The introduction of contestability into training markets is often cited as a prime example of the failures of privatisation. However, the totality of the evidence is rarely examined in support of this allegation. This article aims to fill this gap. It finds that a contestable training market can fail if not properly regulated, but now that Australia’s training market is being properly regulated, the quality of training is being preserved, while competition is reducing costs and increasing choice and responsiveness to customer needs.
A recurring theme in many articles that appear on this blog is that privatisation has generally been bad. In support of this assertion reference is frequently made to what happened to vocational education and training (VET) after governments decided to fund private providers and so increase the competition experienced by the state provider – TAFE. For example, in a (mostly) thoughtful article that appeared recently on this blog (11 October), John Quiggin cited the “disaster of for-profit vocational education” as a prime example of the failure of privatisation; with apparently no further proof needed to substantiate his point.
Let me say at the outset of this article, I don’t doubt that there have been private providers that were able to abuse the system when it was first introduced. The important question however is whether the concept of public funding of private training providers was inherently misguided, or whether the initial system was badly designed and implemented. What is needed is a proper comprehensive evaluation of this shift in favour of a more contestable VET system before we can pronounce on whether it was a success, or not. In fact, there have been proper professional evaluations of the changes that introduced more contestability into VET funding, but the critics seem happy to ignore them. My intention here is therefore to summarise these evaluations and examine the available evidence as the basis for my conclusion that the introduction of contestability for the provision of VET can be beneficial if it is properly handled.
A short history of contestable funding arrangements in Australia
The idea of introducing contestable funding to create a training market was first agreed to by the Council of Australian Governments (COAG) under the leadership of the Keating Government in 1992. Initially contestability was based on competitive tendering where TAFE and private providers bid for the delivery of identified proportions of publicly funded training. The competitive tendering was often limited to growth funds, and these contracts with governments raised no real concerns; but the training market was more contestable.
From around 1998, user choice was introduced whereby employers and their apprentices and trainees could choose their training provider and negotiate key aspects of the training. This shift away from governments planning and purchasing training places was intended to make the system more responsive by creating direct relationships between clients and training organisations. The paucity of such relationships had been a major criticism of TAFE. The early evaluations of this shift to user choice were all broadly supportive (Bowman & McKenna, 2016:32). A later (2006) evaluation of competitive tendering and user choice found that for large and medium enterprises, the outcomes in relation to choice, diversity and responsiveness appeared to be positive, but the responsiveness to the needs of small enterprises and in thin markets was poor (Bowman & McKenna, 2016:33).
From around 2009 and over the next few years, another major type of contestable funding was introduced under the guise of a National Training Entitlement which guaranteed training places to young people and older people who had been retrenched, This entitlement was also backed by access to income contingent loans (VET FEE-HELP).
Victoria was the first jurisdiction to move in this direction, introducing a student training entitlement in 2009, and South Australia followed in 2012. In both states the funding for VET was increased very substantially, and it is arguable that many of the problems in Victoria resulted from the exceptionally rapid expansion of the training market and not the fact that there was such a market. The unintended consequences of this over-rapid expansion of training in Victoria in particular were:
- Substantial budget over-runs as student demand outpaced the budget
- The increases in training in some areas ran ahead of business skill needs
- Concerns about the quality of training provided by what has been assessed as a small minority of providers.
South Australia did, however, learn from this Victorian experience of the problems associated with the introduction of a training entitlement, and as I will discuss below, mostly avoided them.
It is also important to note that public funding of private providers has a significantly longer history than the Victorian changes to an entitlement system that is so often cited as “the evidence” by those who oppose public funding of private VET providers. In addition, arguably Victoria’s problems of budget over-runs and excessive numbers of training places for some courses could have been avoided if business and government had retained more control over the allocation of these training places.
The question that I therefore now want to address is what is required to make contestable funding of a training market work in practice.
The provision of publicly funded education and training needs to be regulated
The most critical lesson from the introduction of public funding of private VET providers is that this ‘market’ needs to be regulated. This should hardly come as a surprise. Generally, it would be expected that there would be some level of regulation where public goods are being provided to consumers who are not always well able to judge value, and at a price that is less than the cost of provision. The Victorian public funding was only available to private provides who had been accredited, but subsequently the Victorian Auditor General found that the Victorian regulator could not reliably assure that it had effectively regulated VET providers (..). Furthermore, a large part of the payment to the provider was made when the student signed on, and not upon completion. Frankly this poor regulation was bound to lead to some rorting, and that is what happened.
