Chapter 42 : Counting the Cost

42.1 We studied income and expenditure in Section G of our Review and we learned that Higher Education, as we have had cause to note elsewhere, is expensive. Costs are high in Hong Kong, in part because of high professional salaries here, but we are cheaper than the US and Japan. The UGC institutions, which have recently undergone massive expansion during which unit costs rose markedly, now have an overall average cost of more than HK$200,000 per student year. The figure for the APA is similar, that for the VTC Technical Colleges considerably less. Much of this large cost is borne directly or indirectly by the taxpayer. It is not surprising that questions are being asked as to whether the cost can be reduced.

42.2 There are a variety of ways in which cost reduction might be achieved. Some are essentially cosmetic. The gross unit cost of students in UGC HEIs includes research expenditure as well as teaching expenditure. It is often argued that the cost of student education would be better represented (and smaller) if research expenditure were deducted. We do not subscribe to this view. Being exposed to research activity is an important part of the student experience, even at the undergraduate level. In any case, the separation of costs into those associated with teaching and those associated with research, even though we do it for funding formula purposes, is artificial. There is a great deal of cross-subsidy and common infrastructure cost, and the major component on both sides is the salaries of staff engaged in both activities. Even if unit costs were calculated differently, there is no obvious implication of reduced expenditure.

42.3 A different way of subdividing the cost of higher education is between the public and private contributions; approximately, but not exactly, between government grant and student fees. Would it be possible to reduce the burden to the taxpayer by raising fees? In 1994-95 full-time students in UGC institutions paid a flat rate fee of HK$24,000 irrespective of subject and whether they were undergraduates, taught postgraduates or research students (sub-degree students paid HK$18,000 and at VTC Technical Colleges HK$15,300). This common fee resulted in humanities undergraduates paying 30% of the cost of their education compared with medical students 6%. It has been argued that students might be willing to pay higher average fees if the contribution were more equitable. The government's present target recovery rate through fees is 18%. By introducing a fairly modest differentiation at undergraduate level (say a maximum ratio of fees of 1 to 1.5) it should be possible to raise this to 20% without hardship (particularly if a non-means-tested loan scheme were introduced). There are a number of possible forms of differentiation. One of the simplest is laboratory versus non-laboratory subjects, but a variation based upon probable future earnings may have attractions.

42.4 As well as making undergraduate fees subject dependent, it has been suggested to us that they might vary from institution to institution. Why should an undergraduate not pay a higher fee in order to study at a more prestigious university? We see dangers in this approach in Hong Kong, where student choice is already limited by factors not present in larger higher education systems.

42.5 At taught postgraduate level the arguments for fee differentiation are stronger. At present courses are either publicly subvented and charge the same standard fee as for undergraduates, or they are run at "full cost" (a term of art which we have discussed in paragraph 35.4). We believe that there is considerable scope for fees pitched between these two extremes, and we shall be glad to discuss with institutions appropriate counting and funding mechanisms. All research students receive very similar remuneration and we propose no change in the present fee arrangements for them.

42.6 The shifting of the cost of higher education from the public to the private purse by fee increases is unlikely to realise gains to the taxpayer of more than 1 or 2%. More potent would be a reduction in the unit costs themselves. The largest component in expenditure on higher education is the provision of academic staff. In most countries their net salary is about half of total expenditure, and in Hong Kong directly associated additions bring this nearer to two-thirds. To reduce costs we either have to reduce academic staff pay or increase student-staff ratios. Academic pay in Hong Kong is linked to that of the civil service, and it seems improbable that either the link will be broken or civil service pay curtailed, at least in the near future.

42.7 Other measures seem more promising. During the recent expansion there was a considerable amount of "front-loading" - the appointment of staff ahead of students - and this will now disappear, with a consequent increase in student-staff ratios. Some other inefficiencies associated with expansion, including mismatches between resources and needs, should also be overcome. There should also be savings on administrative staff as some of the tasks associated with expansion no longer have to be performed. The period of relatively small changes within a fixed envelope which we are now approaching will give many opportunities for the careful appraisal of the efficiency of current processes and their improvement. The yardsticks provided by the UGC funding model should help so long as they are not regarded as prescriptive.

42.8 The UGC institutions have been well funded in the past, particularly during the recent expansion when, as we noted in Chapter 36, unit costs rose by 24% in real terms. The Grants Committee considers that a ramped reduction in the student unit cost of 10% in real terms could be achieved during the course of the next triennium without risk to quality (see paragraph 36.9). We would need, however, to retain 50% of the resultant savings within the UGC-funded sector to meet new expenditure requirements for the introduction of additional quality assurance initiatives (paragraph 29.3), for the development of the areas of excellence (paragraph 29.8) and for institutional restructuring (paragraph 30.11) which is essential in order to achieve the savings in student unit cost.

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