​​​In an opinion article published on the Businesslive website on Wednesday (30 May 2018), Proff Stan du Plessis (Operations and Finance) and Willem Boshoff  (Economics) from Stellenbosch University write that government's plans to regulate fee adjustments will undermine the independence of universities.

• Read the complete article below or click here for the piece as published.
  

It will be very hard to regulate fees properly at SA universities

Stan du Plessis and Willem Boshoff*​

The affordability of Higher Education in South Africa is a matter of great concern. Student fees have risen faster than consumer inflation at most local universities for many years and relative to average family income in South Africa. The complex and contested explanations for this rise in the cost of a university education is not our issue in this article though; at stake is the government's approach to this difficult question and the implications it will have for the country's Higher Education sector.

In December last year, former President Zuma announced a massive expansion of the National Student Financial Aid Scheme (NSFAS) , with the effect of providing comprehensive financial aid to South African students with a combined annual family income of less than R350 000. This comprehensive aid will include student fees, accommodation costs and living expenses to allow students to graduate without the burden of a student loan. While we welcome the NSFAS expansion as a significant step towards ensuring financial inclusion, we are also concerned about a particular implication for the Higher Education sector.

The expanded NSFAS leaves government with a very large and unconditional financial obligation to students, and their total obligation can only be controlled by managing the number of eligible students and the fees 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 though. The 26 public universities currently have a widely divergent fee structure, with differences for comparable programmes exceeding R20 000 per year in some cases. Given this wide disparity in existing fees, the administratively appealing option of regulating the annual adjustment of fees would fail scrutiny against 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 government when regulating prices in such diverse settings as electricity tariffs, telecommunications interconnection charges between networks and retail petroleum prices.

In particular, we argue that regulating fee adjustments implies a price regulation that would not apply equally to all participants in the same market(s) and does not reflect quality-based cost differences among universities. We are also of the opinion that the result of 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 government should regulate only the annual fee adjustment, and not the level of university fees, government 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 certainly not only in their own immediate vicinity.

Furthermore, it is up to 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: those universities offering similar degrees of similar quality must be subject to a single fee ceiling that reflects costs.

Apart from being market and cost-based, rational price regulation need not impede competition or adversely affect the financial stability of regulated firms. 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 in South Africa.

Price regulators usually seek to maintain competition while reducing prices and ensuring the financial stability of the regulated entities. If government should perpetuate the current fee differential between the country's universities, the financial scope to compete with better programmes, better staff, better facilities and so on will be curtailed permanently at universities with currently lower fee structures. The financial viability of universities with lower fees will also be undermined and will be left much more dependent on government funding, at a time of serious fiscal challenges. There can be no rational basis for limiting competition in this way.

These economic arguments must not be misconstrued as a case for regulating university fees in South Africa. Fee regulation will undermine both the financial independence and actual independence of our universities. The independence of universities is an intangible, but real, public good and should not be undermined lightly. But if government is going to regulate university fees, it matters a lot how the regulating will be done. The apparent short-cut of regulating annual fee adjustments fail the minimum requirements of economic rationality. Government should either regulate fees properly, that is to say for each relevant market, or not at all.

*Prof Stan du Plessis is Chief Operating Officer at Stellenbosch University. Prof Willem Boshoff is Associate Professor of Economics in the Department of Economics at the same university.