Public funding of university research is a sound investment and not a charitable donation
Professor Ian Jacobs, President and Vice-Chancellor, UNSW Australia
This is the transcript of a speech delivered at the AFR Higher Education Summit, 27th October 2015
It is a privilege to have the opportunity to give this presentation but I do so with some trepidation as a newcomer to this great country who is still finding his way. I suspect that I have been asked for a few reasons. Partly, my arrival from a career largely spent in UK higher education and the possibility that I may have some insights from that experience relevant to the situation in Australia. Perhaps, some interest in what the new incumbent as VC at UNSW might have to say and hopefully some interest in the coverage that the ambitions and plans in our UNSW 2025 strategy has received. I have been pretty reticent as a newcomer but having been in Australia as the Vice Chancellor of UNSW for almost exactly nine months and given my background earlier on in my medical career as an obstetrician, this seems like a reasonable gestation period for me to develop my thoughts on the higher education debate. Having listened very carefully to the full range of views I will now tentatively offer some initial thoughts on the way forward for Australian higher education.
My starting point is that modern universities are one of the most powerful mechanisms we have for changing and improving peoples lives. At their best they educate people from all backgrounds to a level which frees them to make an enormous contribution to society through their work and their interactions with others. Our universities produce a stream of new ideas across all areas of human endeavour and provide a forum for open, informed discussion and debate which influences government and social policy. Through high quality research they generate discoveries which increase our knowledge and when turned in to applications, lead to enormous benefits for society, including but not limited to economic prosperity – I will return to the economic benefits later. They contribute to equality and social justice by giving people new opportunities. Through their reach in international education and research collaboration they increase understanding and partnership nationally and worldwide. In today’s globalised world universities are crucial for the opportunities they provide, the knowledge they create and the social and economic benefit they generate. I could go on but I don’t think that any of you need convincing that universities are important and precious.
Given that it is reassuring to note that Australia’s universities are in good shape. The international league tables which are fundamentally based on research quality and outputs, include over 20 Australian universities in the top 500. Amongst the three main rankings – QS, Times Higher and Shanghai Jiao Tong – the number of Australian universities in the top 100 has remained about the same over the last 10 years, now numbering 4, 6 and 7 in each of these three rankings. In the Shanghai Jiao Tong rankings, which are heavily based on research quality, only five countries, the US, China, Germany, UK and France have more universities in the top 500 than Australia, with 146, 44, 39, 37 and 22 respectively, compared to Australia’s 20. It is fascinating to note that on a per capita basis that puts Australia at the top of this list by some distance! There is much more good news about Australian universities. They are teaching very large numbers of domestic students at a very high standard. Almost 40% of our population aged 25-34 now have a degree. Comparative international quality measures of teaching are hard to find but perhaps the best illustration is that Australia now has 250,000 visiting international students, only exceeded by the US, UK and France – again per capita Australia is the world leader on international student numbers by a factor of 2-5 fold – so something is going right. There is more positive evidence in the economic contribution of universities which I will return to later.
So in many ways right now Australian universities are performing very well. But there is no room for complacency. There are some important challenges.
The first challenge is that the world of HE is changing dramatically. The information age has transformed the very nature of knowledge and knowledge acquisition, the work place is in the process of fundamental change, student expectations are rising and there is ever greater international competition. Digital technology offers entirely new learning approaches, which will radically change our educational model and many of our competitors are investing heavily in their research base. Given the foundation that we have, there is little doubt that Australian universities can embrace these challenges as opportunities – as long as there is a social and political understanding of what our universities can deliver, that is translated in to a sensible forward looking funding model.
That leads me to the second challenge which is the current pattern of funding in our universities. Australia’s public investment in tertiary education, as a share of GDP is amongst the lowest in the OECD and student fee contributions are already amongst the highest. Australia has dropped from having the sixth highest level of public investment to the second lowest as a share of GDP. In 1995 public investment in tertiary education was 1.2% of GDP but by 2011 it had slipped to 0.74% of GDP and the proposed higher education changes, with 20% cuts to funding would have seen this drop to 0.4% of GDP. Government contribution to university income has dropped from 70% in 1997 to 58% in 2014. During this time Australian universities have maintained their current position through a financial model which has involved a massive increase in domestic student numbers, approximately doubling over 15 years and an extraordinary growth in international HE students more than 3 fold from 72,000 to 250,000 since 2000, with an approximately 40% increase in the last ten years.
This very large increase in funding directly attributable to teaching, has not been matched by the increase in funding directly targeted to research. Available government funding directly for university research does not cover the full costs of research – universities are left out of pocket by about 27 cents for each competitive research dollar awarded and funding for research training has declined by approximately 30% on a per student basis since 2000.
The consequence is that our universities have had to find other sources for research funding. We have become reliant on utilising the income from domestic and international students to ensure that university research in Australia remains high quality and productive. Over 50% of university research expenditure is obtained from sources other than direct research income of which a large proportion is from domestic and international students. This is a dangerously unbalanced funding pattern, which allows little if any room for growth in research activity and even if sustainable reflects a dangerous lack of recognition of the importance of research which I will come back to.
