating fees might lead to increased access and unit cost reduction. However, the
egalitarian notion articulated by the then prime minister led to the change fee
payment was elitist and would exclude the poor. The prime minister said
‘the fundamental, philosophical and firm answer is that the government cannot
accept a school system based on discrimination against children who are expected to
sit side by side with visible advantages or disadvantages of one family against
another’ (The Daily Gleaner 1973). The leader of the opposition rejected the
egalitarian notion in favour of a more targeted approach. He felt the government
should have channelled the subsidy to the SLB to target needy students: ‘the real
benefit under the proposal would be mainly to relieve some parents who have been
paying fees, of the fees they were now paying whether they had any difficulty in doing
so or not’ (The Daily Gleaner 1973). Mingat, Jee-Peng, and Hoque (1985) and
Gradstein (2003) show that the egalitarian view, such as that of the government, does
not result in equity of HE access, but benefits the better off.
Increased access was the main reason for the change from fee-paying to free
education. Enrolment growth for Jamaican HE up to 1974 was 21% relative to 1964.
During free education the average growth rate was 19%. During the cess growth
was 20% and, with increased capacity, enrolment growth rate increased to 43%. This
suggests that the free education policy did not achieve its objective of increase access.
Free education eliminated a source of funding that was independent of political
control and made the HEI more susceptible to state control.
Assessing the Free Education Policy
The egalitarian philosophy of the Free Education Policy and the belief it would
increase access resulted in:
Financial difficulties for the HEI due to inadequate funding and late
remittances.
National difficulties as a result of expensive social programmes, of which
education was the main contributor.
Limitations of HEI infrastructure to cope with demand and reduced access.
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European Journal of Higher Education
13
The ‘conditions precedent’ for total state funding of HE are similar to the conditions
of a totalitarian state as central controls are necessary to deal with the equity
problem and resource constraints. Table 2 compares the conditions necessary to
those existing in Jamaica during that period. Jamaica did not fulfil any of the
preconditions, and hence the consequences that ensued might have been expected.
State control is intended to ensure that, in the absence of markets to regulate
demand for and supply of HE, the state does the balancing. State control therefore
means state planning and management of HEIs. During the free education era
there is no evidence of detailed state planning. Decisions about matriculation and
programmes, their development, and implementation were taken by the HEI without
any direct link to employment planning and projections. The concept of academic
freedom dictated that HEI staff could not be relegated to mere agents of the state.
Enrolment was subjected only to capacity and the matriculation requirements of
the university and not to state dictates. University staff could not be employees of the
state due to the ownership of the HEI by several governments and the HEI being a
body corporate by law. Staffing needs were determined by university administrators.
The data show that the lack of state control of HE production and planning resulted
in incoherence, hence, the inability of the infrastructure to keep pace with demand
and for the resource to be redirected from the primary and secondary sectors to HE
(Sherlock 1986).
In order to prevent the use of public funds for HE from causing reverse
redistribution, the state needs to manage the entire process. Since the total cost is
borne by the public, total benefits should likewise accrue only to society and prevent
private benefits. Yet, instead of preventing private benefits from accruing, the
Table 2. Conditions during free education.
Conditions precedent
j
State control of planning and productive
processes
Detailed planning only by the state
j
HEI operates as agent of the state
Enrolment controlled by state (matriculation
requirements and quantity)
HE staff are employees of the state
State dictates staffing needs of HEI
No market competition
State-organised staffing on rational bases with
no advantage for particular institutions
Salaries determined by the state
j
j
State supervised system of HE
j
Existing conditions
HEI controlled its staff
HEI controlled staffing needs and state
influence was over funding
Monopolistic market competition
Single HEI eliminated need to compete for
staff
State controls salaries through bargaining
process
Non-uniform wage rates
Employers compete for graduates
Uniform wage rates
Employers not allowed to compete
for graduates
Graduate salaries no higher than nongraduate
No distinction among HEIs on quality
No resource constraints
HEI expected to interpret national needs
and implement appropriate programmes
University established under independent
charter
Enrolment under control of the HEI
j
Graduates paid higher wages
Not applicable as single HE provider
Significant resource constraints
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K.K. Nkrumah-Young and P. Powell
opposite happened in the Jamaican system under free education. The University had
to compete for staff internationally. In addition, it offered advantageous accommodation to entice expatriates. Graduates were paid much higher salaries. The only
attempt at eliminating competition in HE was the government’s continued support of
a single provider.
Market conditions under the policy of free education automatically restricted HE
resources as it relieved those who could afford to pay and shifted the responsibility to
those who could not. Instead of targeting assistance to the needy, it depended on
taxation. Jamaica had an inefficient tax collection system which made it difficult to
collect from the self-employed and entrepreneurs.
Resources were needed to enable the state to pay for social services. The process
for determining HEI resource requirements was based on a flawed notion that the
presence of the regional representatives on the funding body automatically
guaranteed resource adequacy. This, however, depended on national productivity
that had to be decided within the context of the overall country’s needs, yet
the funding body made the decision in isolation. The strategy of reviewing the
university’s resources in isolation was more applicable to a situation where the
government was only one of many income sources. In such a case, the institution
could turn to other sources when the government could not respond. As it stood,
there was but one resource provider and when the country could not satisfy the needs
the HEI had no other avenue, hence its financial difficulties. If there was total state
control then limits could have been placed on the functions and restriction of
activities within the resource capabilities of the supporting countries. The flawed
system of resource allocation resulted in financial difficulties, quality threats to
programmes and economic difficulties for the country. The government then adopted
the cess in order to provide funds to address HEI needs.
Effects of the cess
During the cess the financial difficulties of the HEI heightened; infrastructural
neglect increased and enrolment declined. There were increased threats to
programme quality and institutions were forced to depend on loans to address
cash flow deficiencies. The dependence on loans increased operational costs and
reduced efficiency.
The consequences suffered by the HEI during the period of free education were
as a result of the failure to satisfy the conditions precedent. To address the problems
the country should have either returned to a fee paying policy or implement the
conditions precedent. The conditions would have meant a policy of state control of
HE, removal of market conditions and provision of adequate resources consistent
with demand. Jamaica instead implemented a new tax collection measure (the cess),
aimed only at addressing the resource deficiency problems at the systems level. Prior
to this there was an exacerbation of the problems, hence the conclusion that the lone
taxation measure was inadequate. So, in 1993 the government decided to abandon
free education and return to fee-paying. The decision to move to the cess rather than
follow the path dictated by the decision tree was a political one as free education was
popularly regarded as an upward mobility channel for the poor. As a result, the
foreseeable consequences were ignored.
European Journal of Higher Education
15
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Assessing the Cost Sharing Policy
The Cost Sharing Policy has three components: sharing of cost between the
government and beneficiaries, provision of loans to cover tuition fees, and a grant
to the needy to cover other educational costs. According to the decision tree, Jamaica
is in the position of ‘up front charges with mortgage-type loans for students with
inability to pay’ in the upper right position of the figure. Jamaica’s position against
the conditions precedent for cost sharing is summarised in Table 3.
Social subsidy is necessary in an education market where there are disequilibria
between private and social rate of returns since, in such markets, programmes with
high social and low private rates of returns will be neglected in favour of those with
high private returns. State involvement is therefore necessary to protect sociallybeneficial programmes. In Jamaica, there was low demand for programmes in teacher
training, health and applied science, social work and arts subjects. On the other
hand, there was high demand for business administration, engineering, medicine and
law that command higher salaries.
The market-based accountability model views the citizen as consumer and public
sector institutions would be judged by the quality of their services rather than by
detailed monitoring on how they use resources. In an HE system where students are
required to pay fees, they apply less to institutions giving poor service. The decision
by government to maintain authority to approve fees resulted in a politically-based
accountability model as the authorities seek explanations for fees charged. In a
market situation consumer choice is necessary to force quality and efficiency.
Students should be able to choose their institution freely, subject to capacity and
matriculation requirements. This condition is satisfied in the Jamaican education
market.
In the centrally-planned economy the state manages costs; however, under
competitive market conditions costs result from the interaction of demand and
supply. For this reason the condition is for staff to be employees of the HEI. This
would also allow for the interplay of suppliers (staff) and the demand for labour
Table 3. Assessment of Jamaica’s conditions during cost sharing.
