Private vocational training: an accident waiting to happen (“cherry pickability”)

Cherry_picking_med

ABC Radio National,  29 March 2015, http://ab.co/1bpxx0M

The deregulation of vocational education was promoted as a better deal for students and employers.

‘Contestability’, where public and private education providers compete for the same students and for the same government subsidies should have meant more efficient use of public funds.

But in recent months with regular media reports of ‘dodgy training colleges’ and shareholders losing money on education companies, the contestability policy is mired in political and regulatory controversy.

Audio – http://ab.co/1DAaUgj

Transcript – 

Stan Correy: Hello, I’m Stan Correy. This week on Rear Vision, how private vocational training became an accident waiting to happen.

Journalist [archival]: It seems barely a day passes lately when we’re not reading new allegations of dodgy dealings in the private vocational training market. It’s an industry that attracts well over $1 billion a year in federal funding and some of those taxpayer dollars are going to colleges accused of unscrupulous recruitment practices that leave students saddled with huge debts they can’t repay.

Journalist [archival]: The federal government has foreshadowed new controls on private training colleges, including a ban on inducements like free laptops.

Stan Correy: In 2008 the deregulation of vocational education was promoted by both major political parties as a better deal for students and employers. ‘Contestability’, another name for competition, became the order of the day. Public and private education providers competed for the same students and for the same government subsidies.

Supporters claim there would a more efficient use of public funds, with happier students graduating out of VET (vocational education training) ready for work.

 [ABC 7.30 report archival]: Unscrupulous, absolutely unscrupulous. Zero interest in education and training, it’s all about getting these people in, keeping the numbers up and churning them through, churning them through.

Private College promo video: We have many students that come from different cultures, different backgrounds, different life journeys…

Stan Correy: Over the past six months there’ve been almost daily media reports of ‘dodgy training colleges’ and shareholders who have lost money on for-profit education companies listed on the stock exchange. The much lauded contestability policy is bogged down in political and regulatory controversy.

What went wrong with contestability? Chief investment officer at Forager Funds Management in Sydney, Steve Johnson:

Steve Johnson: I’m sure they thought that people would try and maximise their profit, but I don’t think they had any idea how this was going to evolve and how rapidly. They probably thought contestability will happen across all of the different courses that are out there, but the private market is in it to make a profit. So contestability to them meant cherry-pickability, let’s offer the courses here that we can make a profit out of, and if we don’t have to, why would we offer courses that we not going to make a profit out of. So contestability really became cherry-picking, the private sector came along and said we’re going to deliver all of these courses because they’re the ones that are profitable for us and we’re going to leave the TAFEs to deliver all the things that are intensive and expensive to deliver. So now you’ve got a situation where the TAFEs are actually in a worse financial situation than they were prior to this contestability issue and you’ve got the private sector making an absolute fortune out of it.

Stan Correy: For over 100 years, the government-funded TAFE colleges have been the cornerstone of vocational training in Australia. But with the arrival of competition, state governments began to wind back funding of the public sector.

The Victorian Liberal government’s enthusiastic support of the private vocational market did see a voter backlash at the 2014 state election. That’s not surprising, says Gavin Moodie, one of Australia’s leading specialists on vocational education. In Australia’s development, vocational training is traditionally seen as being non-profit and a public activity

On the phone from Toronto where he’s now based, Professor Gavin Moodie:

Gavin Moodie: Australia had various forms of vocational education ever since the first fleet when apprentices and their masters were brought across and they established the English system in the Australian colonies, but very informal and very much responding to the needs of family businesses and small enterprises. And that continued in fits and starts until the mining booms in the 1850s onwards when much more skilled labour was needed. And with that, governments established schools of mines and industry in Ballarat in 1870, in South Australia 1889, Western Australia 1902. And at about the same time, governments established technical colleges to support the growing manufacturing industries.

Stan Correy: Governments became further involved in technical and further education to meet the demands of military mobilisation during the first and second world wars. But what about the private sector, were they interested in vocational training?

