Part three “market” – T J Ryan Foundation: Key policy issues in vocational education and training

key-issues1

 Why is a marketised model inappropriate and too simplistic for VET? ‘Any market relies on a system in which prices reflect supply and demand conditions and where differences in prices reasonably reflect differences in quality. It relies on an informed consumer and a system of incentives that doesn’t undermine quality.’ Each of these elements is far from straightforward in the VET arena.

Those (strategies in using market approaches) that haven’t been abandoned have been characterised by chronic fraud and exploitation of regulatory loopholes.

… the market can dictate, but at the end of the day the public funding of it [VET reform] changes the market dynamics. In economic terms, it [public funding] distorts the market and can incentivise providers to head down and follow the money trail, rather than what consumers want.

The T. J. Ryan Foundation is a progressive think tank focusing on Queensland public policy. The aims of the Foundation are to stimulate debate on issues in Queensland public administration and to review policy directions of current and past State governments on economic, social and cultural issues.

This Foundation focuses on evidence-based policy, and provides links to a range of public accessible online resources.

The Full Report is available here: http://bit.ly/1EsKUUg

by Peter Henneken AM BBus BA FIPAA FAICD Research Associate, TJRyan Foundation

Should we use market and quasi-market mechanisms for resource allocation and encourage efficiencies?

The COAG National Agreement for Skills and Workforce Development (April 2012) includes a commitment to further develop training markets, at 6c saying:

encouraging responsiveness in training arrangements by facilitating the operation of a more open and competitive training market.

It goes on at 6d, perhaps particularly reflecting the concerns of stakeholders, including employers, to developments in Victoria:

enabling public providers to operate effectively in an environment of greater competition, recognising their important function in servicing the training needs of industry, regions and local communities, and their role that spans high level training and workforce development for industries and improved skill and job outcomes for disadvantaged learners and communities.

The most recent meeting of the COAG Industry and Skills Council Meeting (3 April 2014) discussed a regulatory system that supports a competitive and well-functioning training market footnote?

Since the late 1980s market based arrangements have operated in traineeships without a lot of controversy. Apprenticeships have operated, reasonably successfully under “user choice” for over 10 years. The Commonwealth has competitively contracted a range of particular programs such as migrant literacy for some time.

Controversy has emerged over the past four years or so as various States have opened the market to the full range of VET programs. The leading State in this development has been Victoria which, starting in 2010, opened all relevant VET courses to uncapped demand by eligible participants, provided by all appropriately registered providers.

Queensland conducted a relatively small pilot from 2013 and from 1 July 2014, “all government subsidised training will be delivered ‘contestably’, giving students an even greater choice of training provider”. The rationale for this is:

Making training funding available contestably ensures that the government is providing the public with greater choice and the best possible solutions at the best possible price.

The Victorian initiative led to a blowout in the State’s VET budget and the following year led to a $290M cut in budget, mainly achieved by substantially reduced prices paid by government. This created its own problems with substantial cost pressures on providers, especially TAFE, and hence a greater incentive to reduce quality.

The Queensland program attempts to manage its total budget by reduced subsidies and to shape demand to areas of priority and high labour demand by differential subsidies. Whether demand can be effectively shaped is discussed further in the next section. The reduced subsidies mean either higher student fees or providers reduce costs with a consequent potential impact on quality.

What happened in Victoria?

The commentary below is primarily focused on Victoria as this has been the earliest, biggest and purest initiative of an open market and demand based funding. The main lessons, however, apply generally.

Quiggin sees a fundamental problem in the classical market transaction model applied to education. He contends that students cannot know in advance what they are going to learn (the product) or make informed judgement about what they are learning (the pay-off). He does acknowledge that this may be moderated in vocational education, where the pay-off in terms of starting salaries and possible careers are reasonably known, at least in some occupations like the trades:

in general, the idea that the provision of education is appropriately viewed as a market transaction, mediated mainly by prices and subject to the discipline of market competition, is seriously mistaken.

Those (strategies in using market approaches) that haven’t been abandoned:

have been characterised by chronic fraud and exploitation of regulatory loopholes.

Toner makes a similar point:

Why is a marketised model inappropriate and too simplistic for VET? ‘Any market relies on a system in which prices reflect supply and demand conditions and where differences in prices reasonably reflect differences in quality. It relies on an informed consumer and a system of incentives that doesn’t undermine quality.’ Each of these elements is far from straightforward in the VET arena.