General conditions precedent to cost sharing
Existing conditions
Disequilibria between social and private rates Low demand for Education, Town Planning,
of returns on educational offerings
Public administration, Nursing and Social
work programmes with high social and low
private rates of return
Market-based accountability mechanisms
Politically accountability upward
accountability sub-category
Students allowed free choice of institutions Students free to chose which institution to
attend
Staff are employees of HEIs and conditions Staff are employees of institution and state
of service are decided by institution and
involvement in negotiation exerts undue
staff
control
Institutions determine their fees
Institutions determine their fees but state uses
monopsonistic control fees to be charged
Government determine its support,
Government support and fees are linked
independent of institutions’ fees
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K.K. Nkrumah-Young and P. Powell
(institutions). In Jamaica, HEI staff are employees of the institutions but the state
maintains a role in salary negotiations and attempts to control UWI costs. In
the case of UTech it attempts to do so by reviewing the budget and threatening the
institution to acquiesce to its demands for reduction. The consequence of the state’s
position is the exertion of undue influence and hence, a distortion of the labour
market.
The precondition for HEIs to determine their own fees is because there should
not be price control in an HE market. Price control is a mechanism in monopolistic
competition to prevent abuse of power by a single supplier. As industries move
towards free market competition, price controls become less necessary and more
inefficient. In the HE environment, the absence of price controls should lead to
variable fees and encourage competition and will lead to open-ended funding for the
HEI and improvements in efficiencies through competition (Barr 2004b). Thus, this
article suggests institutional control in the determination of student fees. Currently,
the Jamaican government sets tuition fees, meaning price control. Next, the effects of
this price control are outlined. Fees in Jamaican HE are, however, variable and result
from negotiations. This entails a rational basis for determining the fees.
The precondition for the government to determine its subsidy, independent of
fees is made against the background of national resource constraints. The linking of
the subsidy and fees is another method of price control. In the case of the UWI the
state pays the difference between the per unit costs and the amount charged to
students. This perpetuates central control since government is committed to the
difference. In the case of UTech, the commitment of the state is to cover staff costs.
James and Williams (2004) observe ‘much of the psychology of willingness to pay
tuition in the public tertiary institutions is based on the 20% of economic costs
charged and the assumption that government must price education to ensure social
goals are met.’ As the state’s resources are reduced, the de-linking would allow fees to
be based on the supply cost and consumers’ willingness to pay thereby, enabling
institutions to apply managerial creativity to ensure sustainability.
Discussion
The government’s role in a HE market arises because of control of price and cost.
The aim is to ensure affordability for the poor. However, the strategy of minimising
both price and cost results in inefficiencies.
A reduction in cost and price results in a reduction in quantity, that is, restricted
access. The data showed that in Jamaica in the 1970s access was restricted due to
capacity constraints to absorb those who were qualified for HE. The rate of access
achieved was at the expense of deficits on the institution’s balance sheet. Access
would have been more affected if deficits were not created to maintain the levels of
outputs. Since 1973 when the government took control of HE financing and
continued to make access its priority, it allowed the university to build up deficits.
Threat to quality occurred as a result of direct price controls. To maintain output
levels while attempting to minimise or eliminate the deficit, an institution is forced to
reduce quality. In Jamaica the threats to quality were exemplified in inadequate
equipment, over-crowded classrooms, inadequate library resources and a poor study
environment.
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European Journal of Higher Education
17
The cess was not designed to change the strategy as its purpose was to provide a
new source of income to enable the government to maintain its position of control.
In adopting cost sharing the government continued its monopsonistic approach by
maintaining control over the two elements in the cost-revenue equation. This is
implicit in its policy to approve fees and its role in salary negotiations as well
as its grip on HEI budgets. By so doing, it continued a policy that either restricted
access, contributed to HEIs’ poor financial performance, or placed programme
quality at risk.
Price control has effects on equity. The purpose of maintaining responsibility to
approve fees is to protect the poor from being denied access. There are three
problems with the strategy, however. First, to protect the poor, fees have to be set at
levels perceived by them to be affordable. Yet, most of the people in the 1724 age
cohort who are HE-qualified are from the richest quintile in Jamaica.
The second problem is that since the government is committed to bridging the
gap between total cost and students’ fees, and as resources are limited, then the
country would be faced with the three-fold problem of limitation to access, deficit
financing of HEIs and poor quality institution. Here too, price is equal to cost, and
hence when cost is reduced, price is reduced. When cost is reduced then access is
affected.
Price control should protect consumers from unfair practices. Price control is not
suitable for protecting a section of the consumption market, as it is likely to end up
subsidising those who do not need it. A better way of supporting the poor is to allow
institutions to decide their own fees, with the government channelling resources to
assist students who cannot afford to pay. This would also allow targeted assistance
to programmes with high social and low private returns. Thus, the recommendation
to de-link subsidy and fees is made.
Another aspect of the equity problem is that of equal treatment for HE
consumers. The difference in treatment is a consequence of the evolutionary nature
of the development of Jamaican HE. The system compartmentalised HE providers
and so different processes evolved for dealing with the regional institution as against
the national ones. The difference in the processes and treatment of deciding on fees
has led to students of one HEI absorbing a higher percentage of the economic cost
than the other. With UWI, the government first decides on the percentage of costs to
be absorbed by the students and in the case of UTech, fees are determined after the
subsidy is set. In UWI, the underpinning is affordability for the poorest quintile. This
led to a small share for the students and a large share for the government, leaving the
HEI in deficit.
Government resource constraints mean that students are left to pick up the
balance. As a result of limited resources and conflicting priorities, small amounts
are determined for the government’s portion and the students end up paying more of
the economic cost. The different result depends on whether a student attends the
regional HEI as against the national institution and is a market distortion. All
consumers in a market should be given equal treatment and the state’s role should be
to correct inefficiencies and support equity not to be the cause of the reverse. This
inequity in treatment is a consequence of an unchanged financing model for a system
that has shifted from one provider to diverse providers.
The general preconditions are designed to provide market efficiency and to
protect the social programmes that would suffer under imperfect market conditions.
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18
K.K. Nkrumah-Young and P. Powell
They do not, however, address all the equity of access issues. The literature suggests
one or a combination of the options in Table 4 to address equity problems. The
choice of options (sub-routes) is dependent on a country’s ability to satisfy certain
conditions precedent.
Deferred payments schemes are more equitable for access because they provide
free education at the point of delivery and enable beneficiaries to repay when they are
most able to do so. Mortgage-type loans are costly due to the high risk of nonrepayment and the underdeveloped market for loans for human capital development.
A Graduate Tax system is most efficient and egalitarian (Gracı´a-Pen˜alosa and Wa¨ lde
2000) but psychologically discouraging because repayment is indefinite. This would
also have to involve mandatory participation to achieve the lowest risk and highest
returns. Income contingent loans (ICL), with an opting out clause for early
repayment, avoid problems of moral hazards and adverse selection (Jacobs 2002).
The primary preconditions for ICL, therefore, are up front support for HEIs and
efficient taxation and information systems. The secondary preconditions are early
opt-out provisions and the ability of society to absorb the risk of graduates in
difficulties. Jamaica has an inefficient tax system (Tax Policy Review Committee
2004) and is not in a position to undertake a deferred payment scheme.
Jamaica had significant resource constraints that prevented it from financing HE.
Hence, a scheme based on up front charges is the most practicable option. The
Jamaica Student Loan Project, with the World Bank, enhanced the pool of funds of
the SLB and enabled it to provide HE loans. Nonetheless, the pool was still
Table 4. Conditions for the sub-routes of cost sharing against the conditions precedent.