Gavin Moodie: Yes. They would train people for their own enterprises, typically in apprenticeships. So the employer would put on one or two apprentices and they would deal with most of the apprentices training mostly themselves except they would be sent off to trade school for one day a week or so and might be subsidised by the government. But the rest of the thing was done in-house. And so they would train their own employees or their own future employees, but we didn’t have, as it were, a private market. We had private schools, mostly denominational, Catholic and others, but we didn’t have private providers of vocational education whose sole business was training workers for other enterprises. No, we had internal training departments, of the railways and the manufacturing here and of the gasworks there.

Stan Correy: Gavin Moodie.

The notion of a private market in what’s called the VET sector wasn’t born in the boardrooms of Australian business. It’s a bipartisan creation of our major political parties.

John Dawkins is the former Labor Federal Minister for Employment, Education and Training and a former Treasurer in the Hawke/Keating era, and he chaired advisory bodies on vocational education under the Rudd and Gillard governments.

Here’s John Dawkins on RN’s Saturday Extra program in 2013 describing the benefits of contestability in vocational education:

John Dawkins [archival]: If you want to think about the training market, it’s going to be a more contestable market, so there’ll be more competition, even though it continues to be subsidised in a pretty big way by state governments and federal governments, because both levels of government realise that this is a crucially important part of the education and training system as it supplies so many of the skilled workers for our changing economy.

Cain Polidano: I guess it first started when Kevin Rudd and Julia Gillard first came to government. They set out on an ambitious skills agenda and they set out some targets that they would try and meet in terms of trying to up-skill the Australian workers.

Stan Correy: Dr Cain Polidano is a Research Fellow at the Melbourne Institute of Applied Economic and Social Research.

Cain Polidano: Leading on from that, early in 2008 there was also an OECD report into the vocational and training sector in Australia. And some of the recommendations they made was really that the Australian sector needed to become more responsive to skill demands. That was based on evidence that showed that a lot of vocational education and training that had been undertaken in Australia was not necessarily relevant to skill demands. The agreement was back in 2008 for all states to move from a system where publicly funded places were predetermined by government, there was a fixed number of them and the funding for those courses were allocated at the provider level and at the course level based on what the government thought skill demands were.

So the idea in 2008 was all of the governments were going to agree to move away from that system and to move to a more flexible system where instead of the funding being capped at a certain number it was uncapped. Basically the funding would follow student choices. Students would have greater agency than ever before about enrolling in the courses they thought were best in their interest. So I guess the assumption is that in making that change, that students had better information than governments about what courses were in their best interest, including what courses might lead to good jobs and lead to jobs that gave them a fulfilling career path.

Stan Correy: Cain Polidano.

Unfortunately for many students in the private vocational market, it hasn’t been easy. Many have fallen victim to dodgy training providers, incurring large debts and ending up with often worthless diplomas.

Another consequence of the creation of a private market in education was the arrival of education brokers, third-party companies who did the recruitment for the actual education providers.

Journalist [archival]: The salesmen promised the single mother of three there’d be no upfront cost if she signed up for a double diploma in Counselling and Community Services. Instead, the $20,000 course fee would be covered by a loan under the federal government’s Vocational Education and Training FEE-HELP scheme.

Student [archival]: They said that I didn’t have to pay anything until I was earning over $53,000 a year, and if I didn’t earn that much, well then I wouldn’t have to repay it.

Stan Correy: The dubious recruiting techniques of the education brokers are the target of the federal government’s most recent legislation on the private training market. A lot of money was being spent in this new education market. The only problem was not much was being spent on education, as the Minister Simon Birmingham recently told Fran Kelly on RN Breakfast:

Simon Birmingham [archival]: And those reforms we believe will save Australian students from taking out more than $16 billion in unnecessary and dubious loans over the course of the next decade. So that gives a fair…

Fran Kelly [archival]: That’s a lot of HECS loans; $16 billion. Because effectively we’re talking FEE-HELP is like what most people understand as the HECS scheme at universities, isn’t it?

Simon Birmingham [archival]: That’s right, it is Fran, it is a phenomenal amount, and it is a real demonstration that all too many people are either signing up for the wrong reasons, or being signed up to courses that frankly they are just not equipped to undertake.

Gerard Brody: Our view of the deregulation of private vocational training has been a bit of an accident waiting to happen.

Stan Correy: Gerard Brody, chief executive officer of the Victorian Consumer Law Centre. The centre’s telephone advice line started getting complaints about private colleges from about late 2009.