He expands on this particularly in the context of Victoria and lists six problems that occur when a ‘textbook’ view of the market by the administrators in Victoria, butts up against the real world:

1. They assumed that providers would be involved for the long-term and not be opportunistic;

2. They created a market where ‘fly-by-night’ providers were able to charge the same price as reputable providers, and use misleading advertising;

3. They assumed that the consumer would be capable of making an informed decision about which provider to choose;They assumed that students would choose courses that would lead to available jobs;

4. They believed that taking funding of its own TAFE and outsourcing VET provision would save money. For example they didn’t take into account extra regulatory and transaction costs; and

5. They assumed that they could remove thousands of experienced TAFE teachers and the market would adjust.

Many of these comments and criticisms have been taken up by industry and other stakeholders. For example the concerns expressed by Australian Chamber of Commerce and Industry (ACCI):

… the market can dictate, but at the end of the day the public funding of it [VET reform] changes the market dynamics. In economic terms, it [public funding] distorts the market and can incentivise providers to head down and follow the money trail, rather than what consumers want.

While supporting the concept of a market in VET, Clair Thomas of Business Council of Australia (BCA) sys that some of the pre-requisites where not in place:

There needs to be good quality assurance and accountability regulation, so that students in the market place have good information backed by good quality regulation and accountability arrangements that enable them to make informed choices. There also needs to be conditions in the market place for genuine competition, and that requires a level playing field between providers in the market.

Innes Willox from the Australian Industry Group (AIG) adds that:

the Victorian skills reform model has led to a ‘proliferation of courses that have sprung up to meet the demands of industry’. In many cases this has resulted in ‘people doing things that are seen as easy, or as sexy in some way, rather than being core to the economic needs of the country.

He adds a comment about TAFE:

(he) noted the damage the government cuts to TAFE, which he said ‘has been, for a long time, a standard bearer in the delivery of training and education. Willox was also disturbed by the rapidly increasing number of opportunistic training providers:

What we are seeing is the huge growth in the number of private providers, using public funds and attracting enrolments, without any regard to the economic needs of the country.

John Hart, CEO of Restaurant and Catering Australia makes a similar point about whether the system can be industry driven:

If the future as it appears, by placing the purchasing decisions in the hands of the student (‘the product’ in the training system), the employer relationship with the system will be rendered all but irrelevant.

The QTU summarises its view of the Effects of market based VET:

1. prioritises training for those who are easiest and quickest to train and least in need of training;

2. minimises the time spent on training, leading to lower training quality;

3. requires the least capital input (e.g. in the services sector rather than in manufacturing;

4. emphasises narrow skills sets, enterprise-specific qualifications and meeting the immediate needs of individuals and firms rather than lifting the qualifications of the workforce as part of a broad workforce development strategy, and

5. allows the market to determine what training is delivered rather than planning to promote industry development.

Conclusions on the effects of market mechanisms

1. I observed earlier in this paper that there are a wide range of programs, run within the VET system. Some of these areas are more suitable to market based systems than others. I remarked that market based arrangements have worked reasonably successfully in userchoice for some time. The reason essentially is, that you have a much more sophisticated purchaser in the employer. Many employers have been apprentices themselves, and many larger employers have training managers and apprentice masters. The nature of the purchaser will need to be taken into account in the design of market arrangements

2. Will improved information for participants encourage them to make more rational decisions about programs they will participate in? I believe that improved information will be worthwhile, but we can’t expect that it will solve the problem completely as participants choose programs for a whole range of reasons, unrelated to whether there are skill shortages, whether the provider offers the most ‘value for money’ etc. It will certainly improve employer decision-making, when they are the purchaser.

3. Can we get a level playing field on quality? This was discussed in the previous section..The most important action required is to improve assessment. The recent Ministerial announcement on new draft standards is an acknowledgment of the problem, but does not go far enough.

4. The issue of whether the system should be industry driven or consumer driven? The next section will discuss the attempt in Queensland to reconcile this issue by adjusting subsidy levels based on an assessment of the degree to which the skills are important to industry. On the more general level I have earlier argued that if there is no direct employment relationship involved then programs need to be broadly based and focused on broad occupations or groups of occupations (so as to meet the needs of individuals and the long-term needs of industry and the economy). Narrow programs focused on current tasks in industry, cannot generate the broader skills needed for ongoing structural change.

5. Increasing competition and reducing prices paid to TAFE will have a dramatic affect on TAFE, its capacity, its expertise and resources. This has been seen in Victoria and is also evident in Queensland. There is no doubt that TAFE needs to reform and become more efficient and flexible. However this will inevitably take time and to force the changes over a short period and without fixing the unfair competition from lower quality providers means that we are likely to damage TAFE and its role in VET significantly. There is no doubt that a slower implementation of change will better mitigate the risks.

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