Exploring higher education financing options

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Exploring higher education financingoptionsKofi K. Nkrumah-Young a & Philip Powell ba Planning and Operations , University of Technology , Jamaicab School of Business, Economics and Informatics, Birkbeck ,University of London , London, UKPublished online: 28 Apr 2011.

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Exploring higher education financing options

Kofi K. Nkrumah-Younga and Philip Powellb*

aPlanning and Operations, University of Technology, Jamaica; bSchool of Business, Economicsand Informatics, Birkbeck, University of London, London, UK

(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, manygovernments opt for shared financing. This article examines the underpinnings ofdifferent options for financing higher education and develops a model to compareconditions to choices and outcomes. As an illustration, it then uses the Jamaicanexperience of the past four decades to demonstrate outcomes. This demonstratesthat, for political reasons, there were adverse outcomes, including infrastructuralneglect, enrolment decline, threats to programme quality and financial difficultiesbut 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]

European Journal of Higher Education

Vol. 1, No. 1, March 2011, 3�21

ISSN 2156-8235 print/ISSN 2156-8243 online

# 2011 Taylor & Francis

DOI: 10.1080/21568235.2011.577181

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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 competi-

tion, incomplete markets, market failure and imperfect information justify state

intervention through regulation, financing, production and income transfers (Barr2004b). 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 inabilityto 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 strongcontrol 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

4 K.K. Nkrumah-Young and P. Powell

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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).

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

European Journal of Higher Education 5

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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),

Table 1. Conditions and results from financing options.

Options Conditions Precedent

Privatisation j Free market conditions � social and private rate of returns are in equilibriumj No price control � institutions are allowed to determine feesj State does not offer any support to HEj Subsidy to students via vouchers to attend institutions of their choicej No state accountability mechanism to supervise or controlj Freedom of access for all education providersj Staff are employees of institutionsj Institutions compete for students and research grants

Total state financing j 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

j 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

j No resource constraints

Publicly subsidised j Disequilibria between social andprivate rates of return to HE offerings

Upfront chargesj Severe budgetary constraints

j Market-based accountability modelj Students allowed choice of HEIj Staff are employees of HEIs,

conditions of service are decidedbetween institutions and staff

Mortgage-type loan programmej Institutions specialising in

lending for human capitaldevelopment

j Sufficient capital fund for loansj Labour market certainties

j Institutions determine their own feesj Government determines its

contributions independent of

Income contingent loan programmej National budget can afford

upfront cost of HEIsinstitutions’ fees j Tax system able to track

citizens through lifetimej Information encourages

participation of low-risk, high-return graduates

j Provision for early repaymentj Provision for society to absorb

risk for non-payersGraduate taxesj Mandatory participationj Efficient income tax collection

system


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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:

� 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 (Gracıa-Penalosa

and Walde 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


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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 1963�73, Free Education 1973�86, the Cess (a tax) 1986�93 and Cost

Sharing 1993�2003. 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.

Financing HE

State Support

Total StateSupport

FreeEducation

Partial StateSupport

CostSharing

Up FrontCharges

Studentswith Problems

Loans

MortgagedType

IncomeContingent

Studentswithout Problems

Pay Fees

DeferredPayment

GraduateTax

Loans

MortgagedType

IncomeContingent

No StateSupport

Privatisation

Figure 1. Decision tree for a financing option for higher education.


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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%.

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 foruniversity 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 bea strong economy and therefore a nation can look forward to a free flow from whateverlevel, primary straight through to higher education with no concern about payment foreverything, then the end result would be more empowerment to the teachingenvironment, a stronger economy, so that clearly would benefit most of the poorerclass. (President of UTech 2003)

Definitely, many students benefited � those who could not afford it. They benefitedfrom 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 wouldbe 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

7�21%, 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


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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):

The problems started probably in the mid to late 1970s then the weight of responsibilityof funding all the different elements of tertiary education including providing a boardinggrant and so on began to take its toll on the economy and they started thinking of adifferent model and from even in the early to mid 1980s studies were being done to lookat 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 1972�6 (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 1973�76. The increase was mainly for consumption,

including supporting free education. The economy plunged into prolonged recession

and 1972�80 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 1965�75 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 andCAST remained the same, i.e. the tuition fee, but the cess went to the GOJ who used thatto provide subventions for the University. Of course, as far as the students wereconcerned it was more money even though they paid the cess at the Bank of Jamaica.