Conditions precedent for the sub-routes
Existing conditions
Up front charges
j
Severe Budgetary constraints
j
Severe Budgetary Constraints
j
Students Loan Bureau established to provide HE
loans
Loan pool enhanced by World Bank but insufficient
Relatively high labour market uncertainty hence
dependence of specialised lending institutions
Mortgage-type loan programme
j
j
j
Institution specialising in lending for human
capital development
Sufficient capital fund for loan programme
Labour market certainties in absence of
specialised lending institutions
j
j
Income contingent loan programme
j
j
j
j
j
National budget can cover up-front cost of
HEI operations
Tax system able to track citizens through
lifetime
Information to encourage participation
from low-risk, high-return graduate
Opting out provision for early repayment
Provision for society to absorb risk of
non-payment
j
j
j
j
j
National budget cannot manage up-front cost of
university operations
Taxation system unable to successfully track
citizens’ income
National information technology is in infancy
Not applicable in the absence of a programme
Not applicable in the absence of a programme
Graduate taxes
j
j
Mandatory participation
Efficient income tax collection system
j
j
Not applicable in the absence of a programme
Income tax collection system is inefficient
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European Journal of Higher Education
19
insufficient, resulting in loans for tuition fees only. Labour market uncertainty is
demonstrated by the high unemployment rate, which in 2003 was 12.8%. Labour
market uncertainty makes banks reluctant to lend for human capital development.
The analysis shows that equity of HE treatment for students is an issue. The
political rather than the systems approach in deciding students’ fees leads to inequity
of treatment of UWI students as against others. The political approach caused the
government to deal directly with individual institutions rather than collectively.
Equity of access is a problem as the strategy delivers unintended results. The
stated government priority is to increase access. However, the data reveals the
opposite. A mortgage-type loan scheme is not the best option to redress the equity
imbalance in access due to the poor’s inability to provide collateral, the high risk to
lending institutions and the high costs to borrowers. The current cost sharing policy
does not adequately address equity of access to HE. James and Williams (2004) show
that the richest quintile in the population benefits most from tertiary education.
The loan solution is most beneficial to the richest. Only a small percentage of
those who receive assistance are from the poorest quintile. The highest percentage is
from the richest quintile. Further, 72.2% of the poorest quintile who matriculated are
not attending HE compared to the richest quintile where only 54.6% are not
attending. This shows that more effort is needed to assist the poorest.
One solution to the equity of access problem for Jamaica is to shift resources
from the tertiary sector to support primary and secondary education (James and
Williams 2004). That would enable more people from the poorest sector to
matriculate to HE. Of those out of school, the majority belong to the poorest
quintiles for all age groups. The figure declined since the cost sharing policy of 1993;
however, the decline was higher for the richest quintiles. The main problem of the
poorest groups is not attaining the matriculation requirements for higher education.
Attention must be focused at the lower levels to enable the poorest to enter HE.
The sub-routes of cost sharing address further the equity of access issue. These
support the view that up front charges with mortgage-type loans do not adequately
address the issue. However, given the country’s inability to manage the other options,
this may be viewed as the best option.
Conclusions
This article has shown that there are three broad options for financing higher
education: private financing, state financing, and shared financing. The article
examines the nature of these options and explores their economic context and
consequences. It develops a model of the ‘conditions precedent’ for deciding on HE
financing which proposes that, in order for an option to be considered feasible,
certain preconditions must be met. As an example, it then examines the options that
Jamaica used to fund its higher education from 1963 and the outcomes thereof. The
analysis shows that Jamaica was driven more by political reasons along the paths it
has taken to finance HE. The country did not pay attention to its economic situation
as dictated by the conditions precedent in Table 1 and hence the adverse effects which
occurred. These included infrastructural neglect, enrolment decline, threat to the
quality of programme and financial difficulties. The return to fee paying under
the Cost Sharing Policy was better for the HEI. However, there are aspects of the
conditions precedent to which the country should pay attention in order to ensure
20
K.K. Nkrumah-Young and P. Powell
sustainability of its HE financing system. If the mortgage-type loan scheme is to
continue then the loan pool needs to be increased. The country is considering
replacing the mortgage-type loan scheme with an income contingent one. Its success
depends on an efficient tax collection system which at present does not exist.
This research demonstrates that HEI funding choices are not free choices they
are constrained by the prevailing context. Choices also have consequences that need
to be understood by those making them.
Downloaded by [University of Malaya] at 19:20 03 March 2014
Notes on contributors
Kofi K. Nkrumah-Young is the Vice President of Planning and Operations at the University of
Technology, Jamaica. His research interests are in financing and resource allocation models in
Higher Education. He has a DBA (Bath), MBA, Advance Diploma in Banking and Finance,
a BA from the University of the West Indies and a Diploma from the United Theological
College of the West Indies. He is a Justice of the Peace and the member of the Board of the
Students Loan Bureau, the Bethlehem Moravian College and the Vocational Training and
Development Institute.
Philip Powell is Executive Dean of the School of Business, Economics and Informatics at
Birkbeck, University of London. Formally he was Deputy Dean at the University of Bath and
Director of the IS Research Unit at Warwick Business School, having worked in Australia,
Africa, the US and Europe. He is author of 10 books and his work has appeared in over
100 journals and over 100 conferences. He is Managing Editor of the Information Systems
Journal.
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Exploring higher education financing
options
a
Kofi K. Nkrumah-Young & Philip Powell
a
b
Planning and Operations , University of Technology , Jamaica
b
School of Business, Economics and Informatics, Birkbeck ,
University of London , London, UK
Published online: 28 Apr 2011.
To cite this article: Kofi K. Nkrumah-Young & Philip Powell (2011) Exploring higher education
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European Journal of Higher Education
Vol. 1, No. 1, March 2011, 321
Exploring higher education financing options
Kofi K. Nkrumah-Younga and Philip Powellb*
a
Planning and Operations, University of Technology, Jamaica; bSchool of Business, Economics
and Informatics, Birkbeck, University of London, London, UK
Downloaded by [University of Malaya] at 19:20 03 March 2014
(Received 23 January 2011; accepted 21 March 2011)
Higher education can be financed privately, financed by governments, or shared.
Given that the benefits of education accrue to the individual and the state, many
governments opt for shared financing. This article examines the underpinnings of
different options for financing higher education and develops a model to compare
conditions to choices and outcomes. As an illustration, it then uses the Jamaican
experience of the past four decades to demonstrate outcomes. This demonstrates
that, for political reasons, there were adverse outcomes, including infrastructural
neglect, enrolment decline, threats to programme quality and financial difficulties
but also that many of these outcomes should have been foreseen.
Keywords: financing; funding; higher education policies; cost sharing
Introduction
Given the recent global financial crisis and substantial increases in government
borrowing, many states have announced reductions in funding for higher education
(HE). In parallel, some governments are also reassessing the balance of HE funding
that is paid by the state and that from students. There are three broad options for
financing higher education: private financing, state financing, and shared financing.
This article examines the nature of these options and explores their economic
contexts and consequences. As an example, it then examines the funding of Jamaican
HE from 1963 onwards.
The article is structured as follows. First, it examines the options for higher
education funding. It then derives a model of choice and the conditions that need to
exist for each option to work successfully. This allows the development of a decision
tree for financing options. Armed with these frameworks, the article then examines,
as an example, the funding experience in Jamaica. The article then reflects on the
outcomes via use of the frameworks and it discusses the implications.
Funding option
The first stage of this research is to develop a model of financing options. Private
funding of HE, typically based on charging students for courses, is argued to be
appropriate predicated on notions of personal liberty, through the operation of
markets (Barr 2004b), and involves economic efficiency, quality and equity (Sanyal
*Corresponding author. Email: [email protected]
ISSN 2156-8235 print/ISSN 2156-8243 online
# 2011 Taylor & Francis
DOI: 10.1080/21568235.2011.577181
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K.K. Nkrumah-Young and P. Powell
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1998). Private financing delivers equity through acquired private benefits by way of
higher income and social status, greater efficiency in consumption, better health,
increased political efficacy and greater access to, and understanding of, culture,
science and technology (Eicher and Chevaillier 2002).
In contrast, others believe that equality is better achieved through state
intervention as markets are inefficient and inequitable since knowledge, power and
capital markets access are correlated with socio-economic status. Impure competition, incomplete markets, market failure and imperfect information justify state
intervention through regulation, financing, production and income transfers (Barr
2004b). Inequity may result from fear of efficiency losses of high taxation; from the
rich having more power; and from the poor favouring some inequality in the hope of
benefiting if they too become rich (Barr 2004a). Harrison (1997), for example,
identifies four bases for state financing:
Externalities: HE benefits society as knowledge transfers improve production
techniques and increase outputs.
