The judges of a singing contest, dissatisfied with the first diva, awarded the prize to the second without having heard her. The favouring of commercialisation in the late 1980s and early 1990s had a similar empirical base. We have now heard the second diva, and while she has some strengths, her weaknesses are also increasingly apparent. It is time to move on to training a third diva, based on the lessons we learned from the first two.
This paper questions the uncritical application of business (or commercial) principles to the public sector that took place in the early 1990s, from a (wider) economics perspective. It focuses mainly upon the tertiary sector, rather than science for three reasons.
First, there has been a tendency for critics of each commercialised sector to look only into their silo, and not learn from others, yet there are common themes through all experiences. While this author has put most effort into examining the impact of commercialisation on health, he has drawn lessons from other sectors and their experiences, transferring lessons learned from one sector to others.
Critics of the science sector reforms have been less willing to analyse rigorously the commercialisation model than have the critics of some other sectors. This leads to the second reason for detailing a commercialisation critique of the tertiary education sector. It may offer some of the science sector critics a way of thinking more rigorously about their own sector.
Third, the distinction between education and research does not make a lot of sense at advanced levels. Those who wish to reform the science sector need to think a carefully about what tertiary education means, even whether it should be relabelled, ‘quaternary’.
This paper uses the term ‘commercialisation’ to mean the application of business (or commercial) principles, as did my book The Commercialisation of New Zealand. The term should be treated here as a technical-neutral notion, even though it can be, and is, used rhetorically. The fundamental issue is where the principles should be applied. It will be evident from this paper, and from the book, that in my judgement they were applied in situations which rigorous analysis would not justify.
The Failure of Commercialisation
In the late 1980s and early 1990s there were pressures for commercialising of state activities including those in health, education, science research and, even as far as it could be done, the core public service. Applying business principles to the public sector made sense in a kind of elementary economics course way. Its easy understandability made it popular even among some of those who were to become its victims. If the activity was converted into a commercial one in a market, producers – so it was said – would seek least cost solutions, with efficiency and quality of performance gains, as the business drivers for efficiency would make the activities more effective too. (Recall that productivity gains of more than 20 percent were promised for the health commercialisation. Measured against the promises, the actual gains were negligible.) Many of those in the commercialised activities favoured the changes in principle, although once they were begun the flaws began to become apparent. But it was too late, and commercialisation rolled over many of the workers in the sector.
Hardly anyone stopped to wonder why such a simple solution had not been adopted in the past, or whether it had been, and found wanting. The nuances of commercial behaviour and markets – the stuff of advanced courses – were also ignored. No matter that they were only too relevant to the activities which were being commercialise.
It is said marry in haste, repent at leisure. That seems true for much of the commercialisation. It is now a decade and a half since the changes, and many sectors are still struggling with the aftermath of the commercialisation roller.
Commercialisation and the Universities
Take, for example, the universities, which once received block grants with marginal funding for student courses. Nowadays it is – for teaching – the other way around. The commercialisation belief was that student choice would drive the universities to higher efficiency and a more socially desirable balance of courses. We consider the fallacy of student choice below, but first some post-elementary level economics.
Tertiary institutions, their faculties and departments, and their individual courses experience substantial economies of scale, that is, falling unit (average) costs with rising output. The analysis of scale economies is messy, so it is usually ignored at elementary levels, perhaps with the assumption that the level of output of the firm is sufficiently large so there are no further significant economies of scale. What happens when market demand is not big enough to reach this point is left to advanced courses.
To simplify, assume that a tertiary institution has only one department and one course. Moreover, suppose the cost of the core services (we’ll call them the ‘registry’ but it includes other things) is independent of the numbers of students, while the cost of teaching each student is the same. Under the block system the registry would get its funds, and the residual would determine the number of students to be taught.
Now suppose funding switches to student fees. Each fee will have to be higher than it costs to teach a student in order to fund the registry (and other fixed cost activities). That means every time a student is taken on, the institution makes a surplus which it can use to fund the registry (or if those costs are covered, for some other purpose). Now it is in the institution’s interests to increase the number of students as far as possible, in order to make as big a surplus as possible.
We won’t go into the murky analytic details as we introduce many departments and courses, but basically a ‘bums-on-seats’ regime puts pressure on the academics to reduce standards to generate surpluses. Note too, that the relationship between the departments and the registry has changed for now the department (and course) role is to generate funds to cover registry costs. (Many academics are aware of the resulting political tensions without comprehending why. Many CRI scientist consider they are in a parallel situation.)
Why did this quality downgrade not happen under the previous regime of block funding? The short answer is the number of students was fixed, so one department increasing its student numbers could only do so at the expense of other departments, who kept wary eyes on their competitors’ standards. Similarly, there was little incentive for each university to attract students from others.
