November 5, 2017

The Failure of For-Profit Education: Implications for TAFE

This piece is based on a presentation delivered to the AEU National TAFE Council AGM on 7 April 2017

John Quiggin is an Australian economist, commentator, Professor and Australian Laureate Fellow in Economics at the University of Queensland


Among the many failures in the education ‘reform’ movement, the attempt to promote for-profit education has been the most complete. For-profit education has failed at every level.

A history of failure

For-profit school operators like Edison in the United States, launched with high expectations have failed miserably.

The Swedish experiment, for quite a few years seen as the exemplar of success, has turned out very badly. For-profit universities have been similarly disastrous, most notably in the United States.

Australia has had its own share of failures. The most notable has been U21 Global, touted as a global online university, but there have been many others.

In terms of scale relative to a national system, the disaster of FEE-HELP and TAFE privatisation outweighs all of these failures. Before looking at TAFE privatisation, I’ll review some of the evidence.

Edison Schools

Edison Schools was founded in 1992 and was widely viewed as representing the future of school education. Its plans were drawn up by a committee headed by John Chubb, the co-author of, Politics, Markets and America’s Schools the most influential single critique of public sector education in the United States.

After a highly successful sharemarket launch, Edison’s decline was remorseless. It gradually lost its contracts, along with its stockmarket listing and eventually rebranded itself as a provider of educational services, such as testing and the provision of course materials.

Even operating in a highly favorable political and financial climate, Edison was unable to deliver on its promise of transforming the school sector, and has now ceased to operate schools.

However, Edison and similar organizations have re-emerged in zombie form, as providers of management services to ‘charter’ schools, many of which are effectively non-profit fronts for for-profit corporations . Despite repeated failures, charter schools remain the great hope of US educational reformers.

The Swedish experiment

Sweden, until recently the poster child for the for-profit sector, is now in a state of crisis, with declining performance and growing inequality.

Sweden introduced voucher-style reforms in 1992, and opened the market to for-profit schools. Initially favorable assessments were replaced by disillusionment as the performance of the school system as a whole deteriorated. Scores on the international PISA test plummeted. By 2015, the majority of the public favoured banning for-profit schools. The Minister for Education described the system as a ‘political failure’. Other critics described it in harsher terms.

Although a full analysis has not yet been undertaken, it seems likely that the for-profit schools engaged in ‘cream-skimming’, admitting able and well-behaved students, while pushing more problematic students back into the public system.

The rules under which the reform was introduced included ‘safeguards’ to prevent cream-skimming, but such safeguards have historical proved ineffectual in the face of the profits to be made by evading them.

Similar processes took place in Chile, which banned for-profit education in 2015.

For-profit universities

Far worse are for-profit universities like Phoenix, which have prospered by recruiting poor students, eligible for Federal Pell Grants, and enrolling them in degree programs they never finish. Phoenix collects the US government cash, while the students are lumbered with debts they can never repay and can’t even discharge in bankruptcy.

Australian education reformers Alan Gilbert (then Vice-Chancellor at Melbourne) presented the University of Phoenix as the future of education, and its critics as Luddite equivalents of the 19th century handloom weavers.

The exposure of this group as scams based on extracting US government grants for students who will never graduate had little impact on the ideologues. As recently as 2014, Executive Director, Group of Eight claimed, in relation to the exposure of the University of Phoenix that “learning from failure is a step to success”.

Under the Obama Administration, many of these fraudulent operations were shut down. However, it seems likely that the Trump Administration, and education secretary Betsy de Vos, will be much more favorable.

The most prominent Australian venture into for-profit higher education was U21Global, a joint venture of the Universitas21 alliance of universities, of which the most prominent driver has been the University of Melbourne. Launched in 2001, it projected enrolments of 60 000 students, and annual revenue of $500 million by 2010. None of these targets were achieved and the whole venture was eventually sold in 2013 to a Mauritius-based company, now operating in Malaysia under the name GlobalNxt

Melbourne University Private (MUP) was a private university spinoff founded by the University of Melbourne which operated from July 1998 to 2005. It was designed as a profit making venture, developed by Vice-Chancellor Alan Gilbert and modelled on the University of Phoenix)

Over its eight-year life, the university lost A$20 million, although this is believed to be a conservative estimate given the pre-startup investment costs, which Cain and other critics put as high as A$150 million.

These are among the most spectacular failures, but there have been many others, notably including the UNSW Singapore campus (closed in 2007). And the failure goes both ways, with UK and US universities having set up failed subsidiaries in Australia.

Why does for-profit education continue

Given all these failures, why do so many advocates of economic reform still believe that for-profit education is desirable?