Gerard Brody: It seems from our analysis that governments over the past four or five years have progressively brought in contestability with the idea that consumer choice would lead to better, more effective competition that would drive the training providers to deliver more quality services that align with consumer preferences. That really has been the theory behind the reforms. But what I think governments and regulators failed to do as this deregulation process was implemented, was to really think about consumer protection and then really the conditions that are needed for consumers to make informed and effective choices.

Stan Correy: This is Rear Vision with Stan Correy on RN, by podcast and on your mobile through the ABC radio app.

There are multiple federal and state regulators monitoring the private training market. ASQA, the Australian Skills and Qualifications Authority, and there are also state-based quality control authorities. The national competition and consumer regulator the ACCC also has responsibility in the education space.

Have regulators been asleep when it comes to paying attention to the rapid growth of private training colleges?

Gerard Brody: The regulators’ focus was primarily on quality of education, not really issues concerned with consumer protection, issues like contracts and marketing and effective information provision and dispute resolution. Those sort of issues were left off to one side perhaps. There can often be gaps between what the consumer law regulators like the ACCC say that they are responsible for and then what the education regulators are responsible for. And consumers can get confused of course about where to make complaints, and if those complaints are made, are they passed on to the relevant regulatory authority that some action may be taken?

Stan Correy: Gerard Brody, chief executive officer of the Victorian Consumer Law Centre.

Journalist [archival]: The peak body for private training colleges has kicked out 100 of its members for inappropriate practices. A senate inquiry is due to investigate the troubled sector this year…

Stan Correy: The troubled sector, as we’ve heard, has several regulators monitoring it. And there’s even a government-owned not-for-profit company that produces quite detailed research on vocational education. Yet the emergence of private training colleges seems to have confused everybody.

Adjunct Professor in Education at RMIT in Melbourne but currently based in Canada at the University of Toronto, Gavin Moodie:

Gavin Moodie: There are 4,000 providers, 60 of them are public, so there are over 3,500 private providers, and that is an enormous number of providers to be regulating. It’s a very, very large number. Compare higher education, which has had its quality problems, and there are the 40 universities and 120 private providers. Much more manageable. You could almost list the names of them. But 4,000? And they keep on changing, it’s very, very hard. And most of those 4,000 are just one- or two-person operations, you know, they go into business and out of business. And then sometimes they’re combining it with their catering business and sometimes they’re combining it with their trucking business, you know, it’s very, very messy.

Stan Correy: From the beginning of April, thousands of private providers, known in the business as RTOs, registered training organisations, will have to deal with new quality standards. In the past this is where RTOs have got into trouble, complying with the old standards or simply ignoring them.

Why does Gavin Moodie think quality assurance authorities failed to deal adequately with private providers in vocational education?

Gavin Moodie: Since the mid-1990s, Australian vocational education has been, as the jargon says, competency based, which means we’re not relying so heavily on how much time vocational students are spending in their courses and how much teaching they get, all we’re interested in is if are they competent at any point in time. So if you already know how to be a baker, then there’s no need to do the whole three years bakery course, you can just sit the assessment and if you pass that, then off you go, you get your certificate or diploma.

Now, this outcomes-based assessment has many advantages, but the quality assurance in vocational education has relied almost exclusively on it and that means that without any examination of input, like how long has the person been studying for, or the processes, like what were their classes like and what were the quality of their teachers and what equipment were they learning on, without any substantial examination of that, too much pressure was put on the outcomes assessment. It was all internal, very little checking from anybody outside. And so if the trainer certified that someone was competent, and signed off, that was it. If they did the paperwork correctly, then there was no reason for the…whichever quality assurance agency to go behind that to investigate how substantial the teaching was or the assessment was.

Stan Correy: Gavin Moodie.

The holy grail for any small private training provider is to get bigger and become listed on the Australian Securities Exchange. One company, aptly named Vocation, succeeded in doing that. Business Review Weekly in November 2014 commented that ‘Vocation promised to surf the wave of private, demand-driven higher education delivery sweeping the country’.