But I would contend that this sort of rorting didn’t have to happen if the regulations covering the provision of public funding to the private providers had been better designed. In the case of South Australia, where at the time I was a member of the Training and Skills Commission (TASC) advising the SA Government, the introduction of public funding of private provision of VET services was much more successful. In South Australia, only private providers who had been assessed as meeting certain standards were accredited to receive public funding, and then only for some courses, where their offerings were judged to be satisfactory. This government control over the accredited trainers list meant that shonky trainers did not receive public funding. Indeed, an independent evaluation in 2015 found that the quality of training in South Australia appeared to have been maintained due to the monitoring and enforcement activities of the state government department responsible (Bowman & McKenna, 2016:38).
Furthermore, what is also interesting is that since the initial funding of private VET providers in South Australia the regulatory regime has been further tightened. In its 2014 Report, the Training and Skills Commission (TASC) advised the SA Government to adopt a “Capacity Management system that allocates set quotas of publicly funded training places (on a course by course basis) to a smaller number of high-quality Registered Training Providers” (my emphasis). To reduce the chances of skill miss-matches, the funds available for each course is based on independent advice from the TASC after consultation with industry, and the extent of the subsidy varies between different courses. In addition, the TASC suggested that “funding should be aligned not just to course delivery but also to pre-course assessment and post-course development programs that will help students gain employment”. Also in determining funding, preference is given to those providers who have established links with employers, and which have a good track record in terms of their students’ completion of training and their post-training employment.
What has been achieved by a regulated system which includes publicly funded private providers?
In South Australia following the introduction of a contestable VET market, the unit cost of training fell by more than 25 per cent in the first few years. Nor was this reduction in cost achieved by short-changing TAFE, with the public funding of TAFE per hour of training in 2013-14 still being around 2.5 times higher than for private registered training organisations. Thus, despite the claims by the critics, this reduction in costs was not achieved by simple cost-cutting. If cost-cutting had been the objective, a decline in quality would be expected, but judging by the rate of successful completions and subsequent employment the quality of VET training has been maintained, albeit at a lower cost.
For example, an analysis of national completion rates using data from the National Centre for Vocational Education and Research shows that the completion rates for private training providers is typically about 3-4 percentage points better than for TAFE at each level of qualification. While a comparison of the outcomes achieved by those trainees in TAFE and those trainees with private providers, who in both cases undertook their training for employment related reasons, we find that:
- A slightly higher percentage of private providers’ trainees were subsequently successful in gaining employment;
- The private providers also achieved a similar result in terms of the extent to which the training achieved what the trainees were after,
- However, a slightly higher proportion of TAFE trainees were satisfied with the quality of their training.
Perhaps the proper end conclusion from this comparison is not whether TAFE or a private provider is better, but rather that there is not a significant difference between the two types of provider, and that the choice should depend upon what the trainee is most looking for in their individual case. In addition, it will always be important to maintain the TAFE system, if only because TAFE is often the sole provider in thin markets for some skills and in the regions.
In sum, an objective examination of the available evidence does not suggest that the public funding of VET through private providers has been the “disaster” that Quiggin and others have so often asserted. Instead, most measures show that there is little to choose between the quality of public and private provision where the training market is properly regulated. But experience also suggests that public funding can be rorted if there is inadequate regulation. However, with experience governments have found out how to regulate the training market so that quality is preserved, while competition can reduce costs and increase choice and responsiveness to customer needs.
Bowman, K., & McKenna, S., 2016, The Development of Australia’s national training system: a dynamic tension between consistency and flexibility, NCVER Occasional Paper, Australian Government Department of Education and Training.
Michael Keating, AC is a former Secretary of the Department of Employment and Industrial Relations, a member of the Boards of Skills Australia and its successor, the Australian Workforce and Productivity Agency, and was a member of the South Australian Training and Skills Commission. Each of these bodies advised governments on contestability in training markets.