Should we move back to a block grant? It is a difficult system to administrate since in practice each tertiary institution will require a different lump sum reflecting course mix, student numbers and the services the ‘registry’ provides. But better that than a system which we know gives bad outcomes. John Maynard Keynes famously said, ‘It is better to be vaguely right than precisely wrong.’ (Robert Skidelsky, also an eminent economist, remarked that ‘Most economists would disagree.’ Perhaps scientists might support them, but engineers applying the science would not.)
I have gone into some detail to indicate how the simple assumptions of the commercialisation model have distorted the tertiary sector. There are more lessons to draw.
Do Students Make Right Choices?
The first is whether we trust student choice to give the right balance of graduates. If the tertiary institutions’ advertising behaviour is any indication, the institutions see their students as wanting a degree rather than an education. One could argue that many departments are as cynical about student choice.
As it happens, a substantial part of student fees are paid by the government with student demand determining how it is spent. We should not be surprised at the scams (largely outside the university sector), that erupted a couple of years ago, in which valueless courses with poor pass rates (and zero student fees) were being publicly funded (or even that some of the public money was kicked backed to students in various ways as an incentive to enrol) in order for institutions to obtain enough funds to cover ‘registry’ expenses. How on earth does the funding agency know the value of what it is purchasing? Did it agree when certain university departments arbitrarily raised their pass rates to increase student demand for their courses?
Even without scams there is the problem of the right balance. The commercialisers ignore the issue by assuming that students were the best determiners of what society needed. Precisely wrong again. The whole point of an education is that the typical student is vague about what he or she wants, even if fairly clear they want a degree or certificate at the end.
The distinction between education and degrees in New Zealand goes back to at least the 1925 report of the (Reichel-Tate) Royal Commission on Universities which commented that New Zealand ‘offer[ed] unrivalled facilities for gaining university degrees but … [wa]s less successful in providing university education.’ The distinction was lost in the 1989 Review of Post-Compulsory Education and Training (the Hawke Report), the foundation documents for the commercialisation of tertiary education, which said that public policy should not distinguish between education and vocational training.
Whether students are very good at even making training decisions for life may be questioned. Their employers want specific skills, and the system will be pulled towards that short term. What the country wants however – especially in an environment of rapid technological and social change – is generic skills (albeit often advanced ones), more akin to education than training, which will provide a foundation for the whole of the working life.
It is easy to say that the public sector – be it the higher levels of government or the tertiary education providers themselves – are not good at judging future skills and education requirements. But why should students or their parents be any better? It is not obvious that the funding system before 1989, which depended on an interplay between public sector and student judgement, was inferior to that which followed, with its greater weight given to student choice mediated by superficial marketing.
Reforming the tertiary system is not a matter of a few more patches on what is treated as a basically sound system. That is the way we ran the economy before 1984. The assumption was that anti-market regulation was sound, and any defects could be resolved by just a few more adjustments, and then a few more, and then a few more … As the fine tuning accumulated, it became evident that there was something profoundly wrong with the underlying system. We have reached that point with the current tertiary system. It is not a matter of its commercialisation working if only a few further adaptations are made. The commercialisation is not working.
This does not mean we throw every recent change out. Rather we start with a new conceptual framework, which may absorb relevant parts of the current system while rejecting others.
Restructuring the Tertiary Sector
At the heart of the changes is the need to accept that there is no longer a single level all-purpose tertiary system. Although they cannot be totally separated out, we need to distinguish providing mass post-secondary education from providing advanced education and research. Fickle student demand drives mass education, which means each institution’s teaching input has to be flexible. But advanced level education and research need more stability. The two activities require fundamentally different production processes, so the logic is they had to have different kinds of providers with different cultures.
What might such a system look like? It might involve the tertiary system being split into two components: Colleges for Tertiary Education (CTEs) which mainly teach undergraduates, and Institutes of Advanced Studies (IASs) which focus on graduate teaching and research. They would be largely separate organisations although many CTEs would have a few centres of research excellence, and staff upgrading their research. IASs could have an undergraduate college program for (very able) students – even world class academics like to engage with young minds – but it would be a small part of their total of activity than in universities today. There would be a consolidation of IASs to five – one for each main centre. Some of the existing university campuses would become the foundations for CTEs.
This proposal is, perhaps, not as radical as it seems, for it has parallels the way the US tertiary system currently functions.
Attendance at a CTE need not be a dead educational end (although many students will go out from them into employment). IASs would actively recruit their graduate students from CTEs thus setting a quality control on the demand driven courses.
Polytechs and Wananga would become CTEs too and IASs would also recruit from their top graduates. However such institutions would continue to teach a lot of sub-undergraduate ‘craft’ courses. The economy desperately needs those skills too.
The public funding would switch back to block grants, probably on a rolling basis for three to five years, so that the institutions would have some financial stability. The grant would go with a contract between the institution and funder (the Tertiary Education Commission). Students would continue to pay fees, roughly corresponding to their marginal teaching costs, so that the institutions could take on more students if they wanted, but would only do so for educational purposes and not to cover registry costs, thus giving additional flexibility to the system.