The third challenge is the current impasse in political and national debate on the funding of higher education in our universities. The debate has focused fundamentally on the single issue of deregulation of domestic student fees. The government’s 2014 higher education proposal put university VCs between a rock and a hard place – the package proposed cutting universities main source of funding by 20%, leaving fee deregulation as the only option to fill this funding gap and to address any other funding challenges. Faced with no other choice, Vice Chancellors around the country gave their support to deregulation of fees whilst lobbying hard to improve other aspects of the proposed package.
The announcement by the new Minister of Education, the Honourable Simon Birmingham, that the current system will continue in 2016 to allow space for consultation provides us with a welcome opportunity for reflection. In that context I offer the view that the debate about deregulation of tuition fees has taken the sector down an unhelpful cul de sac. I suggest that the debate has been focused on the wrong question and trying to solve a problem that does not exist. There is nothing fundamentally wrong with the current funding model of university teaching and learning in Australia. It is a model which works well. It achieves a balance of 50-60% public funding and 40-50% private funding, which reflects reasonably well the public and private benefit of a university education. It is index linked and it protects students from excessive immediate and long term financial pressure through a sound loan scheme with an income related protection. Overall if used for teaching and learning it just about provides sufficient funding for high quality university education of our domestic students. I accept that there are details which need tweaking, like the precise amounts of funding for different areas of education and I would support schemes which introduce real competition allowing differentiation across the sector but fundamentally it works and in many respects is admired worldwide. Why change this system? It works well.
The real challenge is to disentangle the funding of teaching and learning from the funding of research.
The good news is that we now have an opportunity to reframe the debate about how best to fund our universities in the context of a better understanding amongst lay people, politicians, business leaders and others about the real contribution universities make to society and to our economy. My belief on the basis of evidence in Australia and elsewhere is that universities are a highly effective and efficient economic driver. In order to inform a shift in focus of this debate, soon after arriving in Australia I commissioned a report from Deloitte on the economic contribution of Australian universities.
That report was published last week and it contains analyses which are of great importance in shaping the debate about how best to fund our universities. It is clear that universities are not a cost to society or a drain on the national budget, they are in fact key drivers and contributors to the budget, to innovation and to prosperity. Currently the government invests $14 billion in funding to the university sector per year – for its teaching, research and engagement. The report helps us to understand the economic return the government and the national economy gain for that $14 billion – there are of course many other benefits some of which I mentioned earlier.
UNSW asked Deloitte to examine what economic impact universities had under three headings: the impact of being a large business operation with staff, students, visitors and capital development; the impact of producing skilled graduates for the work force; and the impact of university research driven out in to society leading to knowledge and technology. Deloitte looked at detail of UNSW’s contribution as well as the overall national contribution of universities. For the purposes of this talk I will refer primarily to the university sector nationally but the UNSW specific data are also published and available. For context a useful starting point is that the day to day operations and expenditure of our staff, domestic students, international students and visitors combined with expenditure on buildings and equipment contributed $1.76 billion to the national economy in 2014, which equates to UNSW creating 11,700 full-time jobs for the Australian economy. Rounding that up nationally Australia’s 41 universities contribute simply by their existence as businesses about $25bn to Australian GDP. That is small compared to the impact the production of skilled graduates has on the economy, which Deloitte estimated to be $140bn in 2014. Most importantly the report examined the economic value of the research output of Australia’s universities. It estimated that $160 billion in 2014 was attributable to the impact of university research on knowledge and technology – that is 10% of Australia’s national GDP. To put that in perspective – the $160 billion contribution from university research alone exceeds the entire value of Australia’s mining industry. Deloitte calculated the return on investment in research to be $5-10 for each dollar invested. This equates to an annualised return rate of 60-100% compared to just 1.5% for repaying debt and the 7% average return for private investments. In pure economic terms, the university sector is more than pulling its weight. The impact of university research alone pays for the government funding of higher education with a handsome return – showing that we are a smart investment that contributes enormously to the economy.
This sort of data, which reflects other studies internationally has profound implications for the higher education funding debate, particularly at a time when there is so much discussion and excitement in political circles about the innovation agenda and the opportunity to diversify the Australian economy, moving away from over reliance on export of raw materials to a knowledge based, innovative, technological economy. Universities are key to that agenda and we have an opportunity to build on what is already being achieved.
So, to recap Australian universities are in good shape by international standards, they are well placed to address all the challenges and opportunities of the 21st century, they contribute to the health of our society in a range of ways and they are a massively important contributor to economic prosperity. But our universities have an unbalanced funding model, overly reliant on funding the research which is so important economically and in other ways, through siphoning funding from teaching income streams to research.