The core assumption is that education is a marketable commodity and that markets function best under conditions of competition among suppliers and free choice for consumers.

For example the recent Harper Review begins with the premise: “Consumer choice should be placed at the heart of government service delivery, through policies to encourage diverse and competitive markets populated with innovative and responsive providers.”

Given these assumptions, the best outcomes will generally arise when services are provided on a for-profit basis. In his influential book Reclaiming Education, James Tooley lists ‘seven virtues of the profit motive’ They include brand names, teacher incentives, rational investment decisions and cost-effectiveness.

The role of public funding

For-profit education can only be understood in the context of public funding. The idea that publicly funded services should be supplied by for-profit firms is a cornerstone of ‘New public sector management’, sometimes described in more grandiose terms as the ‘Reinvention of Government’.

The relevant three word slogan here is ‘Steering not rowing’. That is, the role of the government should be to ensure that education is available, rather than to provide education.

The crucial vehicle for replacing public with private provision is ‘contestability’. The terms ‘contestability’ is drawn from microeconomic theory. The idea is that in an initially monopolistic market, the entry of competitors (or even the possibility of entry) will eliminate monopoly profits.

The other magic word is ‘choice’. The model is one in which consumers with well-defined preferences are assumed to face known prices. The relevant case here is that of markets for differentiated products. Choice ensures that the products supplied are those actually wanted by consumers, rather than those producers (in this case, schools, universities and TAFEs) might prefer to supply

Why does the for-profit model fail

First, the idea that competition will enhance diversity and choice is wrong. Economic analysis shows that, in markets of this kind, for-profit providers will converge on a single model. We’ve seen examples in the university sector where, given freedom to compete on price, all universities choose the maximum price. Similarly, given the opportunity to pick a unique ‘flagship’ product, virtually all choose an MBA.

The second problem arises from the availability of public subsidies. It is much easier to find innovative ways to game a poorly monitored system than to improve on educational systems that have developed over centuries.

Finally a crucial feature of the for-profit model is that it rejects professionalism and an education ethos. These are seen as self-serving claims by educators, seeking to avoid competition and contestability.

The disaster of for-profit vocational education

The disaster in vocational education and training encompassed all the worst features of for-profit education. The disaster was both predictable and predicted, given the exposure of massive rorts in Victoria, where the model originated.

The problems were exacerbated by FEE-HELP, which took as its model the successful use of income contingent loans in the HECS scheme, but made crucial changes. First, fees were uncapped (this has also been done for full fee course in the university sector, with dubious results). Second, the target market consisted largely of financially unsophisticated people with limited earnings prospects. For this group, incurring a large debt that might never be called in, in return for a small initial benefit, such as a free laptop, could be made to sound appealing.

The outcome has been a disastrous rundown in vocational education at a time of increasing need. Vast amounts of public money has been spent on worthless courses, while the TAFE sector has suffered drastic cutbacks.

What is the alternative and how can we get there?

What is the alternative? It’s clear that the tweaks that have been made to the system so far haven’t been adequate. Even after the reforms, new scandals have emerged on a daily or weekly basis. So, we should consider what would be required for a fundamental reform?

First, we need a unified approach to post-school education in place of the current separation between ‘vocational’ and ‘higher’ education. This distinction ignores the fact that, for the vast majority of students, both universities and TAFEs are seen as vocational training institutions. In terms of financing, we should aim for a universal study right, sufficient to cover a university degree or technical qualification.

As regards provision, the ultimate goal should be to eliminate public subsidies to for-profit education businesses. The only role of for-profits should be to work as contract providers for public educational institutions.

How can we get there from here? Three steps would help:

First, we should cap, and progressively reduce, the share of funding going to private institutions and particularly for-profits.

Second, we should severely restrict marketing expenditure for both private and public institutions, to say, 1 per cent of total revenue. The worst offenders here have been for-profits, but the problem is not confined to the for-profit sector There is no benefit in having TAFEs and Universities mounting slick, content-free marketing campaigns aimed at domestic students.

Finally, regulation based on formal compliance should be replaced by externally assessed measures of successful completion. Institutions giving substandard qualifications or with the low completion rates typical of for-profits should be shut down.

Concluding comments

Changing policy on an issue like this is like turning a supertanker. Support for microeconomic reform and neoliberalism remains strong in elite circles long after the general public has soured on the idea.

Faced with demonstrated failure, the response is to seek minor adjustments rather than fundamental reassessment. But public hostility is increasing, and reflected in the collapse of faith in the political system.

The challenge is to be ready with realistic alternatives.

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