A lot of the special grants – such as for Centres of Research Excellence and Performance Based Research – could be subsumed in the block grant. (Today they are there to ameliorate the bums-on-seats approach, a clear signal that commercialisation is not working.) It is likely there would be two different block grant formulae, one for IASs and one for CTEs. In both cases they would reflect the size of the local population, and the subject mix plus the institution’s particular contributions to its wider community.
There would still be Private Training Establishments (PTEs). Not-for-profit institutions similar to the public ones (theological schools are an example) would be funded similarly to CTEs. Those for-profit PTEs specialising in providing specific skills programs might get little direct public support since the student would expect to recoup their fees from higher pay-rates on graduation. However, it is hard to generalise about them: some have been doing an excellent task, others not so, and in any case there is such a diversity. (For instance those providing remedial skills because the core education system failed them would receive performance based funding.) Because of their profit orientation, there would be much closer supervision of the public monies distributed to PTEs than has been recent practice.
Where do the Crown Research Institutes Fit In?
The institutional effect of these changes would be to create an upper level in the tertiary education sector – in effect a ‘quaternary’ sector. The Crown Research Institutes are already a part of a quaternary sector. Indeed the DSIR was created at about the time of the Reichal-Tate report because the universities were not functioning as centres of advanced studies, but only as teaching institutions.
CRIs have been torn by pressures from commercialisation too. The approach may work where they are developing commercial applications of their findings but it is not particularly relevant for doing fundamental science whose commercial return, if any, is beyond the normal business horizon. The continuum between the two extremes is related to, but not exactly correlated with, time horizons. The same tensions face a university based centre for advanced studies.
There has been not much rigorous thought about the alternatives to the existing commercialisation mode of CRIs. It cannot just be putting another patch on the existing system. On the other hand it is not a matter of abandoning the precisely wrong approach of the commercialisation reforms to return to the fudged pre-reform situation is. There are proposals for partial block funding of CRIs (say 30 percent of their funding), although this may be more sticking plaster.
Perhaps in the ideal world the fundamental science studies would be the prerogative of the universities and commercial development for the CRIs. But practically, universities want to train students for application science, while as commercial a corporation as Google Inc encourages its engineers to spend a fifth of their time on activities which interest them. It is said that half of new products which Google launches originated from ‘20% time’.
In the end then there is a strong case for merging the IASs and the CRIs. However historical and institutional differences mean it would not be easy. Over the years, the universities and the CRIs have developed in quite different ways. They report to different agencies (Tertiary Education Commission and Ministry of Research Science and Technology) and usually have different ministers; their main public funding mainly comes from different pots (Marsden fund plus CORE and PBRF funding from the TEC compared to FRST), and they have different legal frameworks and geographic dispersions (many CRIs have locations throughout the country).
Moreover CRIs and university departments tend to have different approaches to knowledge, with the CRIs more multi-disciplinary, and universities more disciplined based. Disciplines may be necessary for teaching at CTE levels, but the IASs need to learn from the CRIs and move to a more cross-disciplinary approach.
More subtly, their general stance towards technology is quite different. Teaching tends to be most concerned with international technology transfer, whereas the rhetoric of CRI research is technology creation.
(Research policy in New Zealand is distorted by this rhetoric. To the nearest decimal point, 100 percent of all the world’s research, science and technology occurs overseas. Yet we discuss the national innovation system with barely any recognition of this salient fact. Of course New Zealand RST should be concerned with technology creation, but one suspects that it would be supported differently if international technology transfer were more prominent in policy thinking. And it would probably make a greater contribution to the economy.)
Change will be further frustrated by the existence of institutions and people committed to commercialisation framework. I do not mean a commitment like the one I hold, that sometimes commercial approaches are the best means of pursuing social goals (especially where the interface with commerce is the greatest). Rather there are those who accept uncritically the simple commercialisation message, and who are often working in an institutional context where the paradigm makes sense in a very narrow context. It may be too uncomfortable for such people to change to a better paradigm.
Probably the best strategy for CRI change would be to encourage cooperation among various institutions. Sharing facilities (and campuses), sharing staff , some joint teaching, joint funding applications, investing together in more commercial applications. I wonder if FRST and the Marsden Fund might get together so that the more applied projects of the former would get complementary fundamental research funding from the latter.
Such merger processes should be neither forced nor fast. There will be enough upheaval in the tertiary education sector anyway. Perhaps it will take 20 years to get to a well-functioning structure. In the interim we need to be clear where we are going and to test every change by whether it helps reach the end goal of effective centres for advanced studies
Commercialisation was easy to implement because it was a simple theory using an unrealistic account of reality. Offsetting the ease of implementation was the performance failure. We need the opposite approach based on a complex theory which relates to the actual world. It will be difficult to implement, but will give higher performance than is currently being achieved.
 The author wrote The Commercialisation of New Zealand which elaborates the general theory used in this article. He is grateful for comments on earlier drafts by Paul Gandar and Janet Grieve, and by a very thoughtful anonymous reader.