Social returns: Graduates pay higher taxes as a result of higher earnings.
Equality of opportunity: Social justice demands that government ensures equal
opportunities. State funding ensures that no one is excluded by an inability
to pay.
Equity: Equality requires redistribution of income from rich to poor. By
managing returns from labour the state is able to redirect resources to the poor.
Others argue that better educated societies produce more effectively and efficiently.
Eicher and Chevailler (2002) identify that education is a ‘pure public good.’ But, as
demand for HE increases and budget constraints have grown, egalitarian arguments
diminish and universal support is felt unsustainable, and instead of engendering
equality, it causes inequity. Vawda (2003) argues that public expenditure generally
favours the more fortunate, while Gradstein (2003) shows that public spending on
education is skewed towards the rich.
The outcome of these opposing views tend, in most countries, to result in mixed
financing of HE from private and public funds. The unsustainability and inequity of
public HE financing have led many countries to introduce private contributions. As
HE benefits the individual and society, responsibility for payment needs to be shared.
Public economists believe that ‘in countries where public powers have a strong
control over the institutions, fees increase their autonomy and their capacity for
innovation’ (Eicher 1998, 36). They also feel that private contributions effectively
co-ordinate demand and supply, motivate students as payments discourage
inefficient use of university resources, and perform the role of price in highlighting
the perceived value of programmes (Kupper 2002; Ziderman and Albrecht 1995;
Eicher and Chevaillier 2002). Cost sharing however does not, by itself, solve the
problems of market efficiency and equity.
Any form of joint HE financing requires a method of determining the share of
funding charged to students. This gives rise to debates about capacity to pay and
state fee setting. For example, Carlson (1992, cited in Ziderman and Albrecht 1995)
offers ‘affordability’ as a means of determining fees. An alternative is to measure
HE’s price elasticity. Studies show that demand for HE is inelastic in relation to
tuition fees moderate price increases do not discourage enrolment and increase
European Journal of Higher Education
5
revenue (Ziderman and Albrecht 1995). But, price elasticity only measures the
response to tuition fees and not to total cost. Also, it does not explain the effect of
price changes on the poorest. Stager (1989, cited in Ziderman and Albrecht 1995)
argues that demand for HE is elastic in relation to total cost and the poorest are most
responsive to increases in tuition fees. Eicher (1998) suggests price control is the
wrong solution for the equity problem and that it should be addressed through
targeted assistance. Mitigating the equity problem has led to proposals for loans and/
or selective bursary schemes to reduce the financial hardship of needy students,
graduate taxes and income contingent loans (Johnes and Johnes 1994; Eicher 1998;
Creedy 1994; Jacobs 2002; Barr 2003; Kupper 2002).
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Option choice
If efficiency and equity are grounds for state intervention, then total state financing
only works in a centrally-planned economy. Full privatisation of HE is consistent
with perfect competition, and joint private/public financing is suitable under
imperfect market conditions. Based on the arguments developed so far, this article
develops a model of the ‘conditions precedent’ for HE financing (Table 1). The
model proposes that, in order for an option to be feasible, certain preconditions must
be met.
According to Table 1 the conditions precedent for privatisation of HE are those
of perfect market conditions where private and social rates of return are in
equilibrium so that all programmes have equal demand, with freedom of access to
any HE provider.
In contrast, the conditions necessary for state financing are those associated with
a centrally-planned environment. Here, the state controls the total resource
requirements of higher education institutions (HEIs) to ensure that there is a
balance between societal needs for high-level trained individuals and their
availability. Cost is controlled through university staff being state employees and
by enrolment management. State control mitigates the equity problem by placing
limits on private benefits as individuals are prevented from earning a premium for
educational qualifications. But central control is inefficient, resulting in moral
hazards as individuals are not encouraged to be productive and it may result in the
loss of academic freedom.
In the absence of centrally-planned, or perfect market conditions, state subsidy is
expected to maintain the benefits, social and private, of HE. The intervention
options are upfront charges, upfront charges with loans for the needy, loans with
income contingent repayment schemes, or loans with graduate taxation. The general
preconditions for shared HE costs in an imperfect market are state supervision,
student freedom of choice, institutional autonomy and government freedom to
determine its contribution.
The discussion so far only addresses mechanisms for pricing and quality; it does
not address equity, adverse selection and moral hazard. Countries favouring upfront
charges for students tend to have budgetary constraints, as they are unable to provide
advance funding. While up front charges satisfy institutions’ need for funds, they
do not address equity that arises from disadvantaged students being unable to
access HE. Loans for needy students entail problems, as the risks associated with
6
K.K. Nkrumah-Young and P. Powell
Table 1. Conditions and results from financing options.
Options
Privatisation
Conditions Precedent
j
j
j
j
j
j
j
j
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Total state financing
j
j
j
Publicly subsidised
j
j
j
j
j
j
Free market conditions social and private rate of returns are in equilibrium
No price control institutions are allowed to determine fees
State does not offer any support to HE
Subsidy to students via vouchers to attend institutions of their choice
No state accountability mechanism to supervise or control
Freedom of access for all education providers
Staff are employees of institutions
Institutions compete for students and research grants
Total state control of educational planning and the education productive processes
Detailed planning by the state
HEIs operate as agents of the state
Enrolment controlled by state (matriculation requirements and quantity)
HE staff employees of the state
State dictates HE staffing needs
No market competition
State organises staffing to ensure no advantage for particular institutions
Salaries and wages determined by the state
Uniform wage rates regardless of function in HEIs
Employers not allowed to compete for graduates
Graduates not paid higher salaries than non-graduates
No distinction among HEIs on the basis of quality
No resource constraints
Disequilibria between social and
Upfront charges
private rates of return to HE offerings j Severe budgetary constraints
Mortgage-type loan programme
Market-based accountability model
Students allowed choice of HEI
j
Institutions specialising in
Staff are employees of HEIs,
lending for human capital
conditions of service are decided
development
j
Sufficient capital fund for loans
between institutions and staff
j
Labour market certainties
Income contingent loan programme
Institutions determine their own fees
Government determines its
j
National budget can afford
contributions independent of
upfront cost of HEIs
j
Tax system able to track
institutions’ fees
citizens through lifetime
j
Information encourages
participation of low-risk, highreturn graduates
j
Provision for early repayment
j
Provision for society to absorb
risk for non-payers
Graduate taxes
j
Mandatory participation
j
Efficient income tax collection
system
non-payment result in high risk for the lender. Uncertain and intangible future
earnings create difficulties for this type of lending.
Income contingent loans (ICL) and graduate taxes (GT) are equity participation
schemes that avoid the ill-effects of mortgage-type loan schemes. They reduce risk by
pooling among participants and risk shifting to society. Risk pooling is possible as
higher income participants absorb the costs of lower earners and those unable to pay.
Under risk shifting, society absorbs the cost of those in default. Jacobs (2002),
European Journal of Higher Education
7
however, thinks there are still potential problems of adverse selection and moral
hazard. Adverse selection occurs when there are too many high risk-low return
graduates and the low risk-high return graduates opt out. Moral hazard arises when
beneficiaries do not exert enough effort to avoid defaulting. Jacob offered four
solutions:
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Government-generated information on risk characteristics, abilities and
motivation of students so that the problem may be tackled directly.
An opting-out clause, so that low-risk, high-return students are encouraged to
participate.
Allowing the cost of default to be borne by society thereby separating
repayment conditions from risk-characteristics, preference and abilities of the
students.
Making participation obligatory so that low-risk students are forced to
participate.
Jacob’s proposals dictate the preconditions for ICL and GT. GT are more efficient
and more egalitarian than ICLs as they avoid reverse redistribution (Gracı´a-Pen˜ alosa
and Wa¨ lde 2000). For GT to work, however, there must be mandatory participation.
ICLs can be constructed with early exit options thereby avoiding adverse selection
and moral hazard. Both ICL and GT depend on the country’s ability to provide
funds in advance to the HEIs and on an efficient collection system to recoup them.
