Doable: Students demonstrate for free education. The author argues that the government falls short by adopting a definition of free education that means funding everything immediately, rather than striving to progressively introduce new measures that will benefit those most in need, while allowing for short-term uncertainty. Picture: THE TIMES
Doable: Students demonstrate for free education. The author argues that the government falls short by adopting a definition of free education that means funding everything immediately, rather than striving to progressively introduce new measures that will benefit those most in need, while allowing for short-term uncertainty. Picture: THE TIMES

The affordability of higher education is a matter of great concern. Student fees have risen faster than consumer inflation at most universities for many years and relative to average family income.

At stake is the government’s approach to this question and the implications for the higher education sector.

In December 2017, former president Jacob Zuma announced an enormous expansion of the National Student Financial Aid Scheme (NSFAS) to provide comprehensive financial aid to students with a combined annual family income of less than R350,000. While the expansion is a significant step towards ensuring financial inclusion, there is concern about its implication for the higher education sector.

The expanded NSFAS leaves the government with a very large financial obligation to students that can only be controlled by managing the number of eligible students and the fees that universities charge. Enrolment has long been controlled by the Department of Higher Education and Training, but the expanded NSFAS seems to entail sector-wide fee regulation as well.

To regulate university fees appropriately is extremely hard. As the 26 public universities have widely divergent fee structures, with differences for comparable programmes exceeding R20,000 a year in some cases, regulating the annual adjustment of fees would fail scrutiny against the standards of economic rationality.

Regulating fee adjustments, as opposed to the fees themselves, would effectively perpetuate the existing fee differences among universities. Regulating annual adjustments would sharply contrast with the approach commonly adopted by the government when regulating prices in settings such as electricity tariffs, telecommunications interconnection charges between networks and retail petrol prices.

Regulating university fee adjustments implies a price regulation that would not apply equally to all participants in the market and does not reflect quality-based cost differences among universities. Regulating annual fee adjustments would impair competition among universities and endanger their financial stability.

An economic approach to price regulation subjects all relevant competitors in a market to the same price controls and seeks to align prices with costs. If the government should regulate only the annual fee adjustment, and not the level of university fees, it would implicitly place each university in a separate market.

But there is no basis for defining higher education markets by institution. Universities compete for students and not only in their immediate vicinity.

It is up to the government to prove that the ranking of fees implied by the different fee ceilings reflects differences in quality and cost. Degrees of a similar quality should attract reasonably similar costs and the supposed purpose of a fee regulation is to better align fees with costs. The message is that the extent of the market — which university and degree competes with which other — determines the relevant cost basis for fee regulation: universities offering similar degrees of similar quality must be subject to a single fee ceiling that reflects costs.

Rational price regulation need not impede competition or adversely affect the financial stability of regulated companies. While universities are not profit-seeking entities, they nevertheless strive for excellence with high social impact in their research and teaching and learning activities, and have to do so within notably tight financial constraints.

Price regulators usually seek to maintain competition while reducing prices and ensuring the financial stability of the regulated entities.

If the government should perpetuate the current fee differential between universities, the financial scope to compete with better programmes, better staff and better facilities will be curtailed permanently at universities with currently lower fee structures.

The financial viability of universities with lower fees will also be undermined and they will be much more dependent on government funding, at a time of serious fiscal challenges. There is no rational basis for limiting competition in this way.

These economic arguments must not be misconstrued as a case for regulating university fees. Fee regulation will undermine the independence of universities. But if the government will regulate university fees, it matters how it will do it.

The government should regulate fees for each relevant market or not at all.

• Du Plessis is chief operating officer at Stellenbosch University and Prof Boshoff is associate professor of economics in the department of economics at the university.

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