Journalist [archival]: Well, we can reveal that John Dawkins, the former treasurer and education minister during the Hawke and Keating governments, will be chairman of a new education company being prepared for listing on the share market later this year.Street Talk has information that Vocation is a roll-up of three existing companies, specialising in vocational education and training.

Journalist [archival]: Vocation started in 2013 and, up until last year, it had about 40,000 students studying a diverse range of courses from business management to beauty therapy. It listed on the share market and, at its peak, its share price was more than $3. But last year that changed, and fast.

Andrew Watson [archival]: On 27 October last year Vocation suddenly, and without any warning to the market prior, announced that it had reached a settlement with the Victorian government, and the upshot of that was that it had to surrender $19.6 million in government funding. Now, when that announcement was made, Vocation’s share price fell from $2.29 to $1.

Stan Correy: Vocation Ltd hasn’t really recovered from the loss of Victorian government funding. Critics blamed Vocation’s over-reliance on government contracts as the reason for its rapid demise. Last November, John Dawkins resigned as Chairman of Vocation Ltd, and in an article for the Australian Financial Review he complained the company was a victim of poor understanding in the investment community about commercial training and education.

Steve Johnson of Forager Funds Management in Sydney has a different view.

Steve Johnson: It was a victim of a lot more things than that, I think. I think subsequent to his resignation but also in the few months leading up to his resignation, a lot of those concerns that people had about the business model really came to the fore. And now you’ve got a business that is trying to sell parts of itself just to repay the debt and that has nothing to do with the investment community. It’s not a lack of understanding that’s driving that process, it’s a faulty business model,

Stan Correy: Vocation’s problems were the talk of the market in mid-2014, months before the more recent media reports on smaller training providers offering worthless courses and free iPads.

Another key reason Vocation came unstuck was because of what are called auspicing agreements, essentially subcontracting to often unregulated training providers. These agreements are banned in some states and treated with suspicion in others. But in Victoria they were treated more leniently and that’s where Vocation’s key companies had their business.

The pros and cons of Vocation’s business model were outlined in early 2014 in an analyst’s report by stockbrokers Taylor Collison. Steve Johnson explains what was in the report:

Steve Johnson: There were concerns…and to give Taylor Collision their due, this was well before the whole thing blew up. Vocation was still a darling stock at the time they wrote a report and pointed out what in hindsight were all of the frailties of the business and it probably went much worse than even they expected but they did a very good job of highlighting those risks. Some of those are industry-wide and around how the government was funding the business and what sort of outcomes they were getting and the risks of that changing. But some of it was also very specific to Vocation because they were more of a recruitment agency than an actual education business themselves.

Because the compliance and the approval that you needed from government was very complicated, Vocation would…a large part of their business was going around and getting students and getting the students through the registration process and dealing with the government registration process. And then they would just pass those students straight through to a third-party contractor. Sometimes it was also registered with the government but sometimes not. There was a big risk of that particular auspicing model being shut down in its entirety, and we’ve seen that that’s where a lot the problems have come up, that these guys have just been funnelling students through to some operators at the ground level that were not so credible and were certainly will not delivering the outcomes that the government wanted.

Stan Correy: Steve Johnson.

At the moment there are class actions being launched by Vocation shareholders against the company and the corporate regulator ASIC is monitoring what’s happening.

As for ASQA, the regulatory authority responsible for overseeing vocational education, they’re having to explain in parliamentary committees how the quality of vocational education declined on such a massive scale, not only with Vocation Ltd but scores of other private training providers.

[Senate Estimates]:

Christopher Robinson [archival]: As I say, we get about 1,400 a year.

Kim Carr [archival]: Is it a matter of concern to you that there are so many complaints?

Christopher Robinson [archival]: It certainly is. The whole VET regulatory reform strategy is about taking the information that comes through from complaints and other intelligence from the industry and using that to address poor-quality RTO provision at a much faster rate than we would have if we had continued with the system that we were using before.

Stan Correy: The Chief Commissioner of ASQA, Christopher Robinson, appearing before Senate Estimates last February. The quality of the information about private providers for regulators and for students is an important issue.