The real challenge is to fund the research side of our universities activities adequately so as to secure the enormous additional economic benefit that can bring. The pause Minister Birmingham has provided on the deregulation issue provides us with an important opportunity to reframe the debate about the funding of higher education, recognising that funding research in our universities is not an act of generosity enabling brilliant boffins in ivory towers to pursue their fascinating but pointless intellectual interests. Funding research is in fact crucial for the future prosperity of Australia – it is a sound investment and not a charitable donation. The answer to the budget pressures concerning government, is not to cut university funding. It is in fact to invest skilfully in research, research which can drive the translational pipeline, linking universities and industry to economic outputs. That is a wise investment that will more than pay back the total government funding of universities.
We have an opportunity to accelerate and increase the scale of the virtuous cycle in which a combination of government and private investors provide research funding to universities working intimately in partnership with industry, in the knowledge that their output will yield innovation and new technology, which in turn will generate greater economic activity, exports, profits and taxation to further drive the virtuous cycle. We asked Deloitte to consider what the economic impact would be if the government increased university research funding from the current trend of 4.3% increases pa, to 5.7% increases. The answer was staggering – up to $29 billion pa would in due course be added to national GDP. An increase of 10% would be expected to yield well over $100 billion in increased GDP. This would have a profound impact on the shape of the Australian economy and creating the innovation country that both the Prime Minister and leader of the opposition are so enthusiastic about.
I will finish with some reflections on the way in which this sort of investment could be structured. It would require careful planning, refining schemes which have worked in Australia like the linkage awards and cooperative research centres and drawing on the best examples of success internationally. I propose that the government establishes and invests in a new UNIVERSITY-INDUSTRY-INNOVATION PARTNERSHIP scheme as a vehicle for achieving the highest quality university-industry interactions as well as enhancing university to university and business to business links. UNIVERSITY-INDUSTRY-INNOVATION PARTNERSHIPS would involve drivers and incentives to link universities and businesses much more closely together, to attract private investment and encourage innovation, entrepreneurialism and a new approach to risk taking – a new ethos and culture in our universities and industry is an essential component. This will need incentives to change behaviour amongst staff in universities and industry, with government funding schemes to support this and attract investors. There are impressive examples of effective schemes to stimulate the university-industry axis elsewhere – for example in the UK, USA, Singapore and Israel – including schemes like the catapult in the UK, investment incentives and tax incentives.
Options to consider include introducing funding streams based on engagement metrics; changing the balance of government support for industry R&D from indirect, R&D tax incentives to direct support for genuine university-industry engagement such as the Small Business Innovation Research scheme in the USA and Catapults in the UK. We should provide: support for more student internships in industry to create links, introduce innovation into SMEs and give students employability skills; the introduction of innovation vouchers for SMEs and start-ups to ‘buy’ innovation services from universities; underwriting of a major commercialisation fund involving superannuation funds to ensure that funds are available to develop and commercialise the relatively small number of major commercialisation opportunities like quantum computing; and support for incubators and technology parks close to or embedded in universities.
The UK experience is one example of university engagement with industry and innovation being significantly increased through the deployment of policy levers and funding incentives. The Higher Education Innovation Fund, a relatively small knowledge exchange fund of £150m, allocated based on demonstrated engagement with industry, had a disproportionate effect on a research base of £4.2 billion pa. Relatively low levels of public funding leveraged and promoted substantial university/industry engagement and collaboration. The total value of knowledge exchange income for the sector rose from around £1.5 billion to over £2.6 billion in ten years – £1 of knowledge exchange funding resulted in £6.3 in gross additional knowledge exchange income over the same period. There is good reason to believe that a similar stream of funding, based on engagement metrics, would deliver the same behaviour change and return in Australia.
The evidence from the UK also suggests that the universities which are best at conducting the discovery research are also the most effective at translating that research in to impact and economic benefit. The recent UK Research Excellence Framework (REF) exercise assessed both the quality of research and the impact of research by assessing nearly 7000 case studies submitted by UK universities. There was a strong correlation between universities scoring highest on research quality those scoring highly on research Impact. 7 Universities scored in the top 10 for both the quality of their Research outputs and Impact and 20 Universities were top 30 for both quality and Impact. It is no surprise therefore that in the UK Knowledge Exchange Fund the return for the top 6 research intensive universities was 13.3 for each pound; for the medium cluster, 4.8; and for the low research intensive HEIs, it is 2.6. Research impact follows research excellence.
So, in summary, my message is that we should grasp the opportunity provided by the governments pause and consultation, to back out of the cul-de-sac of fee deregulation and away from the perception that government funding of universities is a cost that needs to be cut. A return of $5-10 for each dollar invested is not something to ignore. The truth is that universities are key drivers of our economy and could deliver ever greater prosperity, through the establishment of additional transparent, direct funding streams for research, which drive the discovery-application continuum, through skilfully constructed UNIVERSITY-INDUSTRY-INNOVATION-PARTNERSHIPS.
Universities are not a financial headache, they are the answer for innovation, for economic growth, and for social improvement. Funding research in our universities is a sound investment and not a charitable donation.