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The UWI and CAST didn’t actually get the cess on their hands. It came back throughthe subvention but certainly it was increased student-participation in funding their owneducation.

Sherlock (1986) points out that the reasons for the change in government policywere: 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 Report1994):

(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 ofdeficits. 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


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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.

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 1962�73. There is no evidence of dissatisfaction or difficulty with the fees

charged by the institutions. Alexander et al. (1967) speculate that the possibility ofeliminating 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 governmentshould 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 lateremittances.

� 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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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 Existing conditions

j State control of planning and productiveprocesses

j State supervised system of HE

� Detailed planning only by the state � HEI expected to interpret national needsand implement appropriate programmes

� HEI operates as agent of the state � University established under independentcharter

� Enrolment controlled by state (matriculationrequirements and quantity)

� Enrolment under control of the HEI

� HE staff are employees of the state � HEI controlled its staff� State dictates staffing needs of HEI � HEI controlled staffing needs and state

influence was over funding

j No market competition j Monopolistic market competition� State-organised staffing on rational bases with

no advantage for particular institutions� Single HEI eliminated need to compete for

staff� Salaries determined by the state � State controls salaries through bargaining

process� Uniform wage rates � Non-uniform wage rates� Employers not allowed to compete

for graduates� Employers compete for graduates

� Graduate salaries no higher than non-graduate

� Graduates paid higher wages

� No distinction among HEIs on quality � Not applicable as single HE provider

j No resource constraints j Significant resource constraints


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opposite happened in the Jamaican system under free education. The University had

to compete for staff internationally. In addition, it offered advantageous accom-

modation 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.


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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 socially-

beneficial 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

of returns on educational offerings

Low demand for Education, Town Planning,

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

of service are decided by institution and

staff

Staff are employees of institution and state

involvement in negotiation exerts undue

control

Institutions determine their fees Institutions determine their fees but state uses

monopsonistic control fees to be charged

Government determine its support,

independent of institutions’ fees

Government support and fees are linked


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(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 programmequality 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 17�24 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 allowinstitutions 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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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 non-

repayment and the underdeveloped market for loans for human capital development.

A Graduate Tax system is most efficient and egalitarian (Gracıa-Penalosa and Walde

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

Mortgage-type loan programme

j Institution specialising in lending for human

capital development

j Students Loan Bureau established to provide HE

loans

j Sufficient capital fund for loan programme j Loan pool enhanced by World Bank but insufficient

j Labour market certainties in absence of

specialised lending institutions

j Relatively high labour market uncertainty hence

dependence of specialised lending institutions

Income contingent loan programme

j National budget can cover up-front cost of

HEI operations

j National budget cannot manage up-front cost of

university operations

j Tax system able to track citizens through

lifetime

j Taxation system unable to successfully track

citizens’ income

j Information to encourage participation

from low-risk, high-return graduate

j National information technology is in infancy

j Opting out provision for early repayment j Not applicable in the absence of a programme

j Provision for society to absorb risk of

non-payment

j Not applicable in the absence of a programme

Graduate taxes

j Mandatory participation j Not applicable in the absence of a programme

j Efficient income tax collection system j 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. Thepolitical 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 policydoes 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 resourcesfrom 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. Thesesupport 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 articleexamines 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 whichoccurred. 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


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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.

Notes on contributors

Kofi K. Nkrumah-Young is the Vice President of Planning and Operations at the University ofTechnology, Jamaica. His research interests are in financing and resource allocation models inHigher 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 TheologicalCollege of the West Indies. He is a Justice of the Peace and the member of the Board of theStudents Loan Bureau, the Bethlehem Moravian College and the Vocational Training andDevelopment Institute.

Philip Powell is Executive Dean of the School of Business, Economics and Informatics atBirkbeck, University of London. Formally he was Deputy Dean at the University of Bath andDirector 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 over100 journals and over 100 conferences. He is Managing Editor of the Information SystemsJournal.

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Documents

Exploring higher education financing options