The framework of preconditions guides the process of understanding financing
option for HE. A decision tree (Figure 1) outlines the paths. If the conditions
associated with central planning and the monopolistic market are fulfilled then the
state can take the path of ‘no tuition’ and full financial support for HE. Under
perfect competition privatisation is an option. In the case of partial public subsidy, a
country has to decide between upfront charges or deferred payments. Upfront
charges necessitate a loan scheme to assist the needy. The choice of loan scheme
depends on the country’s ability to manage the risks of non-payment, as this has to
take precedence over the desire to deal with equity problems.
States do not, of course, simply follow the path suggested by the decision tree as
politics and ideology come into play. However, if issues of equity, efficiency and
resource availability are the driving forces, then the consequences are identified by
the tree.
In order to demonstrate the interplay between financing options and the
consequences, this article now investigates the experiences of one state in financing
its higher education. Clearly, to be of interest here, the exemplar state needs to have
employed a variety of financing methods and there needs to be a sufficient body of
documentary evidence to allow examination of choice and effects. This research
uses documentary analysis of parliamentary and media resources augmented by
interviews with some of the leading politicians who drove change.
Jamaica is a suitable case example as it employed four approaches to financing
higher education in the 40-years from 1963. As will be explained, the Jamaican HE
system is somewhat atypical as it also involves a pan-national institution, the
University of the West Indies, funded by a number of national governments. While
the financing of such an HEI engenders an additional level of complexity in that
8
K.K. Nkrumah-Young and P. Powell
Total State
Support
Free
Education
Mortgaged
Type
Students
with Problems
Loans
Income
Contingent
Up Front
Charges
State Support
Students
without Problems
Financing HE
Partial State
Support
Pay Fees
Cost
Sharing
Graduate
Tax
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No State
Support
Privatisation
Deferred
Payment
Mortgaged
Type
Loans
Income
Contingent
Figure 1. Decision tree for a financing option for higher education.
changes need to be negotiated between a more diverse set of stakeholders, it does not
impact on the fundamental financing choices and consequences investigated here.
The Jamaican experience
Between 1963 and 2003 Jamaica tried four approaches to financing HE the Mixed
System 196373, Free Education 197386, the Cess (a tax) 198693 and Cost
Sharing 19932003. These financing methods and their consequences are now
analysed.
Mixed system 1962 73
During the ‘mixed system’ treatment of secondary education, teacher training,
vocational education and HE varied. Technical high schools, junior secondary
schools and primary schools were funded from the national budget. Students did not
pay tuition fees. Some secondary schools were operated by the church and by trusts,
and supported by the government through ‘grant-aid’ with scholarships for
successful students. Teacher training was a government priority and was fully funded.
The financing of the College of Arts, Science and Technology (CAST) and the
Jamaica School of Agriculture (JSA) was shared between state and students. The
government contributed 75% of CAST income while student fees accounted for 13%.
CAST was responsible for setting fees. The government granted scholarships to
needy students to cover tuition, boarding, and other education-related expenses.
European Journal of Higher Education
9
The University of the West Indies (UWI) was the only HE provider. Regional
contributing governments were responsible for 67% of UWI’s income. Students made
a small contribution towards recurrent cost but this averaged only 4%. Support was
available for the neediest students in the form of scholarships, bursaries and loans.
A consequence of this funding model was the perception that it did not
sufficiently widen access to HE. Alexander, Morgan, and Stone (1967) suggested that
access could be increased by eliminating fees though the average growth rate for
Jamaicans enrolled in HE was 21%.
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Free education system
In 1973 Jamaica moved to a free education system involving four distinguishing
features. There was a single policy for the entire system. No level of education was
prioritised. No student was required to pay tuition fees. The government assumed
financial responsibility for all activities in publicly-supported HEIs.
The second feature was guaranteed financing for any Jamaican student accepted
for study. The then prime minister stated in 2004 that ‘because of the importance of
higher skills and our determination to bring these skills within the reach of the
poorest in the land the government would be making available free tuition for
university education for all Jamaicans qualifying for and gaining entrance at the
UWI.’
The third feature was that the government funded students’ living expenses.
While the fourth feature was expansion of the loan scheme to provide for other
personal education expenses. Since tuition and boarding were free, loans were no
longer granted to students studying locally. Loans, however, continued for people
studying overseas.
Interviews with the president of UTech (the technical university, formally CAST)
and the then ministers of Education and Finance reveal a perception that the Free
Education policy resulted in increased access to HE:
Dealing with the ‘free education,’ clearly, in terms of education supporting the economy,
if you have a strong education system all the studies indicate that the result will be
a strong economy and therefore a nation can look forward to a free flow from whatever
level, primary straight through to higher education with no concern about payment for
everything, then the end result would be more empowerment to the teaching
environment, a stronger economy, so that clearly would benefit most of the poorer
class. (President of UTech 2003)
Definitely, many students benefited those who could not afford it. They benefited
from education so if there was any major benefit sure it was the question of access.
Once you qualified and there was a space in the University then you got a space.
(Minister of Education 2004)
Yes, in a sense, it sought, in a crude way, to remove the possibility that someone would
be excluded from tertiary education because of resources that was a major factor,
in our point of view towards the promotion of equity. (Minister of Finance 2004)
The average enrolment rate for Jamaicans at UWI during fee paying ranged from
721%, However, during the free education period average growth exceeded
20%. The Jamaican enrolment growth rate was consistently above the regional
average. This was a reversal of the trend in the fee paying era. More Jamaicans were
10
K.K. Nkrumah-Young and P. Powell
admitted to UWI than from other UWI-funding countries. It cannot be concluded,
however, that free education resulted in improved access of Jamaicans to HE as the
growth rate at the end of the period was 2% less that of the first year. Indeed, when
fees were re-introduced the growth rate increased.
The economic plight of Jamaica was partly a consequence of the free education
policy of the 1970s. According to the president of UTech (2003):
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The problems started probably in the mid to late 1970s then the weight of responsibility
of funding all the different elements of tertiary education including providing a boarding
grant and so on began to take its toll on the economy and they started thinking of a
different model and from even in the early to mid 1980s studies were being done to look
at an alternative to funding education in general and tertiary education.
In keeping with the ruling party’s election manifesto many new social and economic
programmes were introduced in 19726 (Sharpley 1984). ‘Democratic Socialism’
influenced the priorities attached to income distribution, inflation and the balance of
payments. Free education was one of the wide-ranging social programmes
introduced during the first two years that resulted in government expenditure
exceeding approved estimates by over 20% in 1974. By 1975 the country had a budget
deficit of 37%, escalating to 75% by 1976. Public sector expenditure increased from
18.6% to 26.3% of GDP in 197376. The increase was mainly for consumption,
including supporting free education. The economy plunged into prolonged recession
and 197280 real GDP per capita declined at an average annual rate of 4%.
The free education policy, which eliminated fees and was intended to increased
access to HE, led to increased government costs. The inability to meet costs resulted
in cash flow difficulties for UWI. Liabilities increased and the problems were
exacerbated by foreign exchange risks. CAST consistently operated with deficits.
Flowing from the financial difficulties, the policy strained resources for capital
development, limited capacity and restricted access. A UWI document, Capital Needs
(January 1975) identifies that the physical facilities could not support free education.
Further increases in enrolment were impossible, as the facilities were up to capacity
and there was no funding for additional infrastructure. From 196575 enrolment
doubled without increased capacity.
A further consequence was that funding instability impacted on quality
assurance. The administrator of University Hospital threatened to withdraw
accreditation of the medical faculty and hospital as a teaching institution if funding
was not provided to maintain it.
The cess
As a result of the problems experienced in financing the free education policy the
government decided to charge a cess to UWI and CAST students. A cess is a tax or a
levy and is a concise version of the word assessment. The president of UTech (2003)
explains the system:
The cess was imposed by the GOJ (Government of Jamaica) but the fee for UWI and
CAST remained the same, i.e. the tuition fee, but the cess went to the GOJ who used that
to provide subventions for the University. Of course, as far as the students were
concerned it was more money even though they paid the cess at the Bank of Jamaica.
European Journal of Higher Education
11
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The UWI and CAST didn’t actually get the cess on their hands. It came back through
the subvention but certainly it was increased student-participation in funding their own
education.
Sherlock (1986) points out that the reasons for the change in government policy
were: dramatic increases in the cost of education; accelerating population pressure,
and consequent increases in the number of students; a fall in government revenue
from bauxite; and the need to rebalance the educational budget without sacrificing
the maintenance and development of basic education.
Students were required to pay a fee (tax) pegged to the economic cost of their
education. The rate was announced at 30% of the economic cost. CAST students
paid a fixed fee while those of UWI varied. The cess was restricted to students of
UWI and CAST, others were exempt. Automatic boarding grants were abolished,
though the government later accepted a recommendation that the boarding grant
should continue for those in need.
UWI enrolment demonstrates that the cess did not seriously affect Jamaican HE
growth. By 1992 the growth rate relative to 1963 recovered to 20%. It fell for the first
year and then recovered thereafter.
Cost sharing 1993 present
As of September 1993 the government accepted a policy of cost sharing for all
educational institutions from secondary level. By so doing it gave sanction to reality
as several institutions, out of desperation, started charging fees under various guises.
The government sought to develop governance regulations, but there are no policies
and procedure for the tertiary system. During this period CAST became a university,
renamed the University of Technology, Jamaica (UTech), so the government was
committed to supporting two HEIs.
The bases for the cost sharing in the tertiary level were contained (Davis Report
1994):
(1) Funding was a shared responsibility between the state, corporate sector,
students and educational institutions.
(2) The state would provide a significant portion of the funds and create policies
to facilitate participation of other partners.
(3) The state would ensure the most effective use of HEI’s resources and equity in
the allocation of available benefits.
The distinguishing features of the cost sharing policy for tertiary education include
shared responsibilities for HE costs, the state to provide major contribution and the
regulatory framework, and assistance for the most vulnerable by way of loans and
grants.
The cost sharing policy improved HEI financial performance. UTech, which
implemented cost sharing before the official pronouncement, showed positive results
from 1991 where it recorded a surplus of 6%. This was a reversal of 10-years of
deficits. During cost sharing surpluses averaged 12% compared to negative returns in
the three previous periods. UWI had a 3% average annual surplus compared to 1%
for the two immediate periods. Cost sharing reversed the previous 10-years of
negative accumulated funds resulting in a positive net worth. As UWI increased its
12
K.K. Nkrumah-Young and P. Powell
dependence on government, its ability to manage its receivables decreased. UTech,
which embarked earlier on cost sharing, had far better receivable management ratios.
Cost sharing has seen the most rapid growth in enrolment in HE in Jamaica. The
growth rate for Jamaicans in UWI increased from 20% average in 1993 to 23% in 2003.
It appears that access is more dependent on capacity rather than fees. When the cess
was introduced, growth declined in the first two years due to of capacity constraints.
The decline started before the cess, from 21% in 1984 to 19% in 1985. During cost
sharing there was substantial growth as more institutions were designated HEIs.
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Assessing models for financing HE
The article now assesses the consequences of the financing models. Data do not
reveal significant problems with the financing policy of fee payment that existed up
to 1973. Both the HEI and CAST set their own fees. However, there were no fee
increases 196273. There is no evidence of dissatisfaction or difficulty with the fees
charged by the institutions. Alexander et al. (1967) speculate that the possibility of
eliminating fees might lead to increased access and unit cost reduction. However, the
egalitarian notion articulated by the then prime minister led to the change fee
payment was elitist and would exclude the poor. The prime minister said
‘the fundamental, philosophical and firm answer is that the government cannot
accept a school system based on discrimination against children who are expected to
sit side by side with visible advantages or disadvantages of one family against
another’ (The Daily Gleaner 1973). The leader of the opposition rejected the
egalitarian notion in favour of a more targeted approach. He felt the government
should have channelled the subsidy to the SLB to target needy students: ‘the real
benefit under the proposal would be mainly to relieve some parents who have been
paying fees, of the fees they were now paying whether they had any difficulty in doing
so or not’ (The Daily Gleaner 1973). Mingat, Jee-Peng, and Hoque (1985) and
Gradstein (2003) show that the egalitarian view, such as that of the government, does
not result in equity of HE access, but benefits the better off.
Increased access was the main reason for the change from fee-paying to free
education. Enrolment growth for Jamaican HE up to 1974 was 21% relative to 1964.
During free education the average growth rate was 19%. During the cess growth
was 20% and, with increased capacity, enrolment growth rate increased to 43%. This
suggests that the free education policy did not achieve its objective of increase access.
Free education eliminated a source of funding that was independent of political
control and made the HEI more susceptible to state control.
Assessing the Free Education Policy
The egalitarian philosophy of the Free Education Policy and the belief it would
increase access resulted in:
Financial difficulties for the HEI due to inadequate funding and late
remittances.
National difficulties as a result of expensive social programmes, of which
education was the main contributor.
Limitations of HEI infrastructure to cope with demand and reduced access.
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European Journal of Higher Education
13
The ‘conditions precedent’ for total state funding of HE are similar to the conditions
of a totalitarian state as central controls are necessary to deal with the equity
problem and resource constraints. Table 2 compares the conditions necessary to
those existing in Jamaica during that period. Jamaica did not fulfil any of the
preconditions, and hence the consequences that ensued might have been expected.
State control is intended to ensure that, in the absence of markets to regulate
demand for and supply of HE, the state does the balancing. State control therefore
means state planning and management of HEIs. During the free education era
there is no evidence of detailed state planning. Decisions about matriculation and
programmes, their development, and implementation were taken by the HEI without
any direct link to employment planning and projections. The concept of academic
freedom dictated that HEI staff could not be relegated to mere agents of the state.
Enrolment was subjected only to capacity and the matriculation requirements of
the university and not to state dictates. University staff could not be employees of the
state due to the ownership of the HEI by several governments and the HEI being a
body corporate by law. Staffing needs were determined by university administrators.
The data show that the lack of state control of HE production and planning resulted
in incoherence, hence, the inability of the infrastructure to keep pace with demand
and for the resource to be redirected from the primary and secondary sectors to HE
(Sherlock 1986).
In order to prevent the use of public funds for HE from causing reverse
redistribution, the state needs to manage the entire process. Since the total cost is
borne by the public, total benefits should likewise accrue only to society and prevent
private benefits. Yet, instead of preventing private benefits from accruing, the
Table 2. Conditions during free education.
Conditions precedent
j
State control of planning and productive
processes
Detailed planning only by the state
j
HEI operates as agent of the state
Enrolment controlled by state (matriculation
requirements and quantity)
HE staff are employees of the state
State dictates staffing needs of HEI
No market competition
State-organised staffing on rational bases with
no advantage for particular institutions
Salaries determined by the state
j
j
State supervised system of HE
j
Existing conditions
HEI controlled its staff
HEI controlled staffing needs and state
influence was over funding
Monopolistic market competition
Single HEI eliminated need to compete for
staff
State controls salaries through bargaining
process
Non-uniform wage rates
Employers compete for graduates
Uniform wage rates
Employers not allowed to compete
for graduates
Graduate salaries no higher than nongraduate
No distinction among HEIs on quality
No resource constraints
HEI expected to interpret national needs
and implement appropriate programmes
University established under independent
charter
Enrolment under control of the HEI
j
Graduates paid higher wages
Not applicable as single HE provider
Significant resource constraints
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14
K.K. Nkrumah-Young and P. Powell
opposite happened in the Jamaican system under free education. The University had
to compete for staff internationally. In addition, it offered advantageous accommodation to entice expatriates. Graduates were paid much higher salaries. The only
attempt at eliminating competition in HE was the government’s continued support of
a single provider.
Market conditions under the policy of free education automatically restricted HE
resources as it relieved those who could afford to pay and shifted the responsibility to
those who could not. Instead of targeting assistance to the needy, it depended on
taxation. Jamaica had an inefficient tax collection system which made it difficult to
collect from the self-employed and entrepreneurs.