Dr Cain Polidano of Melbourne University:

Cain Polidano: Well, I think the market failure is clearly lack of information on quality, that’s what is really holding back the system. And if you’re talking about improving the system in the longer term, I think that’s what really has to change. That is the clear market failure. I’m not saying there aren’t providers in the system currently that are not providing up-to-scratch training, that could well be, but we really don’t have good information about to what extent this problem is. I think the risk is that governments just tend to chase their tail all the time trying to find dodgy providers rather than stepping back and looking at the big picture. When it comes to reform (and let’s face it, that’s what we are facing now is potentially another set of reforms following the senate inquiry) I think it’s really important for government to step back from issues, from case-by-case examples of poor performance, to look at the overall picture, because that’s really what’s missing at the moment.

Stan Correy: The optimistic predictions made by Labor and Liberal governments for market driven reform in vocational education haven’t quite succeeded.

Steve Johnson of Forager Funds Management says he’s not interested in investing in the for-profit education sector at the moment, it’s simply too much of a mess. But it’s unlikely the for-profit companies will disappear.

Steve Johnson: I think in 20 years’ time there will be a for-profit sector in Australia and it is probably going to be bigger than it is today. We’ve already seen a company get a listing away post-Vocation. They had to lower the price a lot. We had brokers coming back to us, they wanted to originally list the business at $2.50 but by the time they got it listed the price was $1.60, just because everyone was so nervous about everything that was going on with Vocation. So it’s changed people’s expectations, it’s changed people’s understanding of the risks.

It has changed the business models a lot. So the people that we’re seeing come into the market are not doing any of that auspicing. They tend to be running their own courses. They tend to have a bit more diversity of sources of revenue as well, so they’re across multiple states. We’ve already seen a lot of change and I think we’ll see a lot more change. I still think if I’m the government I sit there and I look at the whole space, and I say, okay, this sector didn’t exist before 2009 in any meaningful way. Now you add up all the market capitalisations of these companies and its more than $1 billion and there’s no assets being put in, no one has tipped a whole lot of money in to try and grow this industry, it is literally off government contracts that that value or wealth has been created.

And the risk for me as an investor and I think the opportunity for the government is to sit there and say, well, we’ve obviously got something very wrong here. These people are making all this money and we’re not actually getting the skilled people coming out the other end that we want. The providers would argue with that, they would say ‘we are providing outcomes and look at how many more people have got skills and qualifications’, but it’s pretty clear when you look at the numbers in different kinds of courses that we’re not yet getting skills in the areas that the economy needs.

Simon Birmingham [archival]: Well Fran, it’s important firstly to appreciate that there are many private training providers and not-for-profit training providers outside of the government system who have been operating for decades, and doing so responsibly…

Fran Kelly [archival]: Of course there are. But there are many who do things…come up with, as you described, dodgy practises. This isn’t the first time we’ve been here.

Simon Birmingham [archival]: Absolutely Fran…

Fran Kelly [archival]: When Labor came in after the Howard government they had to clean out the system then too, and now it’s happening again.

Simon Birmingham [archival]: And Fran, I just didn’t want to leave an impression that I am saying all private providers or all non-government providers are bad. There are dubious practices right across the sector.

Stan Correy: Cleaning out the education sector now seems to be part of the Australian political reform cycle. While there’s been extensive community concern about cutbacks to funding of TAFE colleges, both major parties still a support a competitive market in vocational education and training. So what can be done to avoid a repetition of the current mess?

Gavin Moodie: Just fixing quality regulation as the minister is doing, or just fixing entry barriers to the market is not going to do it on its own. Because of the multiple different aspects that are involved, I think you need to look at the thing holistically. I think that a comprehensive review where you take your time over six months or so and all of the relevant portfolios can be involved and the interest groups can be involved in reviewing the whole system, and that way you can adapt your market mechanisms, your funding levels, your quality assurance, your output based modes, bring them all together to achieve the sorts of change you want. But just changing one aspect of it is going to see the problems emerge later in a different form in a different part of the system.

Stan Correy: That’s Professor Gavin Moodie from RMIT in Melbourne. We also heard Steve Johnson from Forager Funds Management, Gerard Brody from the Victorian Consumer Law Centre, and Dr Cain Polidano from the Melbourne Institute of Applied Economic and Social Research.

Judy Rapley is the sound engineer for Rear Vision today. Thanks for listening and goodbye from Stan Correy.

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