Resources were needed to enable the state to pay for social services. The process
for determining HEI resource requirements was based on a flawed notion that the
presence of the regional representatives on the funding body automatically
guaranteed resource adequacy. This, however, depended on national productivity
that had to be decided within the context of the overall country’s needs, yet
the funding body made the decision in isolation. The strategy of reviewing the
university’s resources in isolation was more applicable to a situation where the
government was only one of many income sources. In such a case, the institution
could turn to other sources when the government could not respond. As it stood,
there was but one resource provider and when the country could not satisfy the needs
the HEI had no other avenue, hence its financial difficulties. If there was total state
control then limits could have been placed on the functions and restriction of
activities within the resource capabilities of the supporting countries. The flawed
system of resource allocation resulted in financial difficulties, quality threats to
programmes and economic difficulties for the country. The government then adopted
the cess in order to provide funds to address HEI needs.
Effects of the cess
During the cess the financial difficulties of the HEI heightened; infrastructural
neglect increased and enrolment declined. There were increased threats to
programme quality and institutions were forced to depend on loans to address
cash flow deficiencies. The dependence on loans increased operational costs and
reduced efficiency.
The consequences suffered by the HEI during the period of free education were
as a result of the failure to satisfy the conditions precedent. To address the problems
the country should have either returned to a fee paying policy or implement the
conditions precedent. The conditions would have meant a policy of state control of
HE, removal of market conditions and provision of adequate resources consistent
with demand. Jamaica instead implemented a new tax collection measure (the cess),
aimed only at addressing the resource deficiency problems at the systems level. Prior
to this there was an exacerbation of the problems, hence the conclusion that the lone
taxation measure was inadequate. So, in 1993 the government decided to abandon
free education and return to fee-paying. The decision to move to the cess rather than
follow the path dictated by the decision tree was a political one as free education was
popularly regarded as an upward mobility channel for the poor. As a result, the
foreseeable consequences were ignored.
European Journal of Higher Education
15
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Assessing the Cost Sharing Policy
The Cost Sharing Policy has three components: sharing of cost between the
government and beneficiaries, provision of loans to cover tuition fees, and a grant
to the needy to cover other educational costs. According to the decision tree, Jamaica
is in the position of ‘up front charges with mortgage-type loans for students with
inability to pay’ in the upper right position of the figure. Jamaica’s position against
the conditions precedent for cost sharing is summarised in Table 3.
Social subsidy is necessary in an education market where there are disequilibria
between private and social rate of returns since, in such markets, programmes with
high social and low private rates of returns will be neglected in favour of those with
high private returns. State involvement is therefore necessary to protect sociallybeneficial programmes. In Jamaica, there was low demand for programmes in teacher
training, health and applied science, social work and arts subjects. On the other
hand, there was high demand for business administration, engineering, medicine and
law that command higher salaries.
The market-based accountability model views the citizen as consumer and public
sector institutions would be judged by the quality of their services rather than by
detailed monitoring on how they use resources. In an HE system where students are
required to pay fees, they apply less to institutions giving poor service. The decision
by government to maintain authority to approve fees resulted in a politically-based
accountability model as the authorities seek explanations for fees charged. In a
market situation consumer choice is necessary to force quality and efficiency.
Students should be able to choose their institution freely, subject to capacity and
matriculation requirements. This condition is satisfied in the Jamaican education
market.
In the centrally-planned economy the state manages costs; however, under
competitive market conditions costs result from the interaction of demand and
supply. For this reason the condition is for staff to be employees of the HEI. This
would also allow for the interplay of suppliers (staff) and the demand for labour
Table 3. Assessment of Jamaica’s conditions during cost sharing.
General conditions precedent to cost sharing
Existing conditions
Disequilibria between social and private rates Low demand for Education, Town Planning,
of returns on educational offerings
Public administration, Nursing and Social
work programmes with high social and low
private rates of return
Market-based accountability mechanisms
Politically accountability upward
accountability sub-category
Students allowed free choice of institutions Students free to chose which institution to
attend
Staff are employees of HEIs and conditions Staff are employees of institution and state
of service are decided by institution and
involvement in negotiation exerts undue
staff
control
Institutions determine their fees
Institutions determine their fees but state uses
monopsonistic control fees to be charged
Government determine its support,
Government support and fees are linked
independent of institutions’ fees
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K.K. Nkrumah-Young and P. Powell
(institutions). In Jamaica, HEI staff are employees of the institutions but the state
maintains a role in salary negotiations and attempts to control UWI costs. In
the case of UTech it attempts to do so by reviewing the budget and threatening the
institution to acquiesce to its demands for reduction. The consequence of the state’s
position is the exertion of undue influence and hence, a distortion of the labour
market.
The precondition for HEIs to determine their own fees is because there should
not be price control in an HE market. Price control is a mechanism in monopolistic
competition to prevent abuse of power by a single supplier. As industries move
towards free market competition, price controls become less necessary and more
inefficient. In the HE environment, the absence of price controls should lead to
variable fees and encourage competition and will lead to open-ended funding for the
HEI and improvements in efficiencies through competition (Barr 2004b). Thus, this
article suggests institutional control in the determination of student fees. Currently,
the Jamaican government sets tuition fees, meaning price control. Next, the effects of
this price control are outlined. Fees in Jamaican HE are, however, variable and result
from negotiations. This entails a rational basis for determining the fees.
The precondition for the government to determine its subsidy, independent of
fees is made against the background of national resource constraints. The linking of
the subsidy and fees is another method of price control. In the case of the UWI the
state pays the difference between the per unit costs and the amount charged to
students. This perpetuates central control since government is committed to the
difference. In the case of UTech, the commitment of the state is to cover staff costs.
James and Williams (2004) observe ‘much of the psychology of willingness to pay
tuition in the public tertiary institutions is based on the 20% of economic costs
charged and the assumption that government must price education to ensure social
goals are met.’ As the state’s resources are reduced, the de-linking would allow fees to
be based on the supply cost and consumers’ willingness to pay thereby, enabling
institutions to apply managerial creativity to ensure sustainability.
Discussion
The government’s role in a HE market arises because of control of price and cost.
The aim is to ensure affordability for the poor. However, the strategy of minimising
both price and cost results in inefficiencies.
A reduction in cost and price results in a reduction in quantity, that is, restricted
access. The data showed that in Jamaica in the 1970s access was restricted due to
capacity constraints to absorb those who were qualified for HE. The rate of access
achieved was at the expense of deficits on the institution’s balance sheet. Access
would have been more affected if deficits were not created to maintain the levels of
outputs. Since 1973 when the government took control of HE financing and
continued to make access its priority, it allowed the university to build up deficits.
Threat to quality occurred as a result of direct price controls. To maintain output
levels while attempting to minimise or eliminate the deficit, an institution is forced to
reduce quality. In Jamaica the threats to quality were exemplified in inadequate
equipment, over-crowded classrooms, inadequate library resources and a poor study
environment.
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The cess was not designed to change the strategy as its purpose was to provide a
new source of income to enable the government to maintain its position of control.
In adopting cost sharing the government continued its monopsonistic approach by
maintaining control over the two elements in the cost-revenue equation. This is
implicit in its policy to approve fees and its role in salary negotiations as well
as its grip on HEI budgets. By so doing, it continued a policy that either restricted
access, contributed to HEIs’ poor financial performance, or placed programme
quality at risk.
Price control has effects on equity. The purpose of maintaining responsibility to
approve fees is to protect the poor from being denied access. There are three
problems with the strategy, however. First, to protect the poor, fees have to be set at
levels perceived by them to be affordable. Yet, most of the people in the 1724 age
cohort who are HE-qualified are from the richest quintile in Jamaica.
The second problem is that since the government is committed to bridging the
gap between total cost and students’ fees, and as resources are limited, then the
country would be faced with the three-fold problem of limitation to access, deficit
financing of HEIs and poor quality institution. Here too, price is equal to cost, and
hence when cost is reduced, price is reduced. When cost is reduced then access is
affected.
Price control should protect consumers from unfair practices. Price control is not
suitable for protecting a section of the consumption market, as it is likely to end up
subsidising those who do not need it. A better way of supporting the poor is to allow
institutions to decide their own fees, with the government channelling resources to
assist students who cannot afford to pay. This would also allow targeted assistance
to programmes with high social and low private returns. Thus, the recommendation
to de-link subsidy and fees is made.
Another aspect of the equity problem is that of equal treatment for HE
consumers. The difference in treatment is a consequence of the evolutionary nature
of the development of Jamaican HE. The system compartmentalised HE providers
and so different processes evolved for dealing with the regional institution as against
the national ones. The difference in the processes and treatment of deciding on fees
has led to students of one HEI absorbing a higher percentage of the economic cost
than the other. With UWI, the government first decides on the percentage of costs to
be absorbed by the students and in the case of UTech, fees are determined after the
subsidy is set. In UWI, the underpinning is affordability for the poorest quintile. This
led to a small share for the students and a large share for the government, leaving the
HEI in deficit.
Government resource constraints mean that students are left to pick up the
balance. As a result of limited resources and conflicting priorities, small amounts
are determined for the government’s portion and the students end up paying more of
the economic cost. The different result depends on whether a student attends the
regional HEI as against the national institution and is a market distortion. All
consumers in a market should be given equal treatment and the state’s role should be
to correct inefficiencies and support equity not to be the cause of the reverse. This
inequity in treatment is a consequence of an unchanged financing model for a system
that has shifted from one provider to diverse providers.
The general preconditions are designed to provide market efficiency and to
protect the social programmes that would suffer under imperfect market conditions.
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K.K. Nkrumah-Young and P. Powell
They do not, however, address all the equity of access issues. The literature suggests
one or a combination of the options in Table 4 to address equity problems. The
choice of options (sub-routes) is dependent on a country’s ability to satisfy certain
conditions precedent.
Deferred payments schemes are more equitable for access because they provide
free education at the point of delivery and enable beneficiaries to repay when they are
most able to do so. Mortgage-type loans are costly due to the high risk of nonrepayment and the underdeveloped market for loans for human capital development.
A Graduate Tax system is most efficient and egalitarian (Gracı´a-Pen˜alosa and Wa¨ lde
2000) but psychologically discouraging because repayment is indefinite. This would
also have to involve mandatory participation to achieve the lowest risk and highest
returns. Income contingent loans (ICL), with an opting out clause for early
repayment, avoid problems of moral hazards and adverse selection (Jacobs 2002).
The primary preconditions for ICL, therefore, are up front support for HEIs and
efficient taxation and information systems. The secondary preconditions are early
opt-out provisions and the ability of society to absorb the risk of graduates in
difficulties. Jamaica has an inefficient tax system (Tax Policy Review Committee
2004) and is not in a position to undertake a deferred payment scheme.
Jamaica had significant resource constraints that prevented it from financing HE.
Hence, a scheme based on up front charges is the most practicable option. The
Jamaica Student Loan Project, with the World Bank, enhanced the pool of funds of
the SLB and enabled it to provide HE loans. Nonetheless, the pool was still
Table 4. Conditions for the sub-routes of cost sharing against the conditions precedent.
Conditions precedent for the sub-routes
Existing conditions
Up front charges
j
Severe Budgetary constraints
j
Severe Budgetary Constraints
j
Students Loan Bureau established to provide HE
loans
Loan pool enhanced by World Bank but insufficient
Relatively high labour market uncertainty hence
dependence of specialised lending institutions
Mortgage-type loan programme
j
j
j
Institution specialising in lending for human
capital development
Sufficient capital fund for loan programme
Labour market certainties in absence of
specialised lending institutions
j
j
Income contingent loan programme
j
j
j
j
j
National budget can cover up-front cost of
HEI operations
Tax system able to track citizens through
lifetime
Information to encourage participation
from low-risk, high-return graduate
Opting out provision for early repayment
Provision for society to absorb risk of
non-payment
j
j
j
j
j
National budget cannot manage up-front cost of
university operations
Taxation system unable to successfully track
citizens’ income
National information technology is in infancy
Not applicable in the absence of a programme
Not applicable in the absence of a programme
Graduate taxes
j
j
Mandatory participation
Efficient income tax collection system
j
j
Not applicable in the absence of a programme
Income tax collection system is inefficient
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insufficient, resulting in loans for tuition fees only. Labour market uncertainty is
demonstrated by the high unemployment rate, which in 2003 was 12.8%. Labour
market uncertainty makes banks reluctant to lend for human capital development.
The analysis shows that equity of HE treatment for students is an issue. The
political rather than the systems approach in deciding students’ fees leads to inequity
of treatment of UWI students as against others. The political approach caused the
government to deal directly with individual institutions rather than collectively.
Equity of access is a problem as the strategy delivers unintended results. The
stated government priority is to increase access. However, the data reveals the
opposite. A mortgage-type loan scheme is not the best option to redress the equity
imbalance in access due to the poor’s inability to provide collateral, the high risk to
lending institutions and the high costs to borrowers. The current cost sharing policy
does not adequately address equity of access to HE. James and Williams (2004) show
that the richest quintile in the population benefits most from tertiary education.
The loan solution is most beneficial to the richest. Only a small percentage of
those who receive assistance are from the poorest quintile. The highest percentage is
from the richest quintile. Further, 72.2% of the poorest quintile who matriculated are
not attending HE compared to the richest quintile where only 54.6% are not
attending. This shows that more effort is needed to assist the poorest.
One solution to the equity of access problem for Jamaica is to shift resources
from the tertiary sector to support primary and secondary education (James and
Williams 2004). That would enable more people from the poorest sector to
matriculate to HE. Of those out of school, the majority belong to the poorest
quintiles for all age groups. The figure declined since the cost sharing policy of 1993;
however, the decline was higher for the richest quintiles. The main problem of the
poorest groups is not attaining the matriculation requirements for higher education.
Attention must be focused at the lower levels to enable the poorest to enter HE.
The sub-routes of cost sharing address further the equity of access issue. These
support the view that up front charges with mortgage-type loans do not adequately
address the issue. However, given the country’s inability to manage the other options,
this may be viewed as the best option.
Conclusions
This article has shown that there are three broad options for financing higher
education: private financing, state financing, and shared financing. The article
examines the nature of these options and explores their economic context and
consequences. It develops a model of the ‘conditions precedent’ for deciding on HE
financing which proposes that, in order for an option to be considered feasible,
certain preconditions must be met. As an example, it then examines the options that
Jamaica used to fund its higher education from 1963 and the outcomes thereof. The
analysis shows that Jamaica was driven more by political reasons along the paths it
has taken to finance HE. The country did not pay attention to its economic situation
as dictated by the conditions precedent in Table 1 and hence the adverse effects which
occurred. These included infrastructural neglect, enrolment decline, threat to the
quality of programme and financial difficulties. The return to fee paying under
the Cost Sharing Policy was better for the HEI. However, there are aspects of the
conditions precedent to which the country should pay attention in order to ensure
20
K.K. Nkrumah-Young and P. Powell
sustainability of its HE financing system. If the mortgage-type loan scheme is to
continue then the loan pool needs to be increased. The country is considering
replacing the mortgage-type loan scheme with an income contingent one. Its success
depends on an efficient tax collection system which at present does not exist.
This research demonstrates that HEI funding choices are not free choices they
are constrained by the prevailing context. Choices also have consequences that need
to be understood by those making them.
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Notes on contributors
Kofi K. Nkrumah-Young is the Vice President of Planning and Operations at the University of
Technology, Jamaica. His research interests are in financing and resource allocation models in
Higher Education. He has a DBA (Bath), MBA, Advance Diploma in Banking and Finance,
a BA from the University of the West Indies and a Diploma from the United Theological
College of the West Indies. He is a Justice of the Peace and the member of the Board of the
Students Loan Bureau, the Bethlehem Moravian College and the Vocational Training and
Development Institute.
Philip Powell is Executive Dean of the School of Business, Economics and Informatics at
Birkbeck, University of London. Formally he was Deputy Dean at the University of Bath and
Director of the IS Research Unit at Warwick Business School, having worked in Australia,
Africa, the US and Europe. He is author of 10 books and his work has appeared in over
100 journals and over 100 conferences. He is Managing Editor of the Information Systems